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Realizing the Threshold Effect of Trade Openness in Finance-FDI Nexus: Evidence from Belt and Road Initiative Countries

Author

Listed:
  • Mollah Islam
  • Md. Riad Hassan
  • Md. Miraj Hossen

Abstract

A country’s attitude towards cross-border trade and its level of openness exert a significant effect on inward foreign direct investment (FDI) flows, which is yet to be empirically answered. Thus, this study explores how trade openness moderates the effect of financial development on FDI inflows in BRI countries, with an emphasis on threshold effects. The panel threshold estimator shows a single significant threshold of 4.524 (or 92.241%) of financial development units, above which the relationship between FD-FDI turns nonlinear. It implies that FD may positively attract FDI when a country achieves a trade openness (TO) beyond a certain threshold level while below the said threshold level, FD may not attract FDI convincingly. The threshold identified indicates a moderate level of TO. The results are robust under different proxies and sub-samples. Thus, the policymakers are suggested to enhance the financial system and concentrate on maintaining a minimum level of TO while devising policies to attract FDI.

Suggested Citation

Handle: RePEc:air:journl:v:12:y:2025:i:11:p:1697
DOI: 10.22034/ijmae.2025.232405
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