SME Market Entry in Transition Economies: The Potential of Cluster Initiatives to Fill Institutional Voids

Transition economies are potential new markets for companies in well-developed market economies and vice versa, but trade between these two institutional setups seems costly. Whereas larger companies can surpass institutional differences to offset higher transaction costs, SMEs are constrained by their limited stock of resources. However, transition economies rely heavily on SMEs to improve their trade balance and foster economic development. On a conceptual level, this article analyzes whether a cluster in a transition economy, through the services it provides, has the potential to reduce transaction costs for SMEs entering the institutional environment. To explain the extensive transaction costs in trade, the concept of institutional voids, which emphasizes missing intermediary institutions in emerging countries, is transferred to the situation in transition economies. A review of two literature streams serves to draw hypotheses for possible modes of entry for SMEs in such institutional environments. International strategy literature suggests the establishment of wholly-owned subsidiaries as an entry mode in environments with institutional voids, whereas the literature on business groups focuses on transaction-cost-reducing modes for companies situated within such an environment. As a result, the article suggests that a cluster initiative in the transition economy can fill certain institutional voids, since the cluster management functions as an intermediary and reduces search and initiation costs for both trading partners. The article contributes to the literature on the concept of institutional voids, transferring it to the context of transition economies and elaborating a link to the cluster concept.