Impossible is nothing: Entrepreneurship in Cuba and small firms’ business performance

ABSTRACT

While entrepreneurs play a crucial role in shaping the business environment in transitional economies, there is a lack of studies that involve such contexts. Cuba represents an idiosyncratic collectivist economy that is gradually transforming into a socialist market economy, and there is a dearth of literature on entrepreneurship in Cuba. Understanding business performance drivers and challenges faced by small firms in this context may have important theoretical and practical implications. We explore the determinants of small firms’ business performance in Cuba. We combine a capabilities and institutional perspective on entrepreneurship to explain small firms’ business performance in this turbulent transitional market. Specifically, we suggest that managerial capabilities, supply-chain problems, and institutional factors explain small firms’ business performance. We contribute to both the small firm and entrepreneurship literature by contextualizing capabilities and institutional perspectives to identify the critical role played by managerial capabilities and supply-chain problems in economies where supply is constrained.

KEYWORDS:

• Institutional theory
• managerial capabilities
• supply-chain problems
• small firms
• business performance

“Impossible is just a big word thrown around by small men who find it easier to live in the world they’ve been given than to explore the power they have to change it.” (Muhammad Ali)

Transitional markets are in a process of change from a planned economy to a market economy through structural transformations that imply the development of market-based institutions. In developing and transitional markets, entrepreneurs play a role as change actors, discovering and creating business opportunities and shaping and transforming the business landscape (Chu & Song, 2015; Guerrero & Marozau, 2023; Hietschold et al., 2023). However, transitional markets are not homogeneous in their historical development and in their resulting institutional characteristics. Their context is relevant because it determines entrepreneurs’ action and behavior. As Welter (2011, p. 165) states, “There is growing recognition in entrepreneurship research that economic behavior can be better understood within its historical, temporal, institutional, spatial, and social contexts, as these contexts provide individuals with opportunities and set boundaries for their actions.”

For historical, political, economic, and cultural reasons, Cuba represents a distinctive collectivist economy that is slowly transforming into a socialist market economy. From the few studies dealing with entrepreneurship in Cuba, we can learn that although national and institutional conditions limit entrepreneurship (García-Rodríguez et al., 2022; Gonzalez-Corzo, 2020; Gonzalez-Corzo & Justo, 2017; Martínez Gil & Echeverría Hernández, 2021) and the entrepreneurial environment has deteriorated recently (Felzensztein & Gimmon, 2023), family support can overcome institutional constraints faced by entrepreneurs (Gimmon & Felzensztein, 2021). Further, differences in the administrative and financial environment affects entrepreneurs’ priorities and projections (Pérez-Campdesuñer et al., 2021), and desirability and feasibility are the main drivers of entrepreneurial intention (García-Rodríguez et al., 2022), although entrepreneurship may be a consequence of necessity in Cuba (Felzensztein & Gimmon, 2023; García-Rodríguez et al., 2022). Lastly, in the tourism industry (one of the most important in Cuba), technological and institutional factors, among other types of factors, could enhance entrepreneurial tourism development (Hingtgen et al., 2015)—for example, the development of Airbnb listings when the Obama Administration allowed U.S. tourists to visit Cuba.

We need more research on entrepreneurship in volatile transitional markets such as Cuba. First, despite the undisputed importance of entrepreneurship in transitional markets, only a small number of studies focus on the role of entrepreneurs in transitional economies (e.g., He, 2009; Lin & Lasserre, 2015; Poon et al., 2009; Wasilczuk & Zieba, 2008; Zhu et al., 2019). Second, the few studies on entrepreneurship in Cuba illustrate that there is still a dearth of literature about Cuba (Becherer & Helms, 2011; Felzensztein & Gimmon, 2023). Studies involving this Cuban context would allow us to capture how entrepreneurs deal with the necessity for self-employment when faced with prolonged and turbulent economic transition. Indeed, entrepreneurs’ needs influence the entrepreneurial process together with their human capital endowments, the environmental context, and institutional factors (Debrulle et al., 2023; Dencker et al., 2021; Nikolaev et al., 2018). Understanding the drivers of small firms’ business performance in this challenging business context is a relevant research gap as we explain below.

