Abstract

The purpose of this paper is to study in-depth the impact of formal and informal factors on the growth of small and medium enterprises (SMEs). Kosovo, as one of the last countries in transition characterized by difficult social and economic conditions, is used as a case study in this paper. The main institutional obstacles faced by SMEs in Kosovo that are involved in international trade will be analyzed from the perspective of the institutional theory developed by North (1990). The case study is based on in-depth interviews of firms in Kosovo, using an unstructured questionnaire, conducted in 2010. The paper’s key findings show that informal activities caused by low levels of professional and ethics of officials in respective institutions, as well as poor enforcement of regulations, have significant impact on increasing transaction costs, which in turn represents a major obstacle to the further growth of SMEs.

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