The impact of institutions on SMEs’ innovation in Transition Economies

Abstract: This paper aims to investigate the institutional impact on innovation of firms across 30 transition countries in Central Asia and Eastern Europe. Building on the institutional theory literature, we hypothesize on the direct influence of formal and informal institutions on innovation, also taking into consideration the interaction effects between them, where the last play the role of moderator variable, and third, we examine the EU Membership as a control variable. The study uses structural equation modeling and data from Business Environment and Enterprise Performance Surveys (BEEPS) conducted by the World Bank/EBRD in 2012-2014 to understand the impact of institutional factors on the innovation of SMEs in transition countries. These results suggest that the perceived institutional obstacles are not an issue for the creation of innovation because bribery is used to overcome government ineffectiveness, bureaucracy and inflexible legislation that inhibits smooth economic activities.