The impact of economic freedoms on foreign direct investments: An empirical analysis of selected countries

Foreign direct investment (FDI) is defined as the long-term inflow of capital into a country. Accurately identifying the factors influencing these investments is essential for improving the investment climate and promoting economic development. Economic freedoms refer to a structure in which property rights are protected, market mechanisms operate freely, and individuals are able to make economic decisions without undue restrictions. Such a framework has the potential to directly affect a country's ability to attract FDI. The aim of this study is to examine the impact of economic freedoms and their subcomponents on FDI using the panel data analysis method and to evaluate whether this impact varies according to the income levels of countries. In this context, data from 174 countries for the period 1996–2024 were analyzed by categorizing the countries into four income groups. The effects of economic freedom—both at the overall index level and in terms of its four main components, namely rule of law, government size, regulatory efficiency, and open markets—on FDI were assessed. Although the analysis results indicate that economic freedom generally has a positive effect on FDI, this effect does not hold for all subcomponents and income groups. Some components show significant and positive effects, while no meaningful relationship is found for others. In particular, the impact of variables related to the rule of law, government size, regulatory efficiency, and market openness varies significantly between low- and high-income groups.