Estimating relationships among foreign direct investment, governance quality, and economic growth in developing countries using the threshold auto‐regressive model

Abstract

AbstractThis study examines the triangular relationship between foreign direct investment (FDI), economic growth, and governance quality for 102 developing countries over the period 2000–2018. Compared with the work carried out until now, the novelty of this research lies in using the panel threshold regression (PTR) model to determine the optimal level of governance quality, which, once attained, will make economic growth increase with FDI inflows. We found that the nexus between these three variables is nonlinear. Besides, results show that there is no significant relationship between FDI and economic growth below the threshold level of −1.20 for global governance index (GGI). The results showed that the positive and significant effect of FDI inflows on economic growth begins to manifest once the GGI exceeds this threshold of −1.20. Several policies are proposed and discussed.