Foreign Direct Investment (FDI) is widely recognized as a crucial driver of economic growth, particularly in its role of transferring advanced technologies from developed to developing nations (Chenaf-Nicet and Rougier, 2016). However, the influence of political stability and trade openness on FDI remains a subject of debate. Some argue that political stability's impact is negligible as investors accept political risk (Kurecic and Kokotovic, 2017), while others highlight its positive correlation with FDI (Sabir et al., 2019). Similarly, the effect of trade openness is complex, with studies suggesting it enhances market access and increases investor revenue expectations (Djulius, 2017). This study focuses on the Asia-Pacific region due to several compelling reasons. First, it encompasses some of the world's fastest-growing economies (e.g., China, India, and Southeast Asian nations), representing a significant portion of global GDP. Second, the region's considerable growth in exports highlights its increasing role in global trade. Third, the diverse political landscapes within the region, ranging from stable democracies to authoritarian regimes, present a rich context for analyzing the interplay between political stability, trade openness, and FDI. Fourth, the Asia-Pacific region has historically attracted substantial FDI inflows. Investigating this interaction within this context provides valuable insights into investment patterns and the contribution of FDI to economic development. This research specifically investigates the moderating role of trade openness on the relationship between political stability and FDI. The Asia-Pacific governments' active pursuit of trade liberalization, economic reforms, and political stability further underscores the relevance of this study. The study's methodological contribution involves using the dynamic system GMM, a more efficient method than OLS and FEM, which better handles autocorrelation and heteroskedasticity inherent in panel data. Furthermore, the study employs the Johnson-Neyman test to rigorously assess the moderating effect of trade openness.

The relationship between trade openness and FDI is multifaceted. While some studies suggest that increased trade openness can reduce FDI in emerging markets due to factors like less attractiveness compared to counterparts, tighter environmental regulations to avoid inefficient projects, and risk/uncertainty affecting investor decisions (Bhasin and Garg, 2020; Mudiyanselage et al., 2021; Khan and Hye, 2014), others highlight its positive effects. Studies supporting the market-seeking, efficiency-seeking, and resource-seeking theories demonstrate that trade openness, by removing trade restrictions, attracts foreign investment (Gnangnon, 2018; Hashmi et al., 2020; Kurul and Yalta, 2017). This is because reduced tariffs and import duties lead to cost efficiency for multinational corporations. Increased demand for goods abroad and exports in the host country further contribute to this positive correlation (Kurul and Yalta, 2017). Gnangnon (2018) adds that less developed countries may have a comparative advantage in attracting FDI through trade openness policies. Regarding the relationship between political stability and FDI, the literature presents contrasting views. Some studies suggest that better political stability fosters FDI through improved institutional environments that protect property rights, guarantee contract enforcement, and create stable economic climates (Elish, 2022; Buitrago and Barbosa Camargo, 2020; Ciesielska-Maciagowska and Koltuniak, 2021). This aligns with institutional and governance theories. Others, however, argue that political stability can negatively impact FDI, particularly when coupled with unfavorable regulatory policies or excessive government intervention (Kurecic and Kokotovic, 2017; Shan et al., 2018). This perspective emphasizes the regulatory risk theory. Finally, the moderating role of trade openness on the relationship between political stability and FDI is explored. Studies suggest that high trade openness and political stability attract foreign investors due to market-seeking and institutional quality theories (Blomstrom et al., 2001; Hashmi et al., 2020; Kurul and Yalta, 2017; Rashid et al., 2017; Sabir et al., 2019; Kinuthia and Murshed, 2015). These studies suggest that trade openness, particularly when combined with political stability, enhances market access and investor confidence.