Business and entrepreneurship theories consider firms’ managerial capabilities among the main drivers of competitive advantage and business performance (Helfat & Martin, 2015; Teece et al., 1997). However, most theories and models that have studied business performance are based on Western and emerging market firms (McCann et al., 2001; Pindado & Requejo, 2015), which cast doubts on the suitability of these theories and models to explain businesss performance in other institutional settings. In particular, to our knowledge, no article has focused on explaining small business performance in Cuba. By studying the context of Cuba, we address Welter’s (2011) call for more research to contextualize entrepreneurship to advance our understanding of how the historical, temporal, and institutional context creates opportunities and challenges for entrepreneurs but also how entrepreneurs’ influence the context. Welter (2011, p. 168) states that “context on a higher level of analysis (the political and economic system) interacts with the phenomenon on lower level (opportunities identified by the entrepreneur) and results in a context-specific outcome.” Thus, understanding business performance drivers and challenges in underresearched empirical settings, such as small firms in transitional markets, can help scholars not only to validate, refine, or question received theories but also to theorize entrepreneurship context. At the same time, practitioners interested in this type of firm and markets such as entrepreneurs, managers, and policymakers could make better decisions after considering their idiosyncrasies.

The purpose of this paper is to explore the determinants of small firms’ business performance in a transitional market wherein specific factors and context often ignored by most business performance frameworks and models may play a vital role. Thus, we combine a capabilities and institutional perspective on entrepreneurship to explain small firms’ business performance in Cuba. There are deficiencies in both perspectives, and we address this in our study by suggesting that both perspectives could be improved by connecting with the context that is being studied. Capabilities perspective tends to underestimate the influence of the external environment (Easterby-Smith & Prieto, 2008; Eisenhardt & Martin, 2000; George et al., 2022) such as historical, temporal, and turbulent institutional contexts. However, capabilities perspective overemphasizes the internal influences at the firm level, such as renewal and reconfiguration of resources, routines, and processes (George et al., 2022). In contrast, institutional perspective tends to overestimate the influence of the external environment, such as the impact of institutions, and underestimates the influence of the internal environment, such as firm-specific advantages (Welter, 2011).

We address the shortcomings in these two theoretical perspectives by considering the interconnection between the historical, temporal, and institutional contexts and the firm’s capabilities to determine business performance in a particular context. Specifically, we suggest that, on the one hand, managerial capabilities, and, on the other, institutional factors and supply-chain problems explain small firms’ business performance. We contribute to both the small firm and entrepreneurship literature by contextualizing capabilities and institutional perspectives to identify the critical role played by managerial capabilities and supply-chain problems in transitional economies where supply is constrained.

In the following section, we provide background of the Cuban context. In the third section, our theoretical lenses help us to propose a model and develop five hypotheses explaining business performance. The fourth section presents the methods employed in our empirical study. The fifth section contains the research findings, and the sixth, their discussion. The paper then outlines the study’s limitations and issues for future research and then ends with a conclusion.

Background of Cuban context

Historical background and the changing institutional environment

The context of Cuba is an exemplar in terms of institutional environment given its historical and economic background. With the Cuban Revolution in 1959, most private businesses, were taken under the control of the state. In 1968, the “Revolutionary Offensive” nationalized the remaining close to 58,000 privately owned small enterprises to focus on industrialization and sugar production. As a result, Cuba has a history of U.S. trade sanctions which has seriously affected its economic development and environment and its supply-chain. The Soviet Bloc was Cuba’s major trading partner so that the Cuban economy suffered drastically when the Soviet Bloc crumbled. By 1991, Cuba’s economy had become more centralized, less market oriented, and less involved with the private sector than the European Communist countries (Mesa-Lago & Horst, 1993).

Cuba is currently undergoing gradual economic transformation, and this involves developing “a new entrepreneurial and regulatory culture” (Lopez-Levy, 2016, p. 58). Thus, allowing private small businesses to operate was expected to take many state employees into the private sector, reduce state expenses, and increase the efficiency of supply in many economic sectors. In Cuba, the level of economic development, institutional reforms, and low wages that are regulated created a favorable context for necessity entrepreneurship (García-Rodríguez et al., 2022).

