Heterogeneous effects of institutional quality on FDI: evidence from EU member states

This paper analyses the impact of institutional quality on foreign direct investment (FDI) inflows in European Union member states over the period 1996–2023. The primary objective is to examine whether the effects of individual Worldwide Governance Indicators (WGI) on FDI differ between countries with high and low levels of institutional quality. Countries are classified based on the median value of the Government Effectiveness (GE) indicator. The analysis applies a fixed effects panel model with robust standard errors. Model diagnostics confirm the specification’s validity while robustness is tested using a dynamic panel model. The results indicate that control of corruption and political stability are positively and significantly associated with FDI inflows. However, their effects are notably weaker in low-governance countries. Other WGI dimensions do not exhibit statistically significant relationships with FDI.