Institutions are strikingly absent from most economic theory, certainly from growth theory. In standard theory it is simply assumed that the needed institutional environment is there, within which economic agents can make their optimizing decisions. At the same time, in descriptive growth studies, particularly in economic history and most influentially in North (1990), the importance of good institutional contract enforcement has been emphasized for long. Good institutions guarantee property rights and minimize transaction costs, creating an environment conducive to economic growth. The considerable sunk costs of most investments create large disincentives against binding resources to projects in an uncertain institutional environment. Until recently, empirical studies measuring just how important institutions are for growth and investment have been scarce. This has mainly been due to a lack of data concerning the quality of institutions. It is obviously impossible to find data which totally conforms to a most broad definition of institutions such as Schmieding's (1993, p. 233), stating that they '... encompass not only bureaucracies and administrations but also, and more importantly, the entire body of formal laws, rules and regulations as well as the informal conventions and patterns of behavior that constitute the non-budget constraints under which economic agents can pursue their own individual ends'. Nevertheless, there has increasingly been data around which at least describes specific aspects of this definition, which covers both 'rule of law', or 'formal' institutions (enforced by the state), and 'civil society', or 'informal' institutions (enforced by convention). This data has been used to construct measures of the quality of institutions which have been applied in (cross-country) growth empirics. The initial studies have proxied the quality of institutions indirectly, using universally observable and thus 'objective' measures. Recently some studies have used more direct ways to try and capture the quality of institutions, using survey and thus 'subjective' measures.<BR> In this paper the most important empirical studies on the relationship between institutions and growth and investment, and the applications to transition countries, will be surveyed. A special focus on transition countries is considered justifiable, mainly because the transition process seems to a large extent about institutional transformation, so it may be expected that institutions 'matter' here in particular. In section 1 the main problems in (cross-country) growth empirics will be treated, showing as an important aside which (economic) variables have been found to be robustly related to growth and investment. Section 2 and 3 will judge the empirical relevance for growth and investment of respectively the objective and subjective institutional measures which have been used in the literature. The to my knowledge only two studies to date which have, in this context, specifically looked at transition countries will be treated in section 4. Section 5 will conclude.
