Threshold effects and regime persistence in the FDI-trade nexus: evidence from emerging markets using panel threshold vector error correction models

Over the last 30 years, China has experienced outstanding economic growth along with significant transformation in its financial system and institutional environment. It has also emerged as the primary destination for substantial foreign direct investment (FDI). Therefore, numerous studies have focused on the roles of FDI, financial development and institutional quality in stimulating the Chinese economy. However, existing literature primarily addresses the direct linear impact on economic growth, neglecting potential non-linear relationships and the roles of institutions and financial development in moderating the FDI–growth nexus. This study employs unit root and Johansen’s cointegration tests to examine the roles of FDI, institutional quality and financial development in explaining economic growth in China from 1985 to 2020. Our results show that FDI, institutions, financial development and growth are cointegrated, with non-linear effects of institutional quality and financial development on growth. Furthermore, the impact of FDI on growth decreases when financial development is high (0.627%–0.517%), but increases with improved institutional quality (0.921%–1.158%). Hence, continuous improvements in institutional quality and the financial system do not uniformly affect economic growth, but significantly influence the contribution of FDI to economic growth in China.

The purpose of this study is to examine the impact of institutional quality on foreign direct investment (FDI) using panel data of 117 countries around the world from the period of 2001 to 2018. To enhance the accuracy of the estimation results, this study includes various statistical tests to select the estimation method that best fits the sampling data used in this study. Furthermore, while the robust standard error is applied to correct the problem of heteroscedasticity, this study addresses the potential endogeneity problem by system GMM estimation. The results indicate that the improvement in institutional quality significantly and positively contributes to FDI. More importantly, the results also reveal that economic integration has improved the role of institutional quality, indicating that the promotional effects of institutional quality on FDI are greater in economic integration areas. The results also suggest that the launch of China’s Belt and Road Initiative has greatly enhanced the promotional effects of institutional quality on FDI. The findings of this study offer policy implications for policymakers to take measures to improve institutional quality and thereby to enhance FDI and further accelerate the formation of economic integration in a more sustainable way.

Purpose This paper aims to offer an empirical study of the impact of institutional quality on the banking system risk and credit risk. Design/methodology/approach Applying cross-sectional dependent tests and stationary tests to check the property of our sample, the panel corrected standard errors model is recruited as the main estimator, while feasible generalized least squares, pool ordinary least squares (OLS), robust pool OLS and other estimators are used as a robustness check for an unbalanced panel data for 56 economies divided into three subsamples between 2002 and 2015. Findings The empirical results show several significant contributions. First, an improvement in institutional quality is an important factor to reduce the banking system risk. This effect of the institutions is less important in well-capitalized, highly profitable and in high-economic growth countries. This effect is also stronger in highly liquid banking systems. Notably, a better institutional quality helps to reduce the banking system risk in the highly concentrated banking system. Second, institutional quality has a significant negative relationship with the banking credit risk, especially in highly concentrated banking systems and in high-growth countries. This influence is weaker in highly liquid and well-capitalized banking systems. Finally, better institutions reduce the positive effect of trade openness, but it induces a higher credit risk for the banking system from the trade openness. Notably, a better institutional quality enhances the negative effect of foreign direct investment (FDI) inflow on both banking system risk and credit risk. These findings are documented for a global sample and three subsamples: low and lower-middle-income economies, upper-middle-income economies and high-income economies. Originality/value This study provides some recommendations, for policymakers, on the roles of institutions in the banking system and financial stability.

This article examines the effect of institutional quality on social cost of intermediation in high and low developed financial markets across 29 African countries between 2006 and 2013. Employing bootstrap‐quantile and two‐step system generalized methods of moments models with bank level data of about 330 banks, the results provide interesting and new insights. The results show that improvement in institutional quality in high or low developed financial markets translates into reduced social cost of intermediation to the society. However, it is evident from the results that improvement in institutional quality is more robust, persistent and weightier in reducing the social cost of intermediation in low developed financial markets which are often characterized with weak regulatory regimes and enforcement. Hence, improvement in institutional quality shores up regulatory supervision, monitoring and enforcement which translates into heavier dampening of social cost of financial intermediation in less developed financial markets. Moreover, bank size, credit shocks, return on equity and liquidity are key drives of social cost of intermediation both in low and high developed financial markets. These findings have policy implications and recommendations for policymakers and regulators of financial institutions. Policymakers and regulators, especially those in less developed financial markets, must endeavour to create, implement and advance mechanisms and enabling environment that enhances the quality of institutions since improved institutional quality reduces social cost of intermediation to the benefit of society.

In the analytical balance sheet of the base money monetary authority, Bank Indonesia explained that net foreign assets (NFA) affected the circulation of base money, including currency. This gives an assumption regarding the indication of a causal relationship between currency circulation and NFA. In addition to the causality test, the primary purpose of this study is to identify long-term equilibrium relationships between NFA and Currency Circulation. The cointegration test obtained r = 1, indicating cointegration (long-term equilibrium). Time series data plots of these two variables tend to have a trend and are not stationary. The Vector Error Correction Model (VECM) is applied as an analytical method used to correct long-term relationships between variables that are not stationary. However, in the concept of VECM deviation and short-term dynamics, the association is assumed to be linear. At the same time, in applying economics, the relationship between economic variables is not necessarily linear. The significance test for the presence of a threshold using a fixed regressor bootstrap shows a threshold effect or nonlinear VECM, so it is necessary to use an analytical method that can combine nonlinearity and cointegration through the Threshold Vector Error Correction Model (TVECM). In this study, modeling of TVECM 2 regimes and three regimes were carried out. TVECM 3 regimes obtain the best model with two threshold values ​​of -310850 and -260156.

