Table 1: Heritage Foundation 2019 (or later year) Index of Economic Freedom
Table 2: Cato Institute Economic Freedom Ratings
In Kenya and Italy, specific components from the two indices would encourage foreign direct investment (FDI). In Italy, the most encouraging components would be investment freedom, property rights, and monetary freedom, rated 80.0, 81.7, and 86.2, respectively. Such high investment freedom means that the country has few restrictions, which provides the proper structure for a flourishing venture (Suleymanov et al., 2019). Property rights are also significant components as it means that the acquisition of property within the country is relatively more straightforward, ensuring that such property can be used as security when the need for expansion and capital acquisition arises (Van, 2020). The monetary freedom rating is also quite encouraging as it reflects a growing GDP, meaning that the earnings expected from that particular market will be high. In Kenya, the most encouraging component is government size, rated at 7.43. With such a big government, it is likely to compensate for its spending and taxes by implementing market-friendly policies (Nyasha & Odhiambo, 2019). This promotes efficiency and efficacy for foreign investors, ensuring little to no harsh policies.
However, specific indices’ components would also discourage FDI. In Italy, this component would be financial freedom, rated at 50.0. This would be discouraging because the rating is about 20 index points below the region’s average rating, meaning it is amongst the lowest. The implication is that its financial results are likely lower, translating to less institutional development, consequently leading to declined economic growth (Van, 2022). Thus, the country’s futuristic plans are average, which could harm long-term investment. In Kenya, the discouraging factors would be government integrity and fiscal health, rated 30.9 and 10.6, respectively. Such a low rating on government integrity means that the investment environment in the country is quite harsh. This can hurt FDI, which is attributable to frustrations and a lack of openness and fairness in how the government handles its operations (Behera & Dash, 2019). The low fiscal health also means that Kenya cannot meet its short and long-term financial obligations, meaning that investors in the country are likely to bear a lot of costs to run.
Nonetheless, considering the risk and return and the data from the two indices, the likelihood of investing in both countries would be low. Primarily, a risky market like Kenya’s should lead to high returns. However, this promise is relatively low considering the adversities presented by its government integrity and fiscal health. These two factors are known to lead to heavier tax and operational burdens on foreign investors (Fu et al., 2022). To reduce this, one would be forced to partner with a citizen from the country, which can also lead one to be defrauded considering the already low integrity fronted by the government (Hassan, 2022). Similarly, investment in Italy could be quite dangerous based of its lack of financial freedom, which could be translated to mean high risk with low returns (Hassan, 2022). Besides, considering the average regional rating, it would mean that one would be making an unwise decision, yet other countries within the region have a higher promise of financial freedom.
References
Behera, D. K., & Dash, U. (2019). Impact of macro-fiscal determinants on health financing: Empirical evidence from low-and middle-income countries. Global Health Research and Policy, 4(1). Web.
Fu, H., Yan, L., & Li, H. (2022). A quantitative analysis of country relations in foreign direct investment. Computational Intelligence and Neuroscience, 2022, 1–12. Web.
Hassan, A. S. (2022). Does country risk influence foreign direct investment inflows? A case of the Visegrád four. Economies, 10(9), 221. Web.
Nyasha, S., & Odhiambo, N. M. (2019). Government size and economic growth: A review of international literature. SAGE Open, 9(3), 215824401987720. Web.
Suleymanov, E., Alirzayev, E., & Talibli, M. (2019). Role of economic freedom in attracting investments in the context of Azerbaijan. International Journal of Economics and Financial Issues, 9(1). Web.
Van, G. (2020). Property rights and economic freedom: An econometric analysis. EERI Research Paper Series.