Enterprises and Institutions in Post-Communist Eurasia

Using the BEEPS, a firm survey, this paper explores whether factors related to institutions account for the observed development gradient in the former Soviet countries of Europe and Central Asia. Some responses suggest, paradoxically, that institutions-related transactions costs are larger obstacles to business in countries with less corruption and more rule of law (controlling for GDP), perhaps because better institutions encourage more transaction-intensive firms, industries, and ways of doing business. However, judiciary quality seems to decline from west to east, and firms report it as an increasing obstacle to business. Results also show that firms to the east rely more on personal networks to find customers relative to those in the west, while those in the west rely more on professional contacts and government agencies. Also, we find that corruption suppresses innovation, because firms that introduce new products have to pay more unofficial payments, especially in more corrupt countries