The effect of economic freedoms on direct foreign investments: Evidence from 125 countries

The most effective way to eliminate capital shortages in developing countries is foreign direct investments to the country. Economic freedoms play an important role in attracting these investments to the country. Economic freedoms lead to more investment coming to countries. Therefore, countries should be economically more free. The aim of this study is to empirically examine the effects of economic freedoms and economic growth on foreign direct investment for 125 countries that were scored in the Heritage Foundation Economic Freedom Index between 1996-2016. Economic freedom variables in the established models from the Heritage Foundation; FDI and GDP (USD) data are taken from the UNCTADSTAT data center. Panel data analysis was carried out to measure the effect of economic freedoms on FDI. In this direction, unit root tests, classical model, fixed effects and random effects estimation, Hausman test and basic specification tests were performed. Autocorrelation problem was found in both models established afterwards. In the face of this problem, the Resilient Standard Errors model of Arellano, Froot and Rogers, which produces more resistant predictions in fixed effects, is used. Economic freedom score, government integrity, public spending and investment freedom, and GDP positive FDI; Property rights, tax burden and freedom of work affect FDI negatively. There is no significant relationship between monetary freedom, trade freedom and financial freedom and FDI. This study supports and strengthens the studies in the literature in line with the findings obtained. It also offers some policy recommendations to countries. Keywords: Foreign Direct Investment, Economic Freedoms, Fixed Effect, GDP, Panel Data, Heritage Foundation