Investigating the Impact of Economic Freedom on Foreign Direct Investment in Pakistan

Abstract

Inward Foreign Direct Investment (FDI) is well established as a vital factor in improving economic growth. Several developed and developing countries are implementing more conducive policies to promote foreign direct investment and create favorable investment conditions within their borders. In this study, economic freedom is examined at a disaggregated level in Pakistan using Heritage Foundation indices. A short- and long-term association was determined by an autoregressive distributed lag (ARDL) model. The current study indicates that FDI is affected differently by each component of economic freedom. In spite of this, regulatory efficiency and the rule of law are significant determinants. It is also important to note that market size affects FDI positively. To reduce taxes and stabilize the economy, it may be recommended that the government implement policies that promote the rule of law. These policies may include transparency, favorable investment policies, and price stabilization.