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ECONOMIC FREEDOM INDEX AND ITS IMPACT ON FOREIGN

DIRECT INVESTMENT: REVIEWING THE LITERATURE

NGUYEN THI KIM CHI, TRAN THI MO

Abstract: Economic freedom (EF) is considered symbolic criteria for a business-friendly environment. To attract foreign direct
investment (FDI), EF is an important key priority. Composite indices of EF may constitute a useful and practical guide and a significant
source of information for experts in government policy, investors and market researchers across the world. Their high applicability
and the important consequences of the relative position of the countries in a ranking of EF have led many practitioners and academic
researchers to open a debate about some methodological aspects in the construction of these indices. In this paper, we will focus on
the aggregation processes used to build the composite indicator, and we will make use of the data of the index of EF published by the
Heritage Foundation. Hence, the contribution of the paper is to contribute to the literature that examines the impact of EF on FDI.

Keywords: EF, EF Index, Foreign direct investment, the Heritage Foundation.
Received: September 8 , 2022 Hence, the contribution of the paper is to contribute to the
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Revised: October 16 , 2022 literature that examines the impact of EF on FDI.
Accepted: December 3 , 2022
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The basic conceptual framework
Introduction
The impact of EF on FDI
According to the Heritage Foundation, EF is the
fundamental right of every human to control his or her EF has been identified as a key determinant in attracting
labor and property. In an economically free society, FDI (Kaufmann et al., 1999; Habib and Zurawicki, 2002;
individuals are free to work, produce, consume, and Bengoa and Sanchez-Robles, 2003; Bénassy-Quéré et al.,
invest in any way they please. In economically free 2007; Quazi, 2007; Azman-Saini et al., 2010). EF could
societies, governments allow labor, capital, and goods exercise a direct promoting effect on economic growth, and
to move freely and refrain from coercion or constraint an indirect effect on economic growth through its positive
of liberty beyond the extent necessary to protect and impacts on inward FDI (De Haan and Sturm, 2000).
maintain liberty itself. Higher levels of EF would motivate individuals and
FDI is very crucial for countries because it helps in firms by stimulating their economic incentives and would
accumulating capital as the source of investment, creates lead to an efficient allocation of resources. According to the
jobs, increases competition in a country and is the biggest Heritage Foundation (Miles et al., 2006), EF is “… the absence
of all transfers technology to the host country. FDI is of government coercion or constraint on the production,
regarded as an engine for growth in the host country and distribution, or consumption of goods and services beyond
hence has a significant importance. In addition, according the extent necessary for citizens to protect and maintain
to OECD, FDI is referred to as an investment made by liberty itself.”
a resident entity in one economy to hold a long-term Bénassy-Quéré et al. (2007) indicate that lower
interest in an institution located in another country. The levels of EF and poor institutions in the host countries
ownership referred to here should at least be 10% of the would generate supplementary costs for MNEs and,
voting right which shows the power and authority of the consequently, would lead to decreases in inward FDI.
investor (OECD). EF is considered symbolic criteria for a business-
In recent years, researchers have illuminated the friendly environment. However, the characteristic of
relation between EF and FDI inflow with consideration significant EF changes according to the regions. To attract
of specific geographically grouped economies. There are FDI, EF is an important key priority. Countries' EF ranking
available indices that measure EF levels, but the most rises and declines due to a single country's economic
commonly used EF indices in the empirical literature are efforts (Heritage Foundation, 2018). According to Tiwari
the ones constructed by the Fraser Institute and by the (2011), the majority of empirical literature presents the
Heritage Foundation. These indices are characterized by relation between economic growth, EF and FDI inflow.
a relatively long period of coverage, and by a broader EF Index and EF sub-component
scope and a wider country coverage. In this paper, we
will focus on the aggregation processes used to build the According to the Heritage Foundation, the principles
composite indicator, and we will make use of the data of of EF are measured in the EF Index, an annual guide
the index of EF published by the Heritage Foundation. published by The Heritage Foundation, Washington's

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