There has been a revival of interest in small scale industries and their linkages with a nation's institutional arrangements, among both academicians and policy makers. Extending the definition of institutions to include formal and informal rules, this paper attempts to identify these lingages using the technique of transaction costs. Applying this to the economic environment of small firms in Tanzania, a country presently undergoing transition from a socialist to a market oriented economic system, it is found that transaction costs have been high among Tanzania's small firms owing to certain institutional factors which have shaped the country's developmental history. Among the most important identified are tha official ideology alien to small scale production, direct intervintion of the government and weak linkages between parastatals and small firms. It is argued that institutional rigidities constitute a main source of high transaction costs during the period of transition, as well as a challenge for the development of a dynamic small scale industrial sector in the future.Small industries; institutions; transaction costs; transition; Tanzania
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