The emergence of private businesses in Cuba

In 1978, the Cuban government revoked some restrictions on private enterprises by approving Decree-Law Number 14, which allowed 48 categories of self-employment (Pérez-López, 1995), mainly in the areas of services and handicrafts (small handmade items and goods sold in artisan markets). In 1980, Decree-Law Number 66 permitted the introduction of “Free Peasant Markets.” These reforms aimed to absorb unemployment, improve the supply of goods and services, and reduce the size of the black market (Ritter & Henken, 2015). Thus, from 1980 to 1986, there was a period of “small openings” to private self-employment and privately owned micro-enterprises, and “agricultural markets” in which private farmers were allowed to sell any excess production after delivering their quotas to the state. However, in 1986, President Castro announced the “Rectification Process” (RP) at the Third Congress of the Communist Party. The RP was intended to rectify the mistakes and negative trends that Castro thought had occurred in previous years, shutting down farmers’ markets and tightening restrictions on self-employment (Ritter & Henken, 2015).

After the collapse of the Soviet Union in 1989, very reticent economic reforms toward a socialist market economy were implemented again to improve the production of food and other staples. Cuban micro-enterprises were first legalized in 1993, with slow growth in the subsequent 10 years and with further restrictions imposed in 2005 (Ritter & Henken, 2015). Entrepreneurship was again at the center of economic reform starting in 2010, which legalized individual, small private businesses (Díaz et al., 2020).

Entrepreneurship growth was also fueled by two main factors: the increasing flow of family remittances and the growth of tourism, mainly U.S. tourists. The Obama Administration freed the flow of remittances and travel to Cuba, in 2014, thus ending five decades of hostility between the two nations. Consequently, the United States became the second-largest source of tourists to Cuba after Canada. However, U.S. sanctions prohibited the business conglomerates belonging to the Cuban armed forces (most of 65% of hotels and restaurants) to provide hotel accommodations for North American tourists and prohibited restaurants belonging to this business group from offering service to tourists. This created an opportunity for private business in lodging (mainly Airbnb), restaurants, and transportation. Figure 1 presents a summary of the historical events affecting entrepreneurship in Cuba. In line with Welter (2011) the historical and temporal context is important because it provides opportunities as well as constraints for entrepreneurs and will determine their actions and behavior.

Figure 1. Historical series of self-employed workers (1993–2020) and major chronological events affecting entrepreneurship in Cuba.

Recent institutional changes and opportunities for entrepreneurship

There was unease in the ruling Cuban Communist Party that free market reforms may have gone too far amid a broader debate about rising inequality. The tension between developing a market economy and maintaining a socialist economy is similar to the situation Vietnam has experienced (Minh & Hjortsø, 2015). As a result of this unease in Cuba, in December 2017, the Cuban government decelerated reforms by curbing the growth of the private sector (Díaz et al., 2020). These measures occurred when entrepreneurs were already suffering from U.S. restrictions imposed by the Trump Administration, which reversed Obama’s favorable moves toward Cuba. This adverse situation worsened with the COVID-19 pandemic, with a drastic decline in economic activity, especially tourism. To improve the economic situation, the government has accelerated reforms to modernize the economy, with a new law in 2021 legalizing private SMEs (Mesa-Lago, 2020). Thus, for the first time in decades, Cubans can establish a micro-, small- or medium-sized company in the form of a limited liability company. However, regulations are complex and opening and operating an SME in Cuba is more challenging than in most countries in the Latin American and the Caribbean region.

Theory and model

Drawing on entrepreneurship and capabilities theory and institutional theory, we propose a model explaining small firms’ business performance in Cuba and develop five hypotheses (see Figure 2).

Figure 2. Managerial and institutional determinants of business performance.

Managerial capabilities outcomes

We use dynamic capabilities as a theoretical lens through which we explain the impact of managerial capabilities on business performance in our small firms. We build on two often cited definitions of dynamic capabilities. First, Teece et al. (1997, p. 516) define dynamic capabilities as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments.” This rapidly changing environment captures the context of Cuba where important capabilities must be reconfigured quickly to adjust to shifts in the economic and institutional environment and facilitate access to critical inputs for the business. Second, Zollo and Winter (2002, p. 340) define dynamic capabilities thus: “A dynamic capability is a learned and stable pattern of collective activity through which the organization systematically generates and modifies its operating routines in pursuit of improved effectiveness.” This encapsulates the notion that dynamic capabilities are learned and involve systematic patterns of activity to develop and adapt operating routines. Teece, Pisano, and Shuen’s definition captures the turbulent transitional environment in Cuba while Zollo and Winter’s definition specifies how dynamic capabilities affect operating routines. Thus, we consider that both definitions are aligned with our theoretical view of the role of dynamic capabilities in an entrepreneurial context wherein recognizing business opportunities is also critical for business performance.

