The role of labour market and economic freedom in the effects of foreign direct investment on growth, economic complexity and environmental quality

This thesis examines the intricate interplay between foreign direct investment (FDI), economic complexity, labour markets, and environmental degradation across various economic landscapes. The study is segmented into three key objectives. The first objective examines the moderating effect of flexible labour markets on the FDI-growth nexus. Using a sample of 123 developing and developed countries over the 2000-2018 period and employing a dynamic panel data estimator, the findings reveal that labor market flexibility significantly enhances the positive impact of FDI on economic growth. This is particularly evident in countries where labour regulations are adaptively aligned with global economic shifts, underscoring the importance of agile policy frameworks that accommodate the evolving demands of labour in attracting beneficial FDI. The second objective explores the effect of FDI on economic complexity (or sophistication), a concept that encapsulates the complexity and knowledge intensity of a nation's productive output. Using the panel data from 108 countries for the period spanning 1995 to 2019, FDI serves as a crucial channel for the transfer of advanced technologies and skill sets, which in turn fosters an environment conducive to sophisticated economic activities. The findings suggest that targeted FDI, particularly in high-tech sectors, is integral to elevating a country's economic complexity, thereby facilitating a transition to knowledge-based industries. The third objective assesses the role that economic freedom plays in the relationship between FDI and environmental degradation. Adopting a threshold regression approach, the study meticulously assesses how varying degrees of economic freedom, particularly regulatory quality, influence the environmental impact of FDI. Using a panel dataset of 123 countries, spanning from 2000 to 2018, the results indicate that beyond a certain regulatory threshold, FDI tends to contribute to improvement in environmental quality, highlighting the critical role of well-designed government policies in mitigating the negative externalities of foreign investment and steering it towards green growth trajectories. Throughout the thesis, the synergistic effects of labour flexibility, economic complexity, and regulatory frameworks are explored in the context of FDI. The research underscores the potential of FDI as a catalyst for economic development when complemented by supportive labour markets and regulations. However, it also addresses the complexities inherent in maximizing FDI's benefits, emphasizing the need for good economic policies that recognize the diverse implications of foreign investment. Policy implications arising from this study are manifold. It recommends reinforcing labour market flexibility to better leverage FDI for economic growth, fostering industry-specific strategies to attract FDI that boosts economic complexity, and enhancing regulatory frameworks to ensure that FDI contributes positively to environmental outcomes. These strategies are vital for policymakers aiming to harness FDI's full potential while safeguarding environmental and economic sustainability.

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