Institutional quality, vulnerability, and FDI attraction: New evidence from a novel quantile regression approach

This study focuses on analyzing the causal heterogeneous impact of institutional quality on FDI attraction by using data from 106 countries over the period 2002-2021 from the novel quantile regression approach, including Smoothed Instrumental Variable Quantile Regression (SIVQR) and Method of Moments Quantile Regression (MM-QR) to address critical issues of endogeneity, heterogeneity, and cross-sectional dependence. Then, the empirical results show that institutional quality has causally heterogeneous impacts, and it increases at higher quantile levels of FDI. This is explained that lower FDI inflows often represent small enterprises that tend to seek resources or speculate, meanwhile higher FDI inflows often represent large corporation s with abundant capital, as well as technology-intensive, tending to seek efficiency. Then, large FDI inflows, which value vulnerability more, tend to focus on countries with high levels of institutional quality to ensure long-term development. Therefore, this study suggests that countries should improve institutional quality to reduce vulnerability, thereby creating a stable business environment and supporting the attraction of large FDI flows more effectively.