However, there are criticisms of the literature on dynamic capabilities for using imprecise definitions, for not providing conceptual clarity, and for weak empirical support (Arend & Bromiley, 2009; Arndt et al., 2022; Easterby-Smith & Prieto, 2008; Zollo & Winter, 2002; Zott, 2003). As Helfat and Peteraf (2009) state, these deficiencies indicate that the theory needs refinement. The dynamic capabilities perspective has also been criticized for focusing on the organization-level rather than the individual-level (Adner & Helfat, 2003; George et al., 2022). Hence, we delve into the individual-level and use the term managerial capabilities to refer to the capabilities, skills, and processes of the founders and managers in our small firms, which is more relevant for our study.

We interweave the turbulent transitional environment of Cuba and the dynamic capabilities literature to better understand the context in which these managerial capabilities develop. This enables us to address a criticism of dynamic capabilities perspective that it is too firm specific and neglects the influence of the external environment (Easterby-Smith & Prieto, 2008; Eisenhardt & Martin, 2000; George et al., 2022). Thus, when theorizing about managerial capabilities we are also considering the rapidly changing and turbulent context of Cuba wherein firms need to constantly adapt and change their managerial capabilities. The environment is constantly changing with the acceleration and deceleration of economic reforms that have an impact on managerial aspects. Similar to circumstances that entrepreneurs in other transitional economies experienced (Welter, 2011), in the context of Cuba, we consider that managerial capabilities that would have been relevant in an earlier period may no longer be useful because the external environment has changed dramatically. Dynamic capabilities perspective focuses on previous learning and experiences and involves routines to integrate and manage resources (Collis, 1994; Helfat & Peteraf, 2003; Zollo & Winter, 2002). Thus, it neglects how entrepreneurs develop dynamic capabilities in unfavorable environments wherein they must anticipate the future and adapt to ongoing drastic external changes that are beyond their control. Based on Welter’s (2011) reasoning, we consider that managerial capabilities and the institutional environment are closely intertwined in turbulent transitional economies, as the environment determines how and what managerial capabilities are developed.

Firms can shape as well as adapt to changing business ecosystems by collaborating with other businesses and institutions (Chetty et al., 2024; Teece, 2007; Welter, 2011). In dynamic capabilities’ perspective, the business “ecosystem” represents “the community of organizations, institutions, and individuals that impact the enterprise and the enterprise’s customers and supplies. The relevant community includes complementors, suppliers, regulatory authorities, standard-setting bodies, the judiciary, and educational and research institutions” (Teece, 2007, p. 1325). The capabilities to network and assess changes in the business environment by sensing new opportunities and threats is important for gaining new insights into what actions to take. Entrepreneurs can use their capabilities to shape the business eco-system and to transform it to suit shifting conditions in the environment (Teece, 2012) and alleviate supply-chain problems. Given the uncertainty and complexity of the Cuban context, an important managerial capability would be to predict future costs and sales figures, which can help quantify inputs and manage the supply chain. However, there is a knowledge gap between the prior experiences that entrepreneurs have gained by working in state-owned enterprises and then setting up their own businesses.

As soon as there is a window of opportunity in Cuba (changes in the law, an increase in tourism, etc.) new businesses are created, as happened in China (Chu & Song, 2015), Russia (Manfred Kets et al., 2004), Vietnam (Minh & Hjortsø, 2015; Nguyen et al., 2015), and Eastern European countries (Luthans et al., 2000; Weisberg & Socha, 2002). However, most entrepreneurs are driven into self-employment out of necessity to generate income for themselves and their families instead of exploiting opportunities (Felzensztein & Gimmon, 2023; García-Rodríguez et al., 2022). Necessity entrepreneurs typically experience challenges with lack of resources and access to finance and have limited relevant capabilities to run their businesses in unstable market conditions. They will learn about how to run their business, get access to supplies, and develop their managerial capabilities through experience, as they conduct their various business activities. The dynamic capabilities literature considers this to be a form of deliberate learning, which is referred to as “learning by doing” (Helfat & Peteraf, 2003; Zollo & Winter, 2002). Helfat and Peteraf (2003) propose that individual and team members would improve their processes and problem-solving as they try different alternatives and reflect on what they have learned to improve their capabilities. Thus, as entrepreneurs accumulate experience in their business by improvising and learning to do more with fewer resources and skills, they develop their managerial capabilities to handle the supply-chain challenges. When entrepreneurs repeat business activities such as managing their sales, supplier management, and cost projections, they accumulate experiences of building and modifying routines to improve the effectiveness of their processes (Zollo & Winter, 2002).

