Dynamic and Nonlinear Links Between Institutions and Growth: The EU Experience

This study looks into the influence of institutional quality on economic development in European Union (EU) countries from 2000 to 2023. Baseline relationships are computed with pooled ordinary least squares (OLS), yet quantile regressions reveal varying impacts throughout the distribution, especially in the extremes. To handle the issues of dynamics and endogeneity, a two-step system generalised method of moments (GMM) estimator is used. Institutional quality is represented by government efficiency, political stability, and regulation quality, while the absorptive-capacity channels are tested with openness, foreign direct investment (FDI), and research and development (R&D) intensity, both ways. The study is a long-run growth study that does not estimate COVID-19 crisis-specific effects. Effective institutions facilitate growth, even though the extent of the facilitation differs across income levels. Openness to trade is a forceful predictor of the distribution. The return on FDI is lower without better institutions and local absorption. Short-term R&D intensity might even hold development back under weak institutional regimes because of the implementation inefficiencies and time taken to obtain the benefits. Multiple indicators and parameter settings yield consistent outcomes. The originality of this research lies in mapping the different and changing impacts on the EU through applied nonlinear interactions (institutions[Formula: see text] × [Formula: see text]openness/FDI/R&D) to uncover threshold processes. Focused improvements in regulation quality are among the proposed policies.