Institutional Voids and Innovation

Abstract

Economies fall short to varying degrees in providing the institutions necessary to support market mechanisms. These limitations, known as institutional voids, are generally thought to reduce the effectiveness and performance of firms operating in such environments. To explain how firms, deal with institutional voids, scholars have pointed to various strategies such as corporate social responsibility (CSR), internalization, information substitution, institutional borrowing, and signaling. These resource-intensive strategies are utilized primarily by very large firms. SMEs have limited resources that reduce their degrees of freedom for enacting such complex strategies. Given the significant contribution of SMEs to worldwide businesses, employment as well as national income, particularly to the emerging economies, it is important to understand their strategies in overcoming institutional voids. We suggest that SMEs will be more likely to undertake innovation to deal with institutional obstacles. Findings highlight the importance of innovation for SMEs even in environments thought to have less developed innovation-supporting systems. The connections we demonstrate between SMEs, institutional voids and innovation are new to the literature.