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REVIEW of FINANCE - Issue 4, 2022
X represents the list of explanatory variables less-restrictive regulatory environment stand out as the
k
it
that are included in their logarithmic form in the major FDI-promoting institutional factors. Also, there is
empirical equation empirical evidence that the effects of EF sub-components
X represents the list of explanatory variables that are on FDI inflows exhibit variations through the economic
l
it
included as ratios or rates in the empirical equation, and characteristics of the host countries and across geo-economic
εit is the stochastic error term. regions. The results suggest that governments should pursue
Ghazalian and Amponsem (2019) empirically examine EF-improving policies, which should be tailored according
the effects of EF on inward FDI flows (henceforth, FDI to the economic and geo-economic characteristics of the host
inflows), and determine the effects of EF sub-components countries, to increase FDI inflows.
on FDI inflows. This paper examines the effects of EF and its
sub-components reflecting the Quality of Institutions (QIs) on References:
FDI inflows, using indices derived from the Fraser Institute 1. Azman-Saini, W. N. W., A. Z. Baharumshah, and S. H. Law. (2010). Foreign Direct
and from the Heritage Foundation. The empirical analysis Investment, EF and Economic Growth: International Evidence. Economic Modelling,
uses a panel dataset covering 120 developed and developing 27(5), 1079–1089.
countries over the time period 1970–2015 when using the 2. Bénassy-Quéré, A., M. Coupet, and T. Mayer. (2007). Institutional Determinants of
Fraser Institute’s EF data, and 146 countries over the time Foreign Direct Investment. The World Economy, 30 (5), 764–782.
period 1995–2016 when using the Heritage Foundation’s EF 3. Bengoa, M., & Sanchez-Robles, B. (2003). Foreign direct investment, EF and
data. The empirical analysis is carried out for a panel dataset growth: new evidence from Latin America. European journal of political economy,
using different econometric methodologies and empirical 19(3), 529-545.
specifications. The results underline positive effects of EF 4. Borensztein, E., J. De Gregorio, and J. W. Lee. (1998). How Does Foreign Direct Investment
on FDI inflows. They reveal that EF sub-components have Affect Economic Growth? Journal of International Economics, 45(1), 115–135.
varying impacts on FDI inflows, where rule of law, market 5. Bosworth, B. and CollIns, S. M. (1999). ‘Capital Flows to Developing Economies:
openness, and less-restrictive regulatory environment stand 6. Implications for Saving and Investment’, Brookings Papers on Economic Activity,
out as the major FDI-promoting institutional factors. Also, 30(1), pp.143–180.
there is an empirical evidence that the effects of EF sub- 7. Cabello, J. M., Ruiz, F., & Pérez-Gladish, B. (2021). An alternative aggregation
components on FDI inflows exhibit variations through the process for composite indexes: An application to the Heritage Foundation EF Index.
economic characteristics of the host countries and across Social Indicators Research, 153(2), 443-467.
geo-economic regions. 8. Dunning, J. H. (2008). ‘Decade Award Location and the multinational enterprise’,
Singh and Gal (2020) used Heritage Foundation EF 9. Journal of International Business Studies. Palgrave Macmillan Journals,
index data over the period of 1999 to 2018 and employ 40(1), pp. 20– 34.
the stepwise multi regression on variables of business 10. Fofana, M. F. (2014). ‘The influence of measures of EF on FDI: A comparison of
freedom, government spending, tax burden, government Western Europe and Sub-Saharan Africa’, Global Economy Journal, 14(3–4),
integrity, property rights, investment freedom, trade pp. 399–424.
freedom and monetary freedom. The results show that 11. Fry, J. (1993). ‘Foreign Direct Investment in a Macroeconomic Framework’,
EF has a significant positive impact in South Asia, Latin The worldbank.
America, East Asia, North Europe and West Europe. 12. Ghazalian, P. L., & Amponsem, F. (2019). The effects of EF on FDI inflows: An
However, for the Middle East and North Africa, East empirical analysis. Applied Economics, 51(11), 1111-1132.
European and South European economies, EF has an 13. Kaufmann, D., A. Kraay, and P. Zoido-Lobatón (1999). “Aggregating Governance
insignificant influence on FDI inflow. Interestingly, trade Indicators.” Research WorkingPaper No. 2195, World Bank, Washington, DC.
freedom is the only variable which positively significant 14. Lily, J. et al. (2014). ‘Exchange Rate Movement and Foreign Direct Investment in
in the maximum economies of South Asia, Sub-Saharan Asean Economies’, Economics Research International, 2014(March), pp. 1–10.
Africa, East Europe and the Middle East and North Africa. 15. Miles, M. A., K. R. Holmes, M. A. O’Grady, A. I. Eiras, B. D. Schaefer, and A. B. Kim.
This illuminates that investor-friendly trade openness (2006). 2006 Index of EF. Washington, DC: Heritage Foundation.
policy and relaxes in tariffs, trade quotas, and export taxes 16. Quazi, R. (2007). EF and Foreign Direct Investment in East Asia. Journal of the Asia
are increasing FDI inflow in South Asia, Sub Saharan Africa, Pacific Economy 12(3), 329–344.
Eastern Europe and the Middle East and North Africa. 17. Singh, D., & Gal, Z. (2020). EF and its impact on foreign direct investment: Global
However, single variables such as government spending overview. Review of Economic Perspectives, 20(1), 73-90.
and investment freedom are positively significant and 18. Subasat, T. (2011). ‘EF and Foreign Direct Investment: A Panel Gravity Model
have a positive impact on FDI inflow in Southern Europe. Approach’, The Empercal Economics Letters, 10(7), pp. 698–704.
19. Tiwari, A. K. (2011). ‘Foreign Aid, FDI, EF and Economic Growth in Asian Countries’,
Conclusion
Global Economy Journal Volume, 11(3), pp. 1–26.
This paper reviewed basic contents related to EF Index
and its impact on FDI. In summary, the results underline Author’s Information:
the positive effects of EF on FDI inflows. The studies reveal Nguyen Thi Kim Chi, Tran Thi Mo
that EF Index and EF sub-components have varying impacts Faculty of Taxation - Customs, University of Finance Marketing
on FDI inflows, where rule of law, market openness, and Email: Kimchi@ufm.edu.vn

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