Razi University

Foreign direct investment is a key driver of economic growth, technology transfer, and productivity enhancement for nations. While economic freedom can boost foreign investment by improving the business environment, the magnitude of this effect varies between developed and developing countries. Furthermore, spatial interdependencies and spillovers among countries influence foreign investment flows. This study aims to examine the effect of economic freedom on foreign direct investment (FDI) and to compare the magnitude of this effect between developed and developing countries. It also evaluates the role of spatial dependence and regional spillover effects in attracting foreign investment, as well as differences among countries in their ability to benefit from economic freedom. The present study is applied in terms of purpose and adopts a descriptive–analytical research design. Data were collected for 40 selected countries, comprising 20 developed and 20 developing countries, over the period from 2017 to 2023. To analyze the relationships among the variables and investigate spatial dependencies, static and dynamic spatial panel data models, including the Spatial Durbin Model (SDM), were employed. The results indicated that economic freedom has a positive and statistically significant effect on foreign direct investment in both groups of countries. However, the magnitude of this effect was greater in developed countries. Spatial dependence tests also confirmed the existence of spatial interactions and spillover effects among the countries, highlighting the importance of cross-border factors in attracting foreign direct investment. The findings suggest that enhancing economic freedom can contribute to greater inflows of foreign direct investment. Strengthening property rights, improving the quality of governance, and promoting economic stability are among the key factors facilitating this process. In developing countries, however, institutional reforms and the removal of structural constraints should be pursued concurrently with efforts to enhance economic freedom. Keywords: Economic Freedom; Foreign Direct Investment; Spatial Econometrics; Developed Countries; Developing Countries; Spatial Spillovers.