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Institutional quality and FDI location: A threshold model

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  • Zhang, Hongxia
  • Kim, Heeho

Abstract

This paper aims to explain why foreign direct investment (FDI) inflows into South and Southeast Asia are increasing as alternative production bases to China, but are concentrated in a few countries with better institution quality. The literature posits that labor costs are a major determinant of FDI location decisions. A model of FDI location is explored to examine the threshold role of institutional quality in determining the relationship between labor costs and FDI location. Using data from 14 South and Southeast Asian countries during 2000–2017, evidence shows that effects of labor costs on FDI are nonlinearly decreasing because their institutional quality is improved above threshold values. A better quality of institution reduces country-related costs for FDI location and undermines the negative relationship between labor costs and FDI location. This study contributes by exploring the role of institutional thresholds in determining FDI location and draws policy implications despite labor costs increases.

Suggested Citation

  • Zhang, Hongxia & Kim, Heeho, 2022. "Institutional quality and FDI location: A threshold model," Economic Modelling, Elsevier, vol. 114(C).
    • Handle: RePEc:eee:ecmode:v:114:y:2022:i:c:s0264999322001882
    DOI: 10.1016/j.econmod.2022.105942
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    6. Oualid MECHTI & Khadija EL ISSAOUI, 2024. "Impact of institutional quality on foreign capital invested in Africa [Impact de la qualité institutionnelle sur les capitaux étrangers investis en Afrique]," Post-Print hal-04698139, HAL.
    7. Cieślik, Andrzej & Ryan, Michael, 2024. "Institutional quality, the level of development and Japanese outward foreign direct investment," Japan and the World Economy, Elsevier, vol. 71(C).
    8. Li, Xiuqing & Xiao, Liming, 2024. "The impact of urban green business environment on FDI quality and its driving mechanism: Evidence from China," World Development, Elsevier, vol. 175(C).
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    10. Nguyen, Ngoc Minh & Sun, Sizhong & Welters, Riccardo, 2024. "The impact of FDI on R&D investment of small and medium-sized enterprises in Vietnam: The role of institutions," International Review of Economics & Finance, Elsevier, vol. 95(C).
    11. Shen, Yu & Ren, Meixu & Zhao, Jingmei, 2023. "Bank competition and zombie company: Empirical evidence from China," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 297-318.
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    14. Dong, Ziguang & Li, Dongyu & Yuan, Bo, 2024. "Does the judicial independence affect foreign investment? Evidence from China," Finance Research Letters, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    Threshold; Relative labor costs; Foreign direct investment location; Institutional quality;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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