ABSTRACTUrea fertilizer is widely used in the United States, however, urea is not publicly traded and formula pricing is common. This article studies spatial transmission and efficiency of urea prices in the Arkansas River‐New Orleans urea markets and the New Orleans‐Middle East urea markets. A vector error correction model (VECM) and Baulch's (1997) parity bound model (PBM) are estimated. A threshold VECM is considered, but no threshold effects are found so threshold effects are not included in the final VECM. The estimated VECM shows that violations of spatial price equilibrium are corrected faster between Arkansas River‐New Orleans prices than New Orleans‐Middle East prices. The long term adjustments to deviations from spatial equilibrium in the New Orleans‐Middle East price relationship are made through adjustments in the New Orleans price. The PBM shows that New Orleans‐Middle East price spreads are greater than transportation costs about 23% of the time. [EconLit citations: C32, Q13, R32].

Does institutional quality and remittances inflow crowd-in private investment to avoid Dutch Disease? A case for emerging seven (E7) economies

The positive relationship between institution quality and “official” income is well-documented. It is unclear, however, if this relationship holds once the “unofficial” economy is accounted for. An improvement in institutional quality tends to shift production out of the shadow and into the official sector. This can result in an increase in official income, at the expense of the shadow economy. This paper uses data from 4,954 Brazilian municipalities to explore the effects of institutional quality on formal, informal, and total income per-worker. The results indicate that an improvement in institutional quality leads to a positive change in total income per-worker. Importantly, the effect of improved institutional quality on income per-worker in the informal sector is neutral to positive, contradicting the findings of previous models. It seems that while positive institutional change does reallocate production from the shadows to the official sector, the reallocation increases overall productivity in the economy.

Domestic institutions are recognized as important factors in attracting foreign direct investment (FDI), and spurring economic development in host countries. There is increasing evidence, however, that FDI may in turn affect and shape domestic institutions, and it is generally difficult to disentangle these two effects. The present paper aims to shed light on this issue using extensive data on the quality of institutions and on inward FDI in 102 countries over a period of 25 years. We distinguish between different types of institution, FDI, and country, and we adopt a panel vector autoregression (VAR) approach to identify the direction of causality between the two variables. Our findings suggest that the quality of institutions matters for attracting FDI, but also that higher inflows of FDI have a significant short-term impact on the institutional quality of recipient economies. We also find that such a relationship varies with the type of FDI considered, and differs between transition and developing economies.

How Do Institutions Affect Corruption and the Shadow Economy?

We propose a three-step procedure to estimate a regime-dependent vector error correction model (VECM). In this model, not only the short-run adjustment process towards equilibrium is non-linear, as in threshold VECM and Markov switching VECM frameworks, but the long-run equilibrium relationship itself can also display threshold-type non-linearity. The proposed approach is unique in explicitly testing the null hypothesis of linear cointegration against the alternative of threshold cointegration based on the Gonzalo AND PITARAKIS (2006) test. The model is applied to apple price data on wholesale markets in Hamburg and Munich, using the share of domestic apples in total wholesale trade as the threshold variable. We identify four price transmission regimes characterized by different equilibrium relationships and short-run adjustment processes. This proposed approach is particularly suitable for capturing irregular seasonal threshold effects in price transmission typical for fresh fruits and vegetables.

GSA-based maximum likelihood estimation for threshold vector error correction model

This article analyzes the link between world prices and producer prices of rubber in Côte d’Ivoire. Using monthly data from 2006 to 2016, we gave special attention to structural breaks in the data and asymmetry in the transmission process. Empirical results validate the presence of two breaks in the data series, both in 2008 and 2011 corresponding to a general surge in commodity prices. A multivariate threshold vector error correction model (TVECM) allows us to test the presence of asymmetry. The results strongly support the linearity hypothesis against k-regime TVECM. From there, a linear VECM reveals that changes in rubber world prices are strongly transmitted to Ivorian producer prices. In case of a world price permanent decrease, this will be devastating for small producer incomes, since financial markets are essentially missing in those rural areas and switching costs for perennial crops are huge. Some recommendations are given to prevent such a crisis.

Evaluating the carbon-macroeconomy relationship: Evidence from threshold vector error-correction and Markov-switching VAR models

This article aimed at analyzing the relationship between foreign direct investments from China and the international trade of African countries. International trade was found to be affected by the degree of openness of the economy, the level of exports and the level of imports. The findings were brought out by using a Vector Error Correction Model in a cylindrical panel of 52 African countries on a period going from 2000 to 2015. The three main findings were: There was a two-way relationship between foreign direct investment and international trade; foreign direct investment had a strong positive influence on international trade; trade exerted a weak and negative influence on foreign direct investment. Thanks to this study, it was indicated to recommend that alternation be sought by African heads of states through transparent elections to guarantee political stability necessary to attract foreign direct investment. Key words: Foreign direct investment, outward Chinese foreign direct investments, international trade, exports, Imports, Africa.