Abstract:

Institutional quality is an important factor that affects the economic and social indicators of countries. The need for strong institutions and the importance of institutional quality are also emphasized in sustainable development goals. The New Fragile Five countries are countries that are considered attractive for investment because of their growth potential. However, some structural problems limit their growth potential. Dependency on foreign investment is one of the main problems faced by these countries. Therefore, these countries should increase direct foreign investments, which are long-term investments, instead of indirect investments. Thus, their fragile structure may be reduced. In this study, the answer to the question of whether improving institutional quality is effective in increasing FDI was sought. The relationship between FDI and institutional quality was examined in the New Fragile Five countries. The World Bank Governance Index data were used to represent institutional quality. The panel ARDL method was applied with data from 2002 to 2022. According to the analysis, a significant and strong long-term relationship between foreign direct investments and institutional quality. In the long term, the effect of the variables of regulatory quality, rule of law, voice and accountability, political stability, and absence of violence/terrorism is positive. Government effectiveness and the control of corruption variables have a negative effect on foreign direct investments in the long term. To increase foreign direct investment, the New Fragile Five countries must improve institutional quality.

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