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Navigating the Path to Increase FDI in South Asia: The Role of Economic
Freedom

Article in Journal of Policy Research · January 2024

DOI: 10.5281/zenodo.7662336

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https://doi.org/10.5281/zenodo.7662336
Navigating the Path to Increase FDI in South Asia: The Role of Economic Freedom

Muhammad Munawar Hussain1, Asim Iqbal2, Syed Jaffar Abbas3, Sara Shahid4, Laila Khalid5
Abstract
Scholars and policymakers have paid special attention to the link between economic freedom and FDI. This
research aims to examine this relationship within the South Asian context through a panel data analysis from 2001
to 2021. A panel fixed effect model is employed to assess the influence of economic freedom on FDI and other
controlling variables, such as GDP per capita, population density, inflation, government expenditure on education,
and general government final consumption expenditure are also taken into consideration. The results indicate that
an increase in economic freedom, GDP per capita, population density, and government consumption leads to an
increase in FDI. These findings suggest that South Asian policymakers should prioritize increasing economic
freedom as a means to attract more FDI. This study offers valuable insights for policymakers seeking to
comprehend the factors affecting FDI and ways to increase it in their respective countries. By promoting economic
freedom, a more favorable investment climate can be created, thereby attracting more FDI which may help to
create jobs and improve living standards for citizens.
Keywords: FDI, Economic freedom, South Asia

1. Introduction
The nexus between foreign direct investment (FDI) and economic freedom has been extensively researched and
widely recognized. Economists believe that the concept of liberalization and globalization could not be fully
realized without economic independence, and it is widely accepted that nations with higher levels of economic
freedom attract more FDI (Foreman 2007; Othman2022; Quazi 2007; Zghidi, Sghaier, & Abida, 2016). Economic
freedom encompasses several important aspects, including the security of people and their property, the right to
compete, and the freedom to make personal decisions and engage in free exchange. It also includes traditional
components such as private property, open markets, and unrestricted commerce. Economic freedom is considered
a collection of financial options that individuals have, and is viewed as a crucial component of welfare economics
(Friedman,2020; Gwartney, Lawson, & Edwards, 2002; Mitchell, 2013). A thorough understanding of economic
freedom is essential to establishing a link between the two. By promoting economic freedom, policymakers can
help increase the inflow of FDI, which has the potential to improve the health of the economy and standard of
living for citizens (Senturk & Ali, 2021; Audi et al., 2022).
The researchers looked at what influences FDI, which is also further negotiable, particularly in the presence of
economic freedom. Using time series or panel analytic frameworks, various studies have examined the link
between economic liberty (openness) and FDI. These investigations, however, produced contradictory findings in
terms of impact direction and importance. This study uses the panel framework to incorporate GDP per capita,
population density, inflation, government consumption, and government consumption on education in the case of
Asian economies in an effort to quantify the effect of economic freedom on FDI. The capital flows and
international trade have fueled global economic expansion, making FDI an important basis of external finance for
nations to support their economic expansion. FDI is the purchase of a majority stake in a business sector or other
entity that is situated exterior of one's native nation (Hooley et al.,1996). Contributing in FDI allows foreign
businesses to conduct regular business activities in the host country, transferring both capital and technological
expertise. FDI often occur in open economies with a high likelihood of growth (Siddiqui & Iqbal, 2018; Hooley
et al., 1996; Bibi & Ali, 2021). The first economist to support economic freedom was Adam Smith. He argued
that the fundamental components of economic freedom which results in economic prosperity are market
mechanisms, little government intrusion, and protection of property rights. In order to improve policymaking and
promote economic development, modern economists also advocate for economic freedom. Economic freedom
and growth are strongly correlated with one another (Ali & Crain, 2002; Barro, 1997; Cole, 2003; Dawson, 1998).
Globalization and economic liberty is related concepts. Globalization accelerates economic expansion (Ali, 2022;
Ali, 2022).
Greater economic freedom is reflected in higher rates of investment, economic growth, FDI, and investment
productivity as compared to economies with less economic freedom. Economic independence has a beneficial
impact on life expectancy. In the nations with greater economic independence, the standard of living has been
increased with the decline rate of infant mortality rate. In those nations that are producing more economic freedom,
poverty is declining and income distribution is improving (Gwartney & Lawson 2004; Arshad & Ali, 2016; Ashraf

