Institutions, Transaction Costs, and Entry Mode Choice in Eastern Europe

The process of change from a centrally planned system to a market economy generates an institutional framework that is only partially reformed, and therefore inconsistent and unstable. This leads to high transaction costs for economic agents. Multinational enterprises entering transition countries have to adapt their strategies to the local institutions and reduce exposure to highly imperfect markets. This paper analyzes how the costs of organizing business in transition environments influence entry mode choice. The empirical results show that host country institutions in transition economies, have an impact on the choice of entry modes. Moreover, different mechanisms determine the internalization of managerial and technological knowledge.