Economic Freedom, Democracy, Human Development and Cultural Paradigm: Qualitative Determinants of Foreign Direct Investments

The traditional analysis of the foreign direct investments' (FDI) determinants usually derives from the rational choice framework. Consequently, these determinants include: market size and growth potential of the host country, production costs, real and financial infrastructures, transaction costs, geography and resources. Relatively less attention was paid to non-traditional qualitative factors such as political, social and cultural FDI environments. Thus, this study advances a theoretical and empirical framework able to capture the potential impact of qualitative variables. Our main argument consists in the thesis that such variables are able to exercise a larger influence on the amplitude and structure of FDI flows than it can be predicted from a classical approach, due to the interlinkages between these and domestic / foreign subjects' behaviours. Bounded-rational investors will consider in their investment decisions not only the macroeconomic and sectorial conditions of the host economy, but also the descriptors of the socio-political and cultural architecture and the compatibility degree with their own referential. Meanwhile, the FDI's success depends on passive transfers of technologies and institutional mechanisms as well as on the absorption capacity of such elements. Our methodology involves a Principal Component Analysis applied on the explanatory variables and a pool data regressions model on a sample of countries with FDI stocks as dependent. The Index of Economic Freedom, Polity IV project Index of Democracy, Political Rights index (Freedom House), Internet users, and World Values Survey questionnaires data and the KOF Index of Globalization (Swiss Federal Institute of Technology Zurich) are used as proxies for the status of economic freedom, democracy, cultural paradigm, knowledge-based society and openness degree to globalization in host countries. The empirical results suggest that there is room for a more detailed study of the FDI behaviors especially in developing countries since institutional, functional, socio-politic and cultural paradigm factors matter more to these behaviours than it can be deduced from standard analysis. These outcomes concur with a recent promising body of literature that attempts to surpass the limits of rational choice models in order to provide a more realistic description of FDI determinants.