Foreign direct investment inflows, intellectual property rights and economic freedom: Empirical evidence from middle- and low-income countries

Abstract

This study examines the impact of intellectual property rights (IPRs) on foreign direct investment (FDI) inflows, using macro data over a panel of 39 middle- and low-income countries as classified by the World Bank. Empirical assessment was made in order to provide a clear and data-based explanation for this controversial issue. The analysis of the IPR/FDI nexus was carried out over the period 1990–2009 using GLS fixed effect (FE) and the two stages least square (IV2SLS) panel data estimation. Our empirical results show that the IPR has no statistically significant impact on FDI inflows in the sampled group, even when controlled for endogeneity. They also demonstrate that the FDI toward the developing countries is not affected by their institutional IPR's reforms. However, other variables, such as the economic freedom index, the market size and the level of human capital, are crucial in explaining foreign investments. These results are of particular interests to policymakers as they help identify the main factors contributing to the creation of an attractive and sound environment for FDI that can ensure sustainable economic growth.