ECONOMIC FREEDOM AND FOREIGN DIRECT INVESTMENT IN DEVELOPING COUNTRIES

Abstract

This study investigates the impact of economic freedom on foreign direct investment inflows in 17 developing countries over the period 1996–2024. The analysis also incorporates export diversification and economic growth to capture structural and macroeconomic dimensions influencing investment dynamics. Using panel data econometric techniques, including panel unit root tests, Pedroni and Kao cointegration tests, and the Panel ARDL (Pooled Mean Group) approach, the study examines both short-run and long-run relationships among the variables. The empirical results confirm the existence of a stable long-run equilibrium relationship. Economic freedom exerts a positive and statistically significant long-run effect on FDI inflows, indicating that improvements in institutional quality, regulatory efficiency, and market openness enhance investment attractiveness. The diversification index demonstrates a significant relationship with FDI, suggesting that structural transformation plays an important role in shaping investment flows. The error correction term confirms a relatively high speed of adjustment toward long-run equilibrium. Overall, the findings highlight the importance of institutional reforms and structural diversification strategies in attracting foreign capital and promoting sustainable economic development in developing economies. Keywords: Foreign Direct Investment, Economic Freedom, Export Diversification, Economic Growth, Institutional Quality, Panel ARDL, Cointegration, SDGs.