Institutional environment, innovation capacity and firm performance in Russia

Purpose – Following the demise of the Soviet Union in 1992, Russia undertook major institutional and market‐oriented reforms to enhance the competitive advantage of domestic enterprises. Although Russia has experienced rapid growth over the last two decades, the extent to which institutions in Russia impact on firm innovation and performance remains poorly understood due to a lack of research on the subject. This paper seeks to contribute to the literature on the competitiveness of Russian firms by focussing specifically on the extent to which the state of the regulatory quality, rule of law, and corruption affect the innovation capacity and performance of firms in Russia. Design/methodology/approach – The study uses structural equation modelling and data from a large‐scale firm level survey ( n =787) of firms in Russia undertaken by the World Bank in 2009. It investigates the direct and indirect perceptions of respondents of the effects the current institutional environment has on the innovation capacity and performance of their respective organisations. Findings – The results show that regulatory quality, rule of law and corruption have strong direct and negative impacts on both the innovation capacity and performance of firms, and that innovation capacity strongly mediates the effects of institutions on firm performance. The results suggest that the current state of the regulatory quality, rule of law and corruption in Russia inhibit firm innovation and their resulting performance. Research limitations/implications – The findings should be interpreted with caution to the extent that the study is limited to only three elements of the formal institutional environment and does not take into consideration the role of informal institutions. These two limitations present avenues for future research. Originality/value – The study is one of the first to provide empirical evidence based on a large‐scale survey of the extent to which formal institutions inhibit innovation and firm performance in Russia, and provides valuable guidance to business policy‐makers in Russia on possible avenues for enhancing the overall competitiveness of Russian firms.