Governance improvements and investment in transition economies

Abstract

Are changes in governance associated with investment and growth across transition economies, and do these relationships depend on initial institutional conditions? This study uses a country-year panel of 30 economies in Central and Eastern Europe, the Western Balkans, and the post-Soviet region from 2005 to 2024. The principal analysis relates a continuous composite of the Worldwide Governance Indicators to net foreign direct investment inflows, gross capital formation, and GDP growth using country and year fixed-effects models, with additional controls for government ideology and electoral timing. Supplementary event-study and staggered difference-in-differences specifications examine economic trajectories around discrete governance-improvement episodes. The continuous-governance estimates show no statistically significant average association with any of the three outcomes, including after accounting for political controls. The supplementary analysis indicates that gross capital formation followed a more positive trajectory in countries with stronger initial Control of Corruption scores than in weaker-institution countries four and five years after a governance-improvement episode. The differential at three years is only marginally significant under wild-cluster bootstrap inference. These coefficients represent differences between institutional groups instead of absolute effects within stronger-institution countries. No comparable pattern appears for foreign direct investment or GDP growth. The findings are consistent with the possibility that the investment relevance of measured governance improvements depends on pre-existing institutional credibility, but they should be interpreted as conditional associations and not causal effects.