Measuring threshold effects in non-dynamic panels: the impact of terms of trade on FDI inflows under different regimes of institutional quality

Bournemouth

Congreso; Arnoldshain Seminar XVI. Trade and Innovation in a Changing World. Bournemouth University.; 2019

Bournemoth University.

This paper explores the relationship between the Foreign Direct Investment (FDI) inflows and the terms of trade (TOT). The underlying assumption is that the impact of terms of trade is strongly conditioned by the level of institutional quality that the countries experience. Following Walsh and Yu (2010) it is assumed that the corruption and weak property rights tend to rise the cost to install new investment; as a consequence, foreign investors decide not to invest in domestic (developing) economy even though it faces an ?opportunity? given by the uprising trend in the terms of trade that they experienced from the beginning of the 2000?s. This methodology estimates the thresholds (meaning those levels of the institutional quality from which the impact of terms of trade on FDI tend to change) and the coefficients of the regression equation as well. The coefficients that measure the impact of TOT of FDI increase as the economy reaches a new (higher) threshold of institutional quality.