The study employs a panel data analysis encompassing 25 Asia-Pacific countries from 1990 to 2020. Data was sourced from the World Bank Database. Outliers were mitigated by winsorizing at the 5% and 95% levels, and observations with insufficient data were excluded, resulting in a final sample of 463 annual observations. Initial estimations utilized standard panel data methods such as OLS, FEM, and REM. The Hausman and Lagrange Multiplier tests determined the most suitable model (REM in this case). However, to address potential autocorrelation and heteroskedasticity, the study ultimately employed the dynamic system Generalized Method of Moments (GMM) estimation. The study also utilized a moderated regression approach and the Johnson-Neyman technique. The interaction term (TO*POL) was incorporated into the model to analyze the moderating role of trade openness (TO) on the relationship between political stability (POL) and FDI. The Johnson-Neyman test allowed identification of the specific ranges of TO where the relationship between POL and FDI is statistically significant. The model included control variables such as the consumer price index (CPI), control of corruption (COC), and GDP growth rate (GDP_GROWTH). Two robustness tests were performed: the first used Two-Stage Least Squares (TSLS) estimation, and the second excluded tax haven countries. This was done to assess the generalizability and the stability of the main findings across varying methodologies and sample selections. The descriptive statistics are presented to showcase the characteristics of the variables, and a Pearson correlation matrix assesses any multicollinearity issues before the analysis commenced.

The empirical analysis yielded several key findings. First, trade openness exhibits a significant positive correlation with FDI inflows. A 1% increase in trade openness is associated with a 0.0330% increase in FDI (GMM results). This result supports the market-seeking, efficiency-seeking, and resource-seeking theories. Second, political stability shows a statistically significant negative relationship with FDI. A one percentage point increase in political stability corresponds to a 0.1571% decrease in FDI (GMM results). This finding supports the regulatory risk theory, suggesting that stable political systems might impose restrictive regulations or bureaucratic hurdles that hinder foreign investment. Third, the interaction term between trade openness and political stability reveals a significant positive effect on FDI, indicating a moderating role of trade openness. The Johnson-Neyman test provides further insight into the strength of this moderation effect across different levels of trade openness. Fourth, the positive relationship between inflation and FDI is reported in some models but not all, indicating a potential for nuanced interpretation in line with economic dynamism and the competitiveness of exports. Fifth, Corruption control, although insignificant in certain models, shows a positive impact on FDI, implying that reduced corruption enhances investor confidence. Sixth, Economic growth demonstrates a robust positive association with FDI inflows, supporting the notion that robust growth signals a favorable business environment. Robustness tests using TSLS and analysis excluding tax havens generally confirm the main findings but with nuances related to the interaction effects.

The findings of this study offer substantial insights into the determinants of FDI in the Asia-Pacific region. The positive relationship between trade openness and FDI confirms the importance of creating an open and accessible market for foreign investors. The negative relationship between political stability and FDI underscores the need for well-designed policies that foster a business environment which is neither overly restrictive nor unpredictable. The moderating role of trade openness highlights the potential of strategically using trade policies to attract FDI even when political stability might be sub-optimal. This is particularly important for policymakers in the Asia-Pacific region, where a diverse range of political systems coexists. The interplay between trade openness and political stability provides a nuanced understanding of FDI determinants, and policies should target these two aspects in tandem. Further research can investigate the effect of different forms of trade openness, political stability, and the moderating role of institutional quality on FDI inflows in various regions.

This study provides valuable evidence on the complex interplay of trade openness, political stability, and FDI in the Asia-Pacific region. The significant positive effect of trade openness and the moderating effect of trade openness on the negative relationship between political stability and FDI highlight the importance of strategic policies that promote both elements. The study's limitations, including the potential inefficiencies of GMM in differentiating short-term and long-term impacts, suggest avenues for future research using ARDL estimations. Overall, the study contributes to the literature and provides policy implications for attracting FDI sustainably in the Asia-Pacific region.

While this study offers significant insights, some limitations exist. The GMM method, while effective in handling autocorrelation and heteroskedasticity, might not fully capture the dynamic short-term and long-term effects of the independent variables on FDI. Future studies employing ARDL estimations could provide a more nuanced understanding of these temporal dynamics. The study's focus on 25 Asia-Pacific countries might limit the generalizability of the findings to other regions. The specific indicators used to measure trade openness, political stability, and other variables could influence the results; using alternative measures in future research could offer further validation. Finally, the study's reliance on World Bank data introduces potential data limitations and biases that warrant consideration.