THE ECONOMIC FREEDOM, COUNTRY RISK AND FOREIGN DIRECT INVESTMENTS

Abstract

The interlinkages between country risk and foreign direct investments are the subject of research interest. The article tests the intuitive hypothesis that economic freedom is associated with low country risk and is an incentive for foreign direct investments. The research paper employs empirical quantitative within-between models to analyze the relationship between foreign direct investments and five indices: trade openness, freedom from corruption, trade freedom, investment freedom, and economic freedom. The database used is The Global Economy for 44 European Countries resulting a panel data employed for between within models, growth curve models, contextual models, generalized estimating equations models (GEE), and asymmetric effects models. Interesting is the different significance of the five indicators in different models. For the first three models within -between model, the growth curve model and the contextual model- statistical significance have trade openness, freedom from corruption, and investment freedom. For the Generalized equations model (GEE) the only indicator that has statistical significance is Investment freedom. For the asymmetric effects model that shows the effect of asymmetric increase and decrease of each indicator, there is no statistical significance for the analyzed indicators. The within – between models combine the robustness of the fix effects models with the flexibility of the random-effects models.