A new index to assess economic diplomacy in emerging countries

Abstract

This paper aims to examine the role of economic diplomacy in attracting foreign capital to emerging countries, by developing a composite index measuring diplomatic activity. We focus on what extent does economic diplomacy influence the inflow of foreign capital to emerging countries. Then, we used data from fifty-five (55) developing economies in 2018. The composite index for diplomatic activity is constructed using principal component analysis. Further, we investigated the effect of this index on foreign capital inflows using linear regression based on the ordinary least squares method. The results indicate that the increase in the number of embassies alone does not significantly influence the evolution of diplomatic action. However, diplomacy plays a non-negligible role in attracting foreign capital. Our results demonstrate a positive and significant link between diplomacy and foreign funding, highlighting the importance of this tool for attracting investment and supporting growth in these countries. The findings of this work are going to serve both scientific and practitioners’ communities as it sheds light on the larger debate around the growing role of economic diplomacy in emerging countries in the context of globalization. Moreover, it provides a useful tool for measuring the effectiveness of foreign policies and their impact on economic expansion.