1
Corresponding Author, Ph.D (Economics) Scholar, University of Education, Lahore, Assistant Professor (Economics) Higher Education
Department, Govt. of the Punjab, Lahore, Pakistan
2
Associate Professor, Department of Economics, Division of Management and Administrative Science, University of Education, Lahore,
Pakistan
3
Ph.D (Economics) Scholar, University of Education, Lahore, Lecturer (Economics) Higher Education Department, Govt. of the Punjab,
Lahore, Pakistan
4
Ph.D (Economics) Scholar, University of Education, Lahore, Pakistan
5
Ph.D (Economics) Scholar, University of Management and Technology, Lahore, Lecturer (Economics) Higher Education Department,
Govt. of the Punjab, Lahore, Pakistan
350
 Hussain et al .…

& Ali, 2018). Further, the two concepts of economic equality and liberty are also directly linked. Greater levels
of national equality are associated with greater economic freedom (Berggren 1999). Every economy’s ultimate
objective is to achieve economic prosperity. FDI is measured as an input reason in determining economic
expansion. Stronger FDI is revealed by more economic freedom which results in higher economic growth (Pearson
et al., 2012; Ali, 2022). Financial freedom and capital stock are all raising as a result of economic liberty which
is significantly accelerating the process of economic acceleration (Tiwari, 2011; Shah & Ali, 2022). Asia got
economic benefits significantly from economic freedom. The current study investigates how economic freedom
affects FDI in South Asian nations.
More than sixty years before the phrase South Asia was created. The word "subcontinent" was replaced by this
one to refer to the southern region, which includes the sub-Himalayan countries and their east- and west-bordering
neighbors. It is represented geographically by the Hindu Kush, the northern region of India, and the southern
Himalayas. South Asia shares geographical boundaries with Central Asia, East Asia, South-east Asia, and West
Asia. To the south, the Indian Ocean is located. Based on distinctly different definitions, the present regions of
Nepal, India, Sri Lanka, Bangladesh, Afghanistan, Pakistan, Maldives, and Bhutan organize the nations of South
Asia in opposition. Iran, Mauritius, and Tibet are sovereign states that are incorporated into the British Indian sea
region. The area is the most populous region. It is the habitation to more than twenty percent of the world's
population. SAARC is involved in this which comprises of eight nations from the area and it was established in
1985 for economic cooperation.

Table 1: EFI in South Asia (Year 2021)

Government Spending
Judicial Effectiveness
Government Integrity

Investment Freedom
Monetary Freedom

Financial Freedom
Business Freedom
Property Rights

Labor Freedom

Trade Freedom
Overall Score

Fiscal Health
Tax Burden

Country

Afghanistan 53 30.3 29.1 25.7 91.1 76.1 99.9 53.9 59.9 80.8 68.6 10 10
Bangladesh 56.5 38 27.7 35.4 84 93.8 66.3 55.6 68.8 69.9 63.4 45 30
Bhutan 58.3 62.6 55 45.7 82.2 71.6 70.2 67.3 79.6 74.3 40.8 20 30
India 56.5 59.2 48.1 55.9 78.7 78.5 18 76.7 41.3 72.1 69.4 40 40
Maldives 55.2 44.1 39.5 28.2 96.5 67 35.9 77.9 71.2 77.5 59.8 35 30
Nepal 50.7 38.1 33.8 34.1 83.2 73.2 61.8 61.5 53.6 71.6 57.6 10 30
Pakistan 51.7 44.9 31.2 40.7 73.8 86 7.4 60.5 41.2 69.7 64.6 60 40
Sri Lanka 55.7 45.4 39.5 46.8 85 88.4 30.1 75.2 59.1 71.6 47 40 40
Source: The Heritage website (https://www.heritage.org/index/)

