Using a fixed-effects panel threshold regression with Driscoll–Kraay inference, this paper examines how institutional quality shapes the distributional effects of foreign direct investment (FDI) in the ASEAN-5 economies (Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) over 2002–2023. The empirical framework allows the impact of FDI on income inequality (net Gini index) to differ across low- and high-institutional regimes and to vary within regimes through interaction terms. Across governance indicators from the Worldwide Governance Indicators and a composite institutional quality index (IQ) constructed via principal component analysis (PCA), the results reveal pronounced nonlinearities, most clearly for government effectiveness, where the association between FDI and inequality switches sign across institutional regimes. For other governance dimensions, the FDI–inequality relationship is similarly regime-dependent and operates partly through regime-specific interaction effects, underscoring the importance of institutional thresholds in mediating distributional outcomes. Robustness checks confirm the directional consistency of the baseline results. Our findings imply that governance reforms must surpass critical institutional thresholds, particularly in effectiveness and implementation capacity, before FDI can contribute to reducing income inequality, highlighting the central role of deep governance improvements in enabling inclusive growth in ASEAN economies.
Tun et al. (Sat,) studied this question.