Moderating Effect of Economic Freedom on the Relationship Between Domestic Investment and Foreign Direct Investment

This paper explores the role of economic freedom in explaining the relationship between foreign direct investment and domestic investment for a panel of 18 African countries for the period running from 1996 to 2021. In particular, the paper uses the JKS panel Granger causality test to underpin the direction of causality between the variables. This procedure is adopted because it is robust under cross-sectional dependence and allows for slope heterogeneous coefficients. The study used the Feasible Generalized Least Squares (FGLS) estimator for parameter estimates. The robustness of the results from the FGLS model was checked through the Panel Corrected Standard Error (PCSEs) estimator. The results from the multivariate functions of the JKS test show that domestic investment and economic freedom jointly Granger-cause foreign direct investment. Similarly, foreign direct investment and economic freedom are found to jointly Granger-cause domestic investment. The results further show evidence of bidirectional causality between foreign direct investment, economic freedom, and domestic investment. The results from both the FGLS and PCSEs estimators indicate that domestic and foreign direct investment have significantly positive effects on each other. However, economic freedom has significant positive and negative effects on domestic and foreign direct investments, respectively. The policy implications are discussed.