The role of trade openness in influencing the impact of political stability and shadow economy on foreign direct investment in emerging markets

Abstract

This research investigates the impact of trade openness, the shadow economy, and political stability on foreign direct investment (FDI) across 32 emerging economies from 2010 to 2023. Utilizing the dynamic system Generalized Method of Moments (GMM), the study addresses heteroskedasticity and autocorrelation concerns. Additionally, the Johnson–Neyman test is employed to explore whether trade openness moderates the effects of political stability and the shadow economy on FDI. The results reveal that both trade openness and political stability significantly enhance FDI inflows, while the shadow economy exerts a negative influence. Notably, the Johnson–Neyman test confirms that trade openness moderates the interplay between political stability, the shadow economy, and FDI in emerging markets. These findings are consistent with theories of market-seeking, efficiency-seeking, resource-seeking, and regulatory risk. The study provides actionable insights for policymakers to design strategies that foster sustainable FDI attraction