This study analyses the complexity of small firm (SME) formation in the 1990s, as Russia underwent systemic change. SME formation helps maintain the dynamism of a market economy and it was capturing this quality that was important for Russia. The role of SMEs in Russia however, was undermined by low formation rates, especially in manufacturing. To examine what was determining this, both the food-processing sector, where it was common to find start-ups in other transition economies, and Rostov Oblast, a well-known agricultural region able to support such a sector, were chosen.\ud
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An initial review of literature showed that no economic activity, should be divorced from the economic, political or socio-cultural environments within which it is embedded.\ud
These three environments consequently formed the basis of the conceptual framework that guided this meso level inquiry. In addition the framework incorporated analytical concepts drawn from institutional economics, the entrepreneurship literature and regional economic development to facilitate a comprehensive and fully contextualised explanation.\ud
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This study argues that throughout Russian history formal and informal institutions have shaped the opportunity structure for SME formation. In the 1990s new and old\ud
institutions maintained the dominance of former state-owned enterprises. For SMEs these same institutions had not reduced transaction costs sufficiently to encourage the exploitation of emerging opportunities, and they even appeared to be pushing SMEs into the informal economy. Moreover although a nascent middle class was emerging it remained risk averse, so that it was not an obvious source for SME entrepreneurship. The whole situation was further complicated by low trust levels, which limited economic relations to the local and the personal