The nexus of FDI, trade, and institutional quality: a panel data analysis of RCEP countries

Studies have shown that the quality of institutions or public governance significantly impacts economic growth. However, the literature on international political economy continues to debate the factors that determine institutional quality and the effects of institutional quality on economic development. There is a dearth of evidence on how international political economy - such as trade, investment, and foreign aid - influences economic and political institutional change. This study examines the relationship between global trade, investment, and public governance using data collected from the 15 Regional Comprehensive Economic Partnership (RCEP) economies from 2014 to 2023. Using a dynamic panel data approach based on the Two-Step System-GMM estimator, findings show that trade openness improves the quality of economic institutions by encouraging regulatory reforms, transparency, and competitiveness. FDI produces mixed results: it boosts economic institutions in the short term but can weaken them when linked to rent-seeking and weak law enforcement environments. However, both FDI and trade have less significant or negative impacts on political institutions, emphasizing uneven democratic accountability and elite capture in several RCEP countries.