This paper investigates whether the impacts of trade and foreign direct investment (FDI) on domestic investment depend upon social capability of a country. Applying the instrumental variable threshold regressions approach to cross-sectional data for 85 countries, it finds that social capability such as human capital, financial development, and political institutions defines the impacts of trade and FDI on domestic investment. Particularly, trade adversely affects investment in low-human-capital, less-financially-developed, or more-corrupted countries, but positively affects it in countries with opposite attributes. In contrast, FDI has a positive effect on investment in countries with low human capital, less-developed financial sectors, or high corruption, but a negative impact in countries with opposite attributes.
Bibliographical noteFunding Information:
The authors are grateful to Bruce E. Hansen for sharing the GAUSS code. The third author is grateful to the financial support from the National Science Council in Taiwan under contract NSC99-2410-H-156-00 . The usual disclaimer applies.
- Foreign direct investment
- Instrumental variable threshold regressions
- Social capability
- Trade openness
ASJC Scopus subject areas
- Economics and Econometrics