While current entrepreneurship and small firm literature focuses on more temporary crises such as the global financial crisis, earthquakes, and the COVID-19 pandemic (Miklian & Hoelscher, 2022), Cuban small firms face ongoing uncertainty and a prolonged period of turbulent transition, which could be more challenging to navigate. The small firm and entrepreneurship literature emphasizes that entrepreneurs react differently to crises, and some may have the capability to become more embedded in networks by collaborating with others to ensure a reliable source for their supplies to cope with disruption (Ho & Teo, 2022; Newman et al., 2022). Entrepreneurs could be optimistic (Ayala & Manzano, 2014) and may see these supply-chain problems as an opportunity to learn and to be flexible by adapting their business activities to navigate these changes in regulations or supplies (Miklian & Hoelscher, 2022). However, other entrepreneurs could be pessimistic (Miklian & Hoelscher, 2022; Newman et al., 2022) and perceive these supply-chain problems as a threat to their business activities. Newman et al. (2022) propose that when faced with crises, entrepreneurs could adopt an “active coping strategy” by shutting down the business, reducing their costs or adapting to the crisis by entering a new industry. In addition, entrepreneurs have the capability to adopt a “passive coping strategy” by taking a “wait and see” approach, relying on government subsidies or letting the business lie dormant and reopen when the situation improves. Thus, we suggest that important managerial capabilities will enable entrepreneurs to better manage scarce financial and human resources, collaborate with other actors, and reduce, in turn, the impact of supply-chain problems on the business.

Hypothesis 1:

There is a negative relationship between managerial capabilities and small firms’ supply-chain problems.

The term dynamic capabilities also refers to “the dimensions of firm-specific capabilities that can be sources of advantage” (Teece et al., 1997, p. 510). Firm-specific advantages relate to important capabilities that firms possess to organize and coordinate their business activities, which subsequently influences firm performance (Hansen & Wernefelt, 1989; Rumelt, 1991; Teece et al., 1997). These capabilities are reflected in an effective management of relevant factors affecting business performance in transitional markets. Among these factors, in a context of necessity entrepreneurship, effective management of costs and sales projections is imperative as resources are scarce and fulfilling small firms’ turnover and profit expectations is critical for survival. Necessity also makes it important to have the ability to manage the few partners or employees the small firm may have because this affects competitive advantage (Ferligoj et al. 1997) and performance through the number of a firm’s customers and its reputation and popularity.

Small firms are more vulnerable than large firms when confronted with a crisis because they lack resources and are unable to gain access to financing, human capital, or government assistance (Miklian & Hoelscher, 2022; OECD, 2009). However, small firms have advantages because they have the capability to be agile and develop strategies to survive crises and to grow successfully (Miklian & Hoelscher, 2022; OECD, 2009). They are resilient and have the knowledge to recognize and exploit new opportunities that the crisis situation presents (Bruton et al., 2018; Devece et al., 2016). Furthermore, their risk-taking attitude will depend on whether they started the business out of necessity or because of an opportunity. Block et al. (2015) found that opportunity entrepreneurs are inclined to take more risks than necessity entrepreneurs.

If these firms already have effective strategies and good financial management before a crisis then they are able to survive the crisis compared to under-capitalized firms (Marshall & Schrank, 2020). In addition, firms that depend on high debt to survive even before the crisis (Lawless et al., 2015) or are founded by individuals who are pushed into entrepreneurship out of necessity to create self-employment (Devece et al., 2016) perform poorly in a crisis compared to entrepreneurs who are driven by opportunity recognition. In a study in Spain relating to the financial crisis, Devece et al. (2016) found that necessity-driven entrepreneurs were less effective than the more successful ones who were driven by innovation and new opportunities. The authors argue that economic context is crucial because if it is favorable then entrepreneurs recognize opportunities and perceive the business opportunity positively. However, if the economic context is unfavorable then opportunities are sparse, and this restricts the entrepreneur’s capability to develop opportunities.

Thus, entrepreneurs who effectively organize and coordinate their business activities, creatively handle and use limited resources, and recognize business opportunities circumvent challenges in a complex and uncertain environment, such as Cuba, to attain successful business performance.

