Trade liberalization has been widely recognized as one of the key driving forces of economic integration and globalization over recent decades. The main objective of this study is to examine the impact of trade liberalization on domestic investment by considering the role of selected macroeconomic variables in developed and developing knowledge-producing countries. To capture potential nonlinearities and regime-dependent effects, the Panel Smooth Transition Regression (PSTR) model is employed. The statistical sample consists of a group of developed and developing countries selected based on their level of scientific production and data availability over the study period. Trade liberalization is considered as the transition variable, while domestic investment is treated as the dependent variable. In addition, macroeconomic factors including economic growth, inflation rate, interest rate, private sector credit, and foreign direct investment are incorporated as control variables. The empirical results indicate that the effect of trade liberalization on domestic investment is nonlinear and depends on the level of trade openness. Specifically, in regimes characterized by lower levels of trade liberalization, its impact on domestic investment is relatively weak, whereas beyond a certain threshold level, trade liberalization significantly enhances domestic investment. The findings also reveal that macroeconomic stability and financial development play a crucial role in strengthening domestic investment, particularly in developing countries. These results highlight the importance of adopting gradual and well-designed trade liberalization policies accompanied by supportive macroeconomic frameworks to promote domestic investment and sustainable economic growth.



Keywords: Trade Liberalization, Domestic Investment, Developed countries, Developing countries, Panel Smooth Transition Regression (PSTR)