2. Literature Review
Over the years, several studies have analyzed the factors affecting FDI inflows. One of these factors is economic
freedom, which refers to how freely individuals and businesses may operate in a market economy without undue
restrictions from government intervention. Economic freedom is considered a significant source of FDI since it
creates a conducive environment for businesses to operate and for investors to make investments. In this literature
review, we analyze the impact of economic freedom on FDI using the findings of previous studies.
Dia and Ondoa (2022) studied how economic freedom helps to raise FDI inflows in 37 Sub-Saharan African
nations. The researchers found a significant and favorable association between economic freedom and FDI, and
they recommended increasing economic freedom to promote FDI. Data from 1995 to 2008 were utilized by Nasir
and Hassan (2011) to examine the connections between FDI, economic freedom, GDP and real exchange rates in
South Asian nations. They discovered a positive association between economic freedom and GDP and FDI as
well as an inverse relationship between real exchange rate and FDI using a fixed effect model. The authors
advocated for legislation that support investment in host nations. However, in developing countries, the
relationship between economic freedom and FDI is not always straightforward. Foreman (2007) found that
economic freedom had little effect on FDI in developing countries, but protecting property rights could increase
FDI by reducing government interference and capital flow barriers.
Muslija (2018) examined the nexus between economic freedom and FDI in 34 OECD countries by annual panel
data from 1997 to 2016. The ARDL model, the random effect, and the linear dynamic panel (GMM) approaches
were used to observe the nexus between the variables in the short and long runs. Economic freedom and FDI were
shown to be directly associated, although the ARDL model only showed a substantial and long-term positive
association. The study's premise was that greater economic freedom, particularly in regard to trade and investment
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 Hussain et al .…

helps to boost FDI. Azman-Saini et al., (2010) looked into the nexus between FDI, economic growth, and
economic freedom in 85 nations between 1976 and 2004. The GMM technique of estimating was utilised in the
study, which showed that FDI had no direct impact on economic growth. The study did find, however, that
economic freedom increased economic gains. In a different study, panel data was used by Saini et al., (2010) to
analyze the linkages between economic freedom, FDI and economic development by utilizing GMM estimation in
the context of 85 chosen nations. The study discovered that while FDI had a negative impact on economic growth,
it had a favorable impact on economic freedom.

Table 2: Literature Review Summary

Authors Countries Time Method and Findings
Period Techniques
Nasir and Hassan South Asian 1995-2008 Fixed effect model Positive linkage between
(2011) economies economic freedom and FDI
Foreman (2007) Developing 1990-1998 Panel data analysis Economic freedom did not
countries have significant effects on
FDI
Kasimov et al., Common wealth 1998-2017 2SLSRE and Government size and open
(2020) independent FGLS market had positive effect
states on FDI
Muslija (2018) Thirty-four 1997-2016 Random effect and Positive linkage among
OECD countries. GMM economic freedom and FDI.
Azman-Saini et al., Eighty-five 1976-2004 GMM FDI had not affected the
(2010) countries economic growth.
Bengoa and Robles Eighteen Latin 1970-1999 Fixed effect model Economic freedom had
(2003) American positive linkage with FDI
Chaib and Siham Algeria 1995-2011 Johansen co Positive linkage between
(2014) integration test and institutional quality (EIQ)
VECM and FDI
Economou (2019) Four South 1990-2017 Random effect Economic freedom had
European model positive impact on FDI
countries
Zghidi et al., (2016) Four countries of 1980-2013 GMM Positive connection
North African between FDI and economic
growth
Ansari and Sensarma BRICS-ASEAN 1995-2020 Two stages least Positive linkage among
(2022) Economies squares economic freedom,
economic growth and FDI
Dkhili and Dhiab Gulf Cooperation 1995-2017 MLS and DOLS Positive relationship
(2018) Council countries between economic freedom
and FDI
Levina (2011) 52 developing 1995-2009 Fixed Effects and Economic freedom, and
countries GMM FDI were positively linked
Badri and Selected ten 2001-2013 Panel data method. Economic freedom
Sheshgelani (2017) developing increases FDI
countries
Sayari et al., (2018) Thirty European 1997-2014 Pedroni and KAO Positive relationship among
countries panel co economic freedom and FDI
integration
Othman (2022) 14 Arab countries 1996-2019 GMM Monetary and financial
freedom had positive
relation with FDI
Source: Author’s creation by doing literature review

