Economic Freedom Index and Foreign Direct Investment: Bridging the Gap between Developed and Emerging Economies

The working paper examines several variables of the Economic Freedom Index and the effect of GDP on foreign direct investment (FDI) in the 6 European Union economies (EU6) and the 6 Western Balkan economies (WB6). This study aims to explore whether these determinants affect foreign direct investments in EU6 and WB6 towards other international economies. To accomplish the stated aim, we used secondary panel data on an annual basis from the trusted databases of the Heritage Foundation and the World Bank, covering the period 2017–2023, comprising a total of 42 observations for each panel. The mathematical modeling paradigm employed is Two-Stage Least Squares (2SLS). The discoveries demonstrate that government integrity, tax burden, and business freedom statistically positively affect FDI, whereas only judicial effectiveness and trade freedom negatively affect FDI in the EU6 context. Meanwhile, in the context of WB6, the discoveries demonstrate that government integrity, business freedom, tax burden, and GDP statistically positively affect FDI, whereas judicial effectiveness and trade freedom negatively affect it. Considering the perspective of scientific contribution and creativity, the research emphasises several significant issues for the regulatory authorities that have as an ongoing agenda the encouragement of FDI entering. Policy development structures, particularly those of WB6, should establish or redesign policies that provide an attractive environment for potential investors.<br />Implications for Central European audience: The findings suggest that fostering government integrity, reducing tax burdens, and promoting business freedom are decisive for attracting FDI. Despite the fact that these factors positively influence FDI in both EU6 and WB6 economies, judicial effectiveness and trade freedom pose challenges, especially in the EU6 context. For policymakers, especially in WB6 countries, the research highlights the need to create a stable and investor-friendly environment. Central European regulators can draw from these insights to design or adjust policies that encourage greater foreign investment and bolster economic competitiveness in the region.