Does the Quality of Governance Have the Power to Attract Foreign Investors? Evidence from the EU-13 Member States

Purpose:This chapter aims to assess the governance quality (GQ) in the EU-13 member states (MS) over the 2004–2022 period, examining the relationship between GQ and investment attractiveness, measured by foreign direct investment (FDI) inward stock as a % of gross domestic product (GDP). Studies on the relationship of institutions and governance on FDI inflowconducted for the EU-13 MS are relatively rare. Methodology: First, countries of the EU-13 exhibiting similar levels of GQ (hierarchical cluster analysis) are identified using the Worldwide Governance Index (WGI). We use the values obtained from the authors’ originalsynthetic index of governance quality(SIGQ) to compare levels of GQ among the EU-13 MS between 2004 and 2022. Third, FDI inflows to the EU-13 MS. Finally, a correlation matrix and contingency coefficients are used to examine the relationship between FDI inflows and groups of countries with similar SIGQ and the relevance of six individual GQ dimensions for FDI inflows in the EU-13 MS. Findings: The EU-13 MS differ significantly in the overall GQ measured by the WGI. Statistical analysis results are used to validate the hypothesis about a positive relationship between GQ and the inflow of FDI. The approach adopted for this chapter and its value-added lie in dividing the EU-13 MS into groups based on their similar performance concerning GQ (measured by six governance dimensions) and proving that GQ matters for FDI inflows. Practical implications: High-quality governance can contribute to the investment attractiveness of countries and influence FDI flows, with implications for practice.