In Europe, Economou (2019) discovered that economic freedom has a positive impact on FDI in Greece, Italy,
Portugal, and Spain. Additionally, the positive relationship between FDI and capital, market size, and other key
indicators of economic freedom provided these countries with some solace. Sambharya and Rasheed (2015)
evaluated the impacts of various economic sub-components on FDI in 95 countries during 1995-200. The study
found that lower levels of government interference, strong property rights, and higher levels of economic freedom
were positively related to FDI. The study suggested that countries should focus on creating an environment with
lower levels of government intervention, which would result in greater levels of FDI inflows. Sayari et al., (2018)
used Pedroni and KAO panel co integration to look at the long-term association among the economic freedom
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 Hussain et al .…

and FDI for 30 economies in Eastern, Central and Western Europe between the years of 1997 and 2014. According
to the study, there is a physically powerful and favorable association connecting the economic freedom, FDI and
the GDP value-added component for a chosen group of nations.
Tiwari (2011) examined how FDI, foreign assistance and economic development are related in the context of
Asian countries. The estimate produced by using yearly time series data from 1918 to 2007 that have been
aggregated. The domestic capital stock, financial independence and fiscal flexibility were considered all important
factors in economic growth. Additionally, it was shown that foreign aid, FDI inflow, and a lack of corruption all
had a bad impact on economic growth. Othman’s (2022) investigation into the function of economic freedom and
its impact on FDI in the context of Arab countries utilized data from 14 nations spanning from 1996 to 2019.
Employing the GMM framework, the inquiry revealed that in the Arab region, FDI was negatively correlated with
other indices of economic freedom. However, monetary and financial freedom were found to be positively and
significantly associated with FDI.
Kasimov et al., (2020) utilized panel data to analyze the empirical relationship between economic freedom, natural
resources, sea access, and FDI. They considered the years 1998 to 2017. The inquiry took place in twelve
sovereign commonwealth states. The estimate was calculated using PCSEs and the RALS techniques. The study
looked into the relationship between increased government volume and economic freedom. Additionally, it
examined the effects of free markets on FDI. Bengoa and Robles (2003) investigated the linkage between
economic growth, FDI, and economic freedom using panel data from 18 countries in Latin America spanning the
years 1970 to 1999. According to the study, FDI and economic independence are related. Additionally, it was
shown that FDI and national economic development had a favorable relationship. Caetano and Celerio (2009)
investigated the connection between economic freedom and FDI. The MENA and EU instances in this study were
taken into consideration. According to the research findings, economic freedom and FDI were favorably
connected in the case of MENA countries and EU countries. Badri and Sheshgelani (2017) considered the
connection between economic freedom and FDI for 10 chosen developing nations between the years 2001 and
2013 by using the panel data approach. The study identified a correlation between economic freedom and FDI
that was equally favorable and substantial. Additionally, it was shown that financial development, gross capital
creation, and economic openness were all favorably related to FDI.
Overall, these studies provide evidence that economic freedom is positively associated with FDI inflows.
Additionally, factors such as financial development, property rights, economic openness, free markets, and sea
access also play significant roles in attracting FDI. The link between FDI and economic freedom, however, is
not straightforward and can be influenced by a variety of factors, including domestic capital stock, foreign aid,
corruption, and government interference.

