The higher education institutions in the European Union are facing more and more challenging demands regarding quality achievement. Croatia, as a EU member state, must comply to this demands. Although quality is crucial for higher education institutions, it is not sufficiently studied in Croatia and countries of the region, from a scientific point of view. In this doctoral thesis, quality of higher education is studied through the evaluation of its two basic principles: efficiency and effectiveness. The research is carried out with two models: empirical to assess the efficiency and theoretical to assess the effectiveness. The empirical model evaluates the relative efficiency of higher education institutions of economic orientation. The model results offered an overview about the relative efficiency of the observed institutions according to their areas of activities and factors affecting it. The subjects of evaluation are 31 public and private higher education institutions of economic affiliation (faculties, university departments, departments of polytechnics and private colleges) from Croatia, Slovenia and Bosnia and Herzegovina. Based on the obtained results it will be possible to influence the sources of inefficiency in each of the observed institution. Also, from results of relative efficiency, it will be possible to identify the factors that determine the position of the institutions in the cluster. The analysis was carried out through three phases. In the first phase, four models are tested using data envelopment analysis. The results of the first phase are relative efficiency scores for higher education institutions of economic orientation. In the first phase, three models evaluate the relative efficiency of the observed institutions within three main areas of their activities (teaching, research and international activity), while the fourth model evaluates the relative efficiency of the overall business. Sources of inefficiency are identified for each model and guidelines for the potential improvement are suggested. In the second phase, cluster analysis was used. Based on the results of relative efficiency for each area of activity, higher education institutions are divided into two clusters. In the third phase, univariate binary logistic regression was used to determine the key association factors of a particular cluster. Based on these factors, the probability of transition to a more favorable cluster was defined. Unlike standard models, the empirical model gives different points of view as it offers both, a comprehensive and a general insight into identifying the essential factors for positioning inside a specific cluster. The clusters are based on results of relative efficiency for different areas of activities of the observed higher education institutions. In addition to the empirical model, a theoretical framework for evaluating the effectiveness of higher education institutions was presented. The effectiveness of an institution is the process of determining how successfully the institution was in achieving its mission. To achieve a higher level of effectiveness, it is important to properly define the mission and the outcomes. If the concept of institutional effectiveness is applied on higher education institutions, it is important to decide what is important, to define the outcomes, to monitor them and to use the results to achieve a more effective activity. Given that the prerequisite for achieving effectiveness is having an efficient activity over an observed period, the results of relative efficiency should be taken into account when defining the objectives and the actions for its achievement. Although the empirical and the theoretical model are designed and applied specifically to higher education institutions of economic orientation, with certain modifications, they could be applied to higher education institutions of different orientation, both in Croatia and in other countries.