Hypothesis 2:

There is a positive relationship between managerial capabilities and small firms’ business performance.

Institutional-challenges outcomes

The institutional environment in a country relates to the political, legal, and cultural conditions that a business operates in (Kostova, 1999). According to North, “institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. In consequence, they structure incentives in human exchange, whether political, social, or economic. Institutional change shapes the way societies evolve through time and hence is the key to understanding historical change” (North, 1990, p. 3). The institutional environment is one of the most significant factors for the success of supply-chain management (Yaibuathet et al., 2008). The rigidity of the institutional environment may pressure local firms to maintain suboptimal channels and inefficient logistic systems (Bello et al., 2004).

The political and legal environment permeates the micro-economic level to create significant supply-chain challenges for small firms in Cuba. The institutional reforms in the financial sector have been slow (Vidal & Brown, 2015), and thus, it is impossible for entrepreneurs to obtain a bank loan or credit from any other formal sources to finance their businesses. Another challenge for entrepreneurs is that entrepreneurs still need to obtain their supplies from the same state-controlled retail channels as general consumers, stores that remain out of stock and with high margins, which encourages corruption and the informal, or black, market (Mesa-Lago et al., 2021).

Panwar et al. (2022) argue that the relationship between firm and government is important for building an efficient supply-chain management that can withstand future crises beyond COVID-19. Similar to circumstances that other post-Soviet transitional economies had faced (Price, 2006), Cuba experiences substantial logistics and supply-chain problems. Aging infrastructure, inefficient logistics, and inadequate storage and warehousing cannot cope with market needs, and there are often electricity outages and water shortages. Sourcing of raw materials and supplies is a major problem (Gimmon & Felzensztein, 2021), with shortages a frequent occurrence. All the institutional factors described above negatively affect production, logistics, and the supply chains of Cuban small firms. Thus, we hypothesize:

Hypothesis 3:

There is a positive relationship between political and legal challenges and small firms’ supply-chain problems.

Institutions specify the rules and regulations to provide the boundaries pertaining to how business activities are conducted and subsequently affect a firm’s performance (Bruton et al., 2018; Chetty et al., 2006; North, 1990). North found that “institutions provide the basic structure by which human beings throughout history have created order and attempted to reduce uncertainty in exchange. Together with the technology employed, they determine transaction and transformation costs and hence the profitability and feasibility of engaging in economic activity” (North, 1990, p. 118). The institutional environment sets boundary conditions for how firms should behave and what actions they can take and, thus, presents opportunities as well as challenges for the firm (Welter, 2011). The institutional environment has consequences for the economic performance in the country, as well as business performance.

Businesses in Cuba operate in complex environments with contrasting institutional logics. The contrasts would entail institutions operating with logics relevant for a command economy concurrently with institutions operating with logics relating to a market economy. Thus, providing additional uncertainty and challenges for firms in Cuba because the boundaries are not clear and are constantly shifting as political and legal reforms are accelerated and decelerated in this turbulent transitional market.

Although the institutional environment in Cuba is transforming slowly there are several challenges remaining that impede small firms’ business performance (Díaz & Barreiro, 2019; Mesa-Lago, 2018; Pérez-Campdesuñer et al., 2021). Bureaucracy and regulation; complexity of processes to register and start a business and of the tax system; and corruption may increase market uncertainty and hinder small firms’ business performance. Institutions create challenges such as regulation limiting foreign direct investment (FDI), restrictions under which industries must operate, and the setting up and functioning of private firms. These prolonged challenges are difficult for small businesses to overcome to be able to run their businesses successfully.

Thus, we suggest that the more important and prolonged the political and legal challenges for a particular industry and business, the higher the market uncertainty and the lower the small firm’s business opportunities and performance.

Hypothesis 4:

There is a negative relationship between political and legal challenges and small firms’ business performance.

Supply-chain-problems outcomes

When small firms experience supply-chain problems they cannot serve their markets and their reputation deteriorates. This in turn may affect their customers’ interest in their products and their future market share. Sales are also delayed, opportunity costs are high, and the profitability of operations is reduced. In this situation, small firms may not generate enough turnover to redeem their investments, affecting not only the firm’s performance but also its long-term feasibility. Supply-chain problems increase transaction costs as the firm has to manage the problems created, which is costly and drains time and resources.

