Economic freedom and foreign direct investment in East Asia

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Since the early 1980s, developing countries have generally welcomed FDI, recognizing its manifold benefits, such as provision of capital, transfer of technology, etc. An extensive literature has evolved on FDI that identifies a number of variables, such as market size, trade openness, etc, as its key determinants. Domestic investment climate as a determinant of FDI has been excluded from the literature as reliable data on investment climate are generally unavailable. This study seeks to fill that void by using the economic freedom index, published since 1995 by The Heritage Foundation/Wall Street Journal, as a proxy for domestic investment climate for a sample of seven East Asian countries over the 1995-2000 period. Employing panel regression methodologies, this study finds that economic freedom is a significant and robust determinant of FDI. These results further our knowledge of the FDI dynamics in East Asia, which should be helpful in devising strategies to attract more FDI into that region.

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