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REVIEW of FINANCE - Issue 4, 2022
No. 1 think tank. The Index has delivered thoughtful magnitude of FDI and EF Index interaction on a regional
analysis in a clear, friendly, and straightforward format. basis holding the control variables such as GDP growth,
With new resources for users and a website tailored for Import and Export per GDP, Trade per GDP, Inflation,
research and education, the Index of EF is poised to help and Interest rates. Following Bengoa and Sanchez-Robles
readers track over two decades of the advancement in EF, (2003) approach, they extend their model as below:
prosperity, and opportunity and promote these ideas in
their homes, schools, and communities. The Index covers (1)
12 freedoms – from property rights to financial freedom Where in:
– in 184 countries. - FDI : is foreign direct investment inflows of the
at
According to the Heritage Foundation, EF Index is country, “a” as percentage of its GDP at time “t”; c is an
defined by the 12 qualitative and quantitative factors intercept; and M stands for six macro-control variables
which are divided into four categories: i) Regulatory of the country “a” at time “t” respectively. Hence, “b”
efficiency (monetary freedom labor freedom and business represents the residual term of the model.
freedom); ii) Government size (fiscal health, government - EF Index : The freedom of economic activity of
at
spending and tax burden); iii) Rule and law (government the country is proxied by EF Index. The data for these
integrity, judicial effectiveness and property rights); iv) indexes are gathered from the online database of the
Market openness (financial freedom, investment freedom Heritage Foundation.
and trade freedom). - Control variables: They also investigate the
Therefore, EF Index is a helpful tool for a variety magnitude of FDI and EF Index interaction on a regional
of audiences, including academics, policymakers, basis holding the control variables such as GDP growth,
journalists, students, teachers, and those in business Import and Export per GDP, Trade per GDP, Inflation,
and finance. The Index is an excellent objective tool for and Interest rates. The data for these variables are derived
analyzing 184 economies throughout the world and from the online database of World Bank.
each country page is a resource for in-depth analysis Similarly, Moussa et al. (2016) analysed the influence
of a country’s political and economic developments. of EF on FDI from the world’s 156 economies including
The EFs and accompanying historical data also provide the conflict countries and research included the variables
a comprehensive set of principles and facts for those viz. growth, export, import, trade, inflation rate, interest
who wish to understand the fundamentals of economic rate and EF index. They examined the impact of EF on
growth and prosperity. FDI inflows in regional and global. They included the
The ideals of EF are strongly associated with ignored regions such as Sub-Saharan, Post-Soviet and
democracy, greater per capita wealth, healthier societies, conflict-affected countries and utilized the panel data
human development, cleaner environments, and poverty analysis. Results show FDI is largely affected by domestic
elimination. Further, it can be classified as government and external (import and export) trades as well as EF
size (fiscal health, government spending, and tax burden), macroeconomic variables in different regions with the
Rule and law (judicial effectiveness, property rights and fixed-effects model. Variables such as political stability,
government integrity), Open markets (trade, investment corruption level of the country, institutional rights,
and financial policy) and Regulatory efficiency (labor, financial market and employment regulations, along
monetary and business) are four broad category measures with the country's credit rates, account for more than
for EF. Every component is equally important in achieving 80-90% of variations in FDI. The aggregate effect of the
the positive benefits of EF. EF and FDI are having a positive and significant effect
The Fraser Institute’s EF and EF sub-component on economic growth, and distinct factors might affect the
indices are reported on a scale of 0 to 10, whereas the countries differently; some, factors have significant in one
Heritage Foundation’s EF and EF sub-component indices country compare to the other.
are reported on a scale of 0 to 100. Imtiaz and Bashir (2017) examined the macroeconomic
variables to find out the determinants of attracting FDI
Empirical research on the EF Index inflow in South Asian countries Pakistan, Nepal, India, Sri
and its impact on FDI Lanka, and Bangladesh and applied the panel regression

The impact of EF Index on FDI over the period of 1995 to 2014. They presented that trade
freedom, quality of infrastructure market size, human
Empirical literature presented over a period of time capital and EF have a positive and statistically significant
analyses the linkage between FDI and the macroeconomic influence on FDI. However, the macroeconomic
environment of the host country and the degree of freedom component of EF government spending, property rights,
to do business (Bénassy-Quéré et al., 2007; Borensztein et corruption, financial, investment, monetary, labor and
al., 1995; Bosworth and Collins, 1999; Dunning, 2008; Fry, business freedom have an insignificant impact while
1993; De Mello 1999). fiscal freedom has a significant positive impact on FDI
Bengoa and Sanchez-Robles (2003) also investigate the inflow in South Asia.

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