Recent literature on institutions and economic growth lays its emphasis on the institutions as an efficiency parameter which enhances the ability of factors of production to contribute to the output. However, this study focuses on the proposition that institutional quality not only acts as an efficiency enhancing parameter but also plays a significant role in determining the stock-level of the factors of production. This results in an increased role of institutional quality in determining and explaining income differentials among the countries. A theoretical framework has been proposed in the study to incorporate such a role of institutional quality. The study employs the system GMM to estimate the empirical relationship between institutional quality and economic growth. Supervisor:-Dr. Idrees Khawaja