Global supply-chain disruptions are unplanned events, such as supply shortages during the COVID pandemic, and firms have built resilience to cope with this uncertainty (Namdar et al., 2022; Panwar et al., 2022). During the supply-chain disruptions caused by COVID-19, small- and medium-size firms found that transport costs were spiraling upwards and this had an impact on their business performance and survival. More generally, supply-chain problems create uncertainty and transaction costs that deteriorate expectations of business success. Thus, we propose the following hypothesis:

Hypothesis 5:

There is a negative relationship between supply-chain problems and small firms’ business performance.

Methods

Sample and data

Respondents were selected among Cuban entrepreneurs who are self-employed and have an official license. At the time of the field research, only private businesses were allowed to operate, with restrictions on the number of employees they could retain. As 80% of self-employed businesses and business licenses are located in Havana, the data were collected in the major business, commercial, and tourist areas of this city. We obtained 112 responses from managers and owners. We discarded four uncompleted questionnaires and used a sample of 108 responses in the data analysis.

In terms of age, most respondents are mature, with 37.5% being ages 45 to 54 years and 25.0% being ages 35 to 44 years. Most respondents (56.6%) declared that their income level before creating their business was similar to the Cuban mean income, and close to one-fourth (24.2%) reported that their income was over the mean. Concerning education, most managers have a professional diploma (45.5%) or have graduated from university (31.7%). The social capital of respondents (number of relatives or friends providing advice in the start-up phase) is larger (1.5) than the business capital (number of business ties providing advice) (0.5). Most entrepreneurs (66.7%) stated that their business idea did not come from their previous experience in state institutions or state-owned corporations where they had worked before. The firms the entrepreneurs created are small (five employees on average), because of a regulation limiting the number of employees allowed to work in these ventures, and young (53.4% created in the period 2012–2014). In terms of firm ownership, most firms (70.4%) have two partners.

Questionnaire and field research

A structured questionnaire was developed in Spanish based on the Global Entrepreneurship Monitor Survey Questionnaire. However, it was “adapted” to local conditions with the feedback of three Cuban marketing professors who participated in a qualitative pretest to enhance face validity. The questionnaire included different sections to describe, among other aspects, the characteristics of the entrepreneur and the business, the reasons to open the business or to become entrepreneurs, factors explaining success and creating challenges and problems to the business, business performance, and environmental factors affecting entrepreneurial activity. The questionnaire is available from the authors in Spanish upon request.

The data collection method was face-to-face interviews, conducted by interview teams of two people from May 2016 to June 2016, which is part of a period (2011–2017) in which entrepreneurship was growing. To increase trust in the study and enhance participation, MBA students from the University of Havana were in charge of the interviews. The fieldwork was carried out while one of the authors held a visiting position at the University of Havana. The interviewers visited the firms and the interviews lasted around 30 minutes on average.

To control and test for systematic variance resulting from our data collection, we considered it in the research design stage and used the pretest of the questionnaire to avoid the inclusion of vague, unfamiliar, or confusing terms in the questions and items. Further, in an attempt to limit respondent bias, the four main groups of questions and indicators used in our constructs (about managerial capabilities, political and legal challenges, supply-chain problems, and business performance) were placed into three separate sections and measured with different response formats (e.g., absolutely not important/extremely important and far below expected/well above expectations). Finally, the large number of interviewers engaged in collecting the data diminished the potential biases caused by interviewers’ verbal particularities and expectations.

In a second stage, we applied statistical procedures to the collected data to diagnose and detect the biases not minimized by the research design. First, we used Harman’s one-factor test and found that four factors with eigenvalues over 1 explained between 26.3% and 8.2% of the variance. Second, we added a “marker” variable to the model as a surrogate for method variance. We asked for the level of agreement or disagreement (on a scale ranging between 1 and 5) with the following statement: “In Cuba, most people prefer that all individuals have the same standard of living.” We found low correlations between the “marker” and the four constructs in the model (a mean correlation of 0.07) while the significance of the path coefficients partialling out the “marker” did not differ, and the changes in their absolute values are very small (0.001 for the effects of managerial capabilities on supply-chain problems and business performance, and for the effect of supply-chain problems on business performance, and 0.005 for the effect of political and legal challenges on supply-chain problems). The research design and the results of the post hoc statistical test pointed in the direction of a limited impact of common method bias on our measures and empirical findings.

