WHICH DIMENSIONS OF INSTITUTIONAL QUALITY MATTER MORE IN ATTRACTING FDI FLOWS: GREY RELATIONAL ANALYSIS

Abstract

The purpose of this study is to determine the relationship between individual dimensions of institutional quality and inflows of foreign direct investment (hereinafter: FDI) on a sample of European countries in 2020. In order to investigate this relationship, the data used are from the relevant World Bank databases. Taking into account the heterogeneity of the analyzed countries regarding the development level of the dimensions of institutional quality, cluster analysis is applied to define homogeneous groups. After identifying the significance of differences in the development level of the institutional quality dimensions between clusters, the analysis focus is placed on the group of countries that belong to the first cluster. The Gray relational analysis is applied to identify those institutional quality dimensions which development should be improved. The main empirical finding of this study reveals that the relative importance of the individual institutional quality dimensions in determining FDI inflows varies in the observed countries. Also, the analysis shows that a low level of political stability has the greatest negative impact on FDI inflows in countries that belong to the first cluster. Therefore, this study gives policy recommendation regarding the activities that should be taken by the authorities in order to create an enabling institutional environment for FDI in these countries.