This paper examines the impact of institutional quality on foreign direct investment (FDI) in developing countries. It uses a gravity model of bilateral FDI stocks, incorporating governance indicators for both the source and host countries. The study finds that institutions matter independently of GDP per capita, with public efficiency, tax systems, ease of doing business, lack of corruption, transparency, contract law, property rights security, and judicial efficiency being key determinants of inward FDI. The extent of competition and capital concentration also influence FDI. While good institutions in the host country tend to attract more FDI, no general result applies to outward FDI. Panel data regressions show that institutional distance tends to reduce bilateral FDI, although results are mixed in cross-sectional analysis. The paper highlights the importance of improving institutional quality to attract FDI and promote development, as institutional improvements can have a significant impact on FDI inflows. The study uses a variety of institutional data sources, including the French Ministry of Finance's Institutional Profiles database, the Fraser Institute's economic freedom index, and the KKZL database. It addresses potential multicollinearity and endogeneity issues through various estimation techniques, including two-stage regressions and instrumental variables. The results suggest that institutional quality is a crucial factor in determining FDI flows, and that improving institutions can help developing countries attract more FDI and achieve economic growth.This paper examines the impact of institutional quality on foreign direct investment (FDI) in developing countries. It uses a gravity model of bilateral FDI stocks, incorporating governance indicators for both the source and host countries. The study finds that institutions matter independently of GDP per capita, with public efficiency, tax systems, ease of doing business, lack of corruption, transparency, contract law, property rights security, and judicial efficiency being key determinants of inward FDI. The extent of competition and capital concentration also influence FDI. While good institutions in the host country tend to attract more FDI, no general result applies to outward FDI. Panel data regressions show that institutional distance tends to reduce bilateral FDI, although results are mixed in cross-sectional analysis. The paper highlights the importance of improving institutional quality to attract FDI and promote development, as institutional improvements can have a significant impact on FDI inflows. The study uses a variety of institutional data sources, including the French Ministry of Finance's Institutional Profiles database, the Fraser Institute's economic freedom index, and the KKZL database. It addresses potential multicollinearity and endogeneity issues through various estimation techniques, including two-stage regressions and instrumental variables. The results suggest that institutional quality is a crucial factor in determining FDI flows, and that improving institutions can help developing countries attract more FDI and achieve economic growth.