Foreign Direct Investment, Economic Growth and Economic Freedom: A Literature Survey

The purpose of this study is to survey the literature on the relationship between foreign direct investment, economic freedom and economic growth. For several years, with regard to the determinants of foreign direct investment (FDI) inflows, there has been a tendency to draw attention to specific elements such as technological development, the stock of human capital, market size, economic distance/transport cost and factor costs. However, the potential other factors such as economic freedom as an institutional element seem to have been relegated to second place, and even ignored by some investigators. In the present survey, focusing on economic freedom, shows that it may have an influence on FDI inflows as well as on economic growth. Therefore, allowing for the institutional approach, this study can shed light on the potential interactions between economic freedom and foreign direct investment/economic growth. All the studies that the present paper reviews have suggested that FDI affects economic growth in two ways: positively or negatively. Those effects based mostly on initial effects which are briefly mentioned above. On the other hand, some other studies show that economic freedom is an explanatory variable for direct cross-border investments. Finally, the papers surveyed show that economic freedom causes growth.