Institutional Thresholds and the Growth Effects of Foreign Resource Inflows in the Global South

Abstract

This study examined institutional thresholds in the relationship between foreign resource inflows and economic growth in the Global South, focusing on Foreign Direct Investment (FDI), Official Development Assistance (ODA), and Foreign Portfolio Investment (FPI). A dynamic panel threshold framework estimated via the First Difference Generalised Method of Moments (FD-GMM) was employed to account for endogeneity, heterogeneity, and cross sectional dependence. The results showed that FDI had a positive and statistically significant effect on economic growth, but its impact was conditional on institutional quality. Improvements in corruption control and regulatory quality strengthened the growth effects of FDI once threshold levels were attained. In contrast, ODA exerted a significant negative effect on growth, largely driven by corruption control conditions. FPI also negatively affected economic growth across all specifications, reflecting its speculative and volatile nature. Notably, institutional improvements did not enhance the growth effect of FPI, indicating a distinct transmission mechanism. Thus, the study confirmed strong nonlinear institutional threshold effects, showing that the growth impact of foreign inflows in the Global South is highly contingent on governance quality.