The Determinants of Trade Openness in Two Emerging Economies; China-Pakistan Economic Corridor Perspective

The role of foreign direct investment (FDI) in trade openness (TO) is becoming increasingly prominent in the literature. However, the literature has not clearly distinguished whether FDI has a direct or indirect influence on TO. This article aims to examine the impact of FDI on TO through the mediating role of financial development (FD), technological innovation (TI) and labor productivity (LP) in the realism of the China–Pakistan Economic Corridor (CPEC). We used the data of China and Pakistan from 1980–2019 and applied SmartPLS for analyses. The results indicate that FDI is a significant predictor of TO, FD, TI, and LP in China and Pakistan. FD and LP significantly expand TO. Surprisingly, TI does not facilitate TO in China and Pakistan. Moreover, the relationship between FDI and TO is partially mediated by FD and LP while not mediated by TI. Based on these results, both countries are recommended to encourage FDI to configure FD and LP that will boost international trade. Further implications based on FDI, international trade and CPEC are discussed.