Moderated Mediation Effects of Economic Freedom on FDI Under Different Levels of Political Stability

Abstract

Global competitiveness position is perceived as a highly relevant enabler for attracting foreign direct investments. Our study goes beyond this well-known fact to understand whether economic freedom indicators are relevant cause for global competitiveness in attracting foreign direct investments and how this relationship behaves in different conditions of political stability. We focused our empirical study to mediating and moderating processes through which global competitiveness is linked with FDI. We developed and tested a second stage moderated parallel mediation model to observe mediating effects of economic freedom and moderating effects of political stability. Our research was focused on mediating effects of several indicators of Economic Freedom including Size of Government, Legal System & Property Rights, Sound Money, Freedom to trade internationally and Regulation. The findings indicate that Legal System & Property Rights and Freedom to trade internationally have positive conditional indirect effects within the model. Freedom to trade internationally is a much more sensible mediator variable in case of different levels of political stability while Legal System & Property Rights is not significantly affected by political stability, strengthening economic freedom in these two dimensions provides an enhanced effect of existing competitiveness on FDI growth. We recognized that political stability has no influence on the indirect effects between competitiveness and inward FDI produced by Legal System & Property Rights, as one of the dimensions of economic freedom. Therefore, to attract FDI in unstable political conditions is very useful to establish a proper legal system and adequate protection of property rights. In such a legal environment, foreign investors will feel comfortable regardless of the political risks in the country. Freedom to trade internationally is a much more sensible mediator variable under the influence of political instability.