3. Theoretical Background
This study sought to ascertain how FDI and economic liberty interacted in the presence of GDP per
capita, population density, inflation, final consumption spending by the general government, and government
spending on education.
An investment into a company or subsidiary that is based on another nation is mentioned to as a foreign entity’s
FDI. The development of a new company in a foreign market or the purchases of a long-term share in a foreign
corporation are both involved. FDI manifests itself in a number of ways, including stock investments, mergers &
acquisitions, and Greenfield projects.FDI is viewed as a source of funding, knowledge transfer, and access to
global markets that may aid in raising economic prosperity and development in recipient nations.
Nguyen (2020) demonstrated that FDI affects economic growth in a favorable and statistically significant way,
especially in emerging nations.
The linkage between FDI and economic freedom has been extensively investigated in academic literature.
According to studies, countries with better economic freedom characterized by low tax rates, less governmental
regulation, and strong property rights tend to attract more FDI than countries with lower economic freedom. This
is because investors think these countries provide a better business environment and more productive prospects.
Both institutional quality and economic freedom are positively correlated with FDI however, Ansari & Sensarma
(2022) and Chen and Jiang (2022) founded that the impact of economic freedom is vast.
3.1. Economic Freedom Index
The progress of a nation is greatly influenced by the economic freedom. It is an important tool and instrument to
promote economic harmony and makes major contributions to our understanding of human behavior. Economic
freedom has been measured using the Heritage Foundation's Index of Economic Freedom. Dawson (1998) and
Holden & Vos (2018) already used the economic freedom index for analysis. It was estimated and explored by
various researchers that economic freedom had positive impact on FDI (Ansari & Sensarma, 2022; Economou,
2019). Ten separate broad components (policy parameters) make up the Index of Economic Freedom, which is
divided into four key components:
3.1.1. Rule of Law
Two key elements make up the rule of law: the primary is the absence of corruption, and the second is the
protection of property rights as a key policy indicator.
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 Hussain et al .…

3.1.2. Regulatory Efficiency

Money freedom, labor liberty, and business liberty are the three indicators that make up the concept of regulatory
efficiency.
3.1.3. Limited Government
This category is broken down into two major categories. Indexes for fiscal freedom and government spending are
part of limited government.
3.1.4. Open Markets
The three guiding principles of an open market are financial freedom, investment freedom, and trade freedom.
3.2. Gross Domestic Product Per Capita
The GDP per capita is determined by dividing the economy's total gross value which includes all resident
producers' contributions as well as any product taxes (fewer subsidies) by the mid-year population. Utilizing GDP
information in local currency at constant prices, growth is calculated. The studies have shown a positive
association between FDI and GDP per capita, albeit the intensity of the link might vary depending on the economic
conditions and features of the host nation. Hakizimana (2015) suggested that GDP per capita and FDI both have
positive and statistically note worthy relationship. Other studies have also investigated effect of FDI and GDP on
environment (Abbas et al., 2022).
3.3. Population Density
The sum figure of inhabitants, or the figure of people divided by the size of area, determines the population
density. The association between FDI and population density is a topic of interest among economists and
policymakers. Kim and Lee (2022) suggested that population density has a positive and statistically important
consequences on FDI inflows.
3.4. Inflation
The pace at which prices increase over a set time period is referred to as inflation. Two broad measurements that
are used to define inflation are the growth in living cost or increase in overall prices. The relationship between
FDI and inflation is an area of debate among economists. Studies have discovered a generally negative correlation
between FDI and inflation, while others have found no correlation or even a positive correlation. According to a
study by Alfaro et al,. (2004) and Demirhan & Masca (2016) inflation has a detrimental impact on FDI inflows
in developing nations. In transition economies, FDI and inflation did not significantly correlate, according to a
study by Mihaljek and Kreb (2002). In other research, the association between FDI and inflation is even positive.
For instance, a research by Borensztein et al., (1998) discovered that FDI may cause a rise in demand, which may
raise prices and contribute to inflation in the host nation. In conclusion, there are several factors that affect the
complex link between FDI and inflation which is further debatable.
3.5. Government Consumption Expenditure
The total final consumer spending of the general government includes all current government outlays on goods
and services.FDI and government consumption expenditure have a complicated relationship that is prejudiced by
various variables, including economic growth, institutional quality, and economic growth stage. According to a
study by Sousa and Leal (2010), government consumption spending has a favorable impact on FDI in emerging
nations. However, excessive government spending on consumption may result in macroeconomic imbalances,
such as high levels of public debt and inflation, which can make a nation less appealing to foreign investors (Ali,
2022; Arshad & Ali, 2016). Large government consumer spending can also discourage private investment and
restrict the resources available for private sector growth, lowering the possibility for FDI by Sousa and Leal
(2010).
3.6. Government Expenditure on Education
Total government spending on education is computed by taking the GDP, dividing it by the total government
spending across all levels of education, and multiplying the result by 100. The role of education is very important
for economy (Iqbal et al., 2022). World Bank projections provide the foundation for aggregate data. The
relationship between FDI and government expenditure on education is widely recognized as positive. Investment
in education can improve the quality of the workforce, increase the pool of skilled labor, and enhance the overall
business environment, making the country more attractive to foreign investors. The government expenditure on
education has an affirmative and significant effect on FDI by Odhiambo (2010).
4. Data Sources and Methodology
The empirical results always depend upon data set and data sources. This part of study comprises data source and
methodology which have been deployed to estimate empirical results.
4.1. Data Sources
In this study panel data analysis has been deployed to estimate the impacts of economic freedom index, GDP per
capita, population density, inflation, general government final consumption expenditure and government
expenditure on education, on FDI in case of eight countries of South Asia (Afghanistan, Bangladesh, Bhutan,
India, Maldives, Nepal, Pakistan, Sri Lanka). Data was composed from various annual reports of Economic
Freedom Index given by Heritage Foundation and World Development Indicator, World Bank for the period 2001
to 2021.

