Economic freedom and foreign direct investment in South Asian countries

The risk related to any overseas investment is polygonal which reflects numerous features that are appropriate for investor, such as rule of law, transparency, governance, level of international trade, business and financial conditions etc. All such components combine to form domestic investment climate of an economy, which influence the inflows of foreign capital in a country. This study analyzed the role of domestic investment climate (measured by Heritage Foundation economic freedom index) along with other macroeconomic variables in attracting FDI in South Asia covering 20 years from 1995 to 2014 by applying panel data techniques. Results revealed that overall economic freedom is an important determinant of FDI. Disaggregated analysis of economic freedom suggests that only fiscal and trade freedom has statistically significant influence on FDI. Therefore, Study recommends south Asian Nations to improve domestic investment environment to attract more foreign capital.