Investment has been found to be a significant determinant of growth. This paper
analyses the effects of institutions and transition progress on investment rates of
transition economies since the collapse of the Socialist Bloc. Political institution is
measured by the Freedom House’s Political Rights and Civil Liberties indexes;
economic institution is proxied by the Index of Economic Freedom compiled by the
Heritage Foundation; and transition progress is documented by the European Bank for
Reconstruction and Development’s transition index. Panel data estimation techniques
are applied and the results show that institutions and transition progress have expected and significant effect on investment rates of transition economies. However, it is the progress in all aspects of economic freedom that matters; just some individual economic freedom measures are significant marginally. Besides, as conditioning variables, growth, saving and financial development (liquid liabilities as % of GDP) are also found to have significant and positive effect on investment in transition economies. This paper highlights the indirect effect of institutions on economic growth via investment