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 Hussain et al .…

4.2. Methodology
Various functional forms have been used to check the relationship among economic freedom, gross domestic
product per capita, population density, inflation, government consumption, government expenditure on education
and FDI. The most appropriate functional form with interested variables was specified as:

FDI it = 1 +  2 EFI it + 3 ln GDPit +  4 POPit + 5 INFit +  6 ln GCit +  7 ln EDU it +  i +  it

where βs are the intercept and slope coefficients of explanatory variables, δi is cross-section fixed effect and εti is
usual error term. The description of all other variables is reported in Table 3.

Table 3: Detail of the variables used by this study

Variable Description Measurement Source
FDI Foreign direct investment net inflows (% of GDP) WDI
EFI Economic Freedom Index Index Heritage Foundation
lnGDP GDP per capita constant 2015 US$ WDI
POP Population density populace per sq. km of land area WDI
INF Inflation Consumer prices (annual %) WDI
lnGC General government final (% of GDP) WDI
consumption expenditure
lnEDU Government expenditure on total (% of GDP) WDI
education
Source: Author’s creation

4.3. Method of Estimation

4.3.1. Hausman Specification Test
The primary goal of a researcher after gathering data is to choose an appropriate estimating strategy so that the
research question may be satisfactorily addressed. To choose the best panel data estimate technique, this study
used the Hausman specification test. The empirical outcome of the Hausman test recommended a fixed effect
model.
4.3.2. Fixed Effects Model
A fixed effects model has set model parameters rather than random values. It differs from a model with random
effects in which some or all of the parameters are random variables. An analysis using fixed group means is known
as a fixed effects model. Since the data may be categorized based on a number of observable characteristics, group
means might be treated as random or fixed effects for each classification. The mean of each group is a fixed
variable that is group-specific under the model we chose (fixed effect model).

5. Results and Interpretation

The descriptive statistics of variables and results of Hausman test are reported in Table 4 and Table 5 respectively.
The Hausman measurement test is deployed to determine the best panel data estimation method. This test
establishes the statistical significance of the variation between the coefficient estimates generated using the fixed
effect technique and the random effect method. The null hypothesis describes that although random effect
estimates are accurate and dependable, fixed effect estimates are ineffective. Wald test is a kind of Hausman test.
It is frequently reported in χ2form with k-1 degrees of freedom. Here, k denotes the model’s regressor count. The
Hausman test determines whether we should estimate our panel data using a fixed effect model or a random effect
model.

Table 4: Descriptive Statistics of South-Asian Countries

Variable Mean Std. Dev. Min Max
FDI 1.849 2.83 -.676 17.138
EFI 52.662 9.466 10.5 69.7
lnGDP 7.345 .879 5.15 9.23
POP 469.646 465.379 15.167 1801.807
INF 6.1 4.597 -18.109 26.419
lnGC1 2.277 .435 -.337 3.12
lnEDU1 1.205 .359 .282 2.027
Source: Author’s creation

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 Hussain et al .…

Table 5: Hausman Specification Test

Coef.
Chi2 test value 13.174
Prob. Value 0.04
Source: Author’s estimation

It is observed that the p-value of the Hausman test is less than 5%, the random effect model’s null hypothesis
cannot be accepted. It indicates that the alternative hypothesis of utilizing a fixed effect model is accepted by this
investigation.

