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Economic freedom and trade flows: A moderated mediation model of inward foreign direct investment (FDI) and government stability

Belay Seyoum (Department of Business, Nova Southeastern University, Fort Lauderdale, Florida, USA)
Juan Ramirez (Department of Business, Nova Southeastern University, Fort Lauderdale, Florida, USA)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 5 August 2019

Abstract

Purpose

Economic freedom is the fundamental right of every person in a free society to control his/her own labor and property without government intervention beyond what is necessary to protect and maintain freedom itself. The purpose of this paper is to examine the association between economic freedom, inward foreign direct investment (FDI) and trade flows.

Design/methodology/approach

The authors test a moderated mediation model of the effects of economic freedom on trade flows with the objective of exploring the mediation effects of FDI and the moderating effects of government stability.

Findings

Based on a sample of 155 countries from different geographical areas, the study shows that economic freedom is associated with inward FDI, which, in turn, predicted trade flows. Furthermore, government stability moderated the relationship between economic freedom and FDI.

Originality/value

This study goes beyond the traditional focus on the macro determinants of trade flows and explores the link between economic freedom and trade flows, and the roles of inward FDI and political stability in the context of this relationship. It also provides a novel methodological approach to examine this relationship.

Keywords

Acknowledgements

The terms “economic freedom” and “institutional quality” are synonymously used in this study. “Trade flows” is exclusively used to denote international trade.

Citation

Seyoum, B. and Ramirez, J. (2019), "Economic freedom and trade flows: A moderated mediation model of inward foreign direct investment (FDI) and government stability", Journal of Economic Studies, Vol. 46 No. 4, pp. 985-1006. https://doi.org/10.1108/JES-12-2017-0378

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited