The Investigation of the Role of Economic Freedom in the influence of FDI on Economic Growth using the Generalized Method of Moment (GMM) Panel Data Approach

In this Research, the relationship between foreign direct investment, economic freedom and economic growth is investigated in a panel of 84 selected countries during 2000-2012. For this purpose, the GMM approach has been applied. More precisely, this paper examines the impact of FDI on economic growth through the channel of economic freedom. Estimation results show that FDI by itself has no positive effect on economic growth. However, the effect of FDI on economic growth depends on the level of economic freedom in the host countries. The main channel of absorption capacity of host countries to benefit from spillover effects of multinational firms is economic freedom. Also FDI has positive and significant effects on economic growth in countries with high economic freedom and countries with higher middle economic freedom. Moreover among components of economic freedom, the components related to Size of Government, Security of Property Rights, Freedom to Trade Internationally, and Regulation of Labor, Credit and Business have the most positive effect on the effect of FDI on economic growth.