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

This study analyzes threshold effects in the relationship between Foreign Direct Investment (FDI) and international trade in 50 emerging markets from 2010 to 2023 using Panel Threshold Vector Error Correction Models. It identifies an institutional quality threshold at 0.647, above which FDI and trade show stronger long-term relationships and faster adjustment speeds. Countries with higher institutional quality converge to equilibrium 2.3 times faster and have less regime persistence. These findings suggest that improvements in institutional quality above this threshold significantly enhance FDI-trade integration, offering clear targets for policy interventions in emerging markets.