Table 6: Estimated Results from Fixed Effect Model

FDI2 Coef. St.Err. t-value p-value [95% Conf Interval] Sig
EFI 0.061 0.02 2.21 0.02 0.00 0.11 **
lnGDP 0.914 0.24 3.71 0.00 0.42 1.402 ***
POP 0.003 0.00 8.07 0.00 0.00 0.00 ***
INF -0.021 0.03 -0.57 0.56 -0.09 0.05
lnGC 1.872 0.43 4.34 0.00 1.02 2.72 ***
lnEDU 0.398 0.44 0.89 0.37 -0.49 1.28
Constant -14.44 2.11 -6.82 0.00 -18.62 -10.26 ***
R-squared 0.602
F-test 37.245 Prob > F 0.000
Source: Author’s estimation, *** p<0.01, ** p<0.05, * p<0.1

Based on the estimates presented in Table 6, the results of this study align with prior research (Badri &
Sheshgelani, 2017; Levina, 2011; Sajid & Ali, 2018) and reveal a robust and favorable association between
economic freedom and FDI. The evidence suggests that a rise in economic freedom within South Asian economies
corresponds to an increase in FDI inflows.
Further, the empirical estimations showed that GDP per capita is positively associated to FDI in the region. This
finding is in line with earlier studies (Alshamsi et al., 2015; Iqbal et al., 2014; Senturk & Ali, 2022). It means
with an increase in GDP per capita there will be rise in FDI. Population density has a positive linkage with FDI.
This finding is similar to earlier investigations (Al-Lafi et al., 2022; Lee& Kim 2022; Audi et al., 2021). It
represents that with an increase in population density in South Asia, the FDI increases. Govt. consumption
expenditure is found to be positively related to FDI in South Asia which is in line with earlier studies (Li & Liu,
2019; Shahid & Ali, 2015). It means the FDI of South Asian economies are rising with an increase in govt.
consumption expenditure. Inflation is found to be negatively related to FDI, this finding is similar to earlier studies
(Demirhan & Masca, 2016; Siddiqi et al., 2014) but coefficient of inflation in this study is insignificant. The govt.
expenditure on education is positively related to FDI which means with an increase in Govt. education
expenditure, the FDI in south Asian economies rises, however its coefficient is statistically insignificant.
The value of R-squared is 0.602 and F-test is significant and its value is 37.245. According to the R-squared value,
the independent variables employed in this study account for 60% variations in FDI in South Asian nations. This
indicates that the variables chosen for this study were well-chosen. The fitted model’s overall significance is
shown to be good by the F-test statistic result. The findings show that the quality of the fitted model is validated
by both R-square and F-test statistics. In other words, the econometric model that was fitted to examine FDI in
South Asia fits adequately.
Overall, the empirical estimations showed that economic freedom, GDP per capita, population density,
government consumption expenditure, and government expenditure on education are positively associated with
FDI in South Asian countries. In contrast, inflation was found to have a negative relationship with FDI.

6. Conclusion and Recommendations

The goal of the current study was to investigate how FDI in the South Asian region is impacted by economic
freedom. The period under examination spanned from 2001 to 2021, during which the influence of several factors
such as population density, GDP per capita, inflation, government spending on education, and government
consumption was also evaluated. The relationship between these variables was examined using the panel data
estimation fixed effect model. The findings confirm that economic freedom and FDI in the South Asia have a
strong and direct relationship. Further, increased population density, government spending on education, per
capita GDP, and government consumption all have a favorable effect on FDI inflows. In contrast, it was
discovered that inflation had a detrimental impact on FDI inflows. In conclusion, this study provides insights into
the nexus between FDI and economic freedom in the region. The findings suggest that promoting economic
freedom can play a crucial role in increasing FDI. Policymakers in the region are advised to prioritize creating an
environment that fosters economic freedom and mitigates the negative impact of inflation on FDI. This can be
achieved through various measures such as reducing barriers to entry, promoting competition, improving the
356
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business climate, providing tax incentives, enhancing the legal system, improving education and human capital,
and encouraging innovation.

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