Nonlinear relationship between institutional factors and FDI flows: Dynamic panel threshold analysis

- The asymmetric linkages between institutional factors and foreign direct investment (FDI) flows are examined.
- A dynamic panel threshold methodology is employed.
- The effects of the factors such as global liquidity and global risk are considered.
- Institutional quality affects FDI positively only after this measure exceeds a certain threshold value.

We analyze the asymmetric linkages between institutional factors and foreign direct investment (FDI) flows and extend the literature in the following ways. First, we employ a dynamic panel threshold methodology to analyze whether a certain level of institutional quality should be attained to attract more FDI. Second, we use a composite institutional quality index, which includes various measures of institutional quality to identify the overall impact of institutions on FDI inflows. Finally, we consider the effects of the factors such as global liquidity and global risk measure, which gained importance in recent years. Our empirical results based on 126 countries over the period 2002-2012 reveal that institutional quality affects FDI positively only after this measure exceeds a certain threshold value.