In some transition countries, the number of small businesses continues to grow, and the most successful ones developed into larger firms. In others, including Russia, small and medium enterprise (SME) sectors, after a period of initial expansion, are stagnating or even declining, due to a lack of institutional foundations for sustainable development and growth of private businesses. This paper presents evidence of the above pattern in Russia and describes some of the obstacles the SME sector has been facing. It concludes that small businesses are caught in an institutional trap of policy making that neglects needs of smaller firms.
It is often argued that secured property rights are established in response to grassroots demand of private owners. The paper analyzes preferences of private owners over the degree of protection of property rights. The framework for this analysis is an equilibrium model, which combines production and appropriation activities. It is shown that inequality in resource ownership and/or relative inefficiency of production technologies could make wealthier agents to favor less than full protection of property rights. If such agents decide the outcome of public choice of a property rights regime, then fully secured property rights will not emerge from the grassroots. This conclusion is consistent with the failure to establish an efficient system of property rights regime in Russia.