Operationalization of the constructs

We operationalized the constructs based on business and management literature when it existed and adapted most of the items and scales to the Cuban context (see Table 1). The four key constructs are composites, as they measure concepts drawn from theoretical constructs that have been widely used in business and management (Henseler, 2017). Therefore, managerial capabilities, political and legal challenges, supply-chain problems, and business performance are modeled as composites—that is, linear combinations of their indicators (Henseler, 2017). We used multiple indicators and scales ranging from 1 to 5.

Table 1. Constructs and measures. Factor loadings, construct reliabilities, and average variances extracted (AVE).

Construct/Items	Mean	SD	Standardized loadings	CR	AVE
On a scale of 1 to 5, with 1 being absolutely not important and 5 being extremely important, please rate the importance of each of these factors for the SUCCESS of your business (self-employed) Managerial capabilities				0.86	0.67
Managerial (organizational) skills and capabilities	3.88	1.07	0.86
Good management of costs and sales projections	4.12	1.06	0.70
Ability to manage and lead staff	3.93	1.07	0.88
On a scale of 1 to 5, with 1 being absolutely not important or serious and 5 extremely important or serious, please rate the importance of each of these OBSTACLES and/or PROBLEMS for proper functioning and growth of your business
Supply-chain problems				0.79	0.56
The possibility of obtaining credits or financing for the business	3.54	1.26	0.82
Problems with electricity and/or water services	3.23	1.53	0.71
Problems with getting supplies	4.49	0.87	0.71
Political and legal challenges				0.85	0.60
Too much bureaucracy and regulation by the state	4.00	1.03	0.75
Complicated processes to set up and register the business	3.50	1.24	0.87
A complex and confusing (and changing) tax structure	3.80	1.13	0.80
Corruption	3.44	1.41	0.64
Business performance Please rate on a scale of 1 to 5, with 1 being far below expected, 2 being below expected; 3 as expected; 4, above expectations; and 5, well above expectations, the success of your business in the following variables				0.90	0.64
Turnover	3.59	0.95	0.88
Number of customers	3.62	1.02	0.87
Profits	3.37	0.96	0.77
Market share compared to its closest competitors	3.36	0.94	0.72
Popularity of your business among your customers	3.83	0.89	0.74
Firm size (number of employees)	5.00	6.59	1	1	1
Firm age (year of creation)	2009.69	5.86	1	1	1
Firm ownership (number of owners)	1.35	0.63	1	1	1
Firm competitors (number of similar businesses)	2.68	0.59	1	1	1
Manager age (5-point scale)	3.38	1.05	1	1	1
Manager income (5-point scale)	3.21	0.91	1	1	1
Manager education (8-point scale)	6.51	1.25	1	1	1
Social capital (number of relatives or friends providing advise)	1.48	1.16	1	1	1
Business capital (number of business ties providing advise)	0.47	0.81	1	1	1
Business idea origin (previous experience)	1.54	0.81	1	1	1

Managerial capabilities

A managerial (organizational) capability is a manager’s (company’s) ability to manage resources effectively to gain an advantage over competitors (Teece et al., 1997). Based on their personal experience managing their own firms in the Cuban market, respondents were asked to rate the importance for the success of their business of conceptual, technical, and human skills and capabilities (Katz, 1974). Specifically, the three items captured managerial (organizational) skills and capabilities, good management of costs and sales projections, and the ability to manage and lead staff.

Supply-chain problems

A supply chain is the network of all the actors, resources, and activities involved in the creation and distribution of a product. Different dimensions and measures have been used to capture various aspects of supply-chain management and performance (Maestrini et al., 2017). Supply-chain problems capture the main challenges faced by small firms in Cuba dealing with financial restraints, essential services and utilities, and raw materials and supplies. Thus, the interviewers asked the entrepreneurs to rate the importance of the possibility of obtaining credits or financing for the business, problems with electricity and/or water services, and problems with getting supplies for proper functioning and growth of their business.

Political and legal challenges

Studies embedded in different institutional perspectives rely on different dimensions and items to measure political and legal challenges. The relevant regulatory aspects we include in our construct have been measured in business and management studies with indicators such as fiscal policy (Gaur & Lu, 2007; Gaur et al., 2007); freedom from corruption; and financial, fiscal, and business freedom (Kostova et al., 2020). Frequently used normative aspects have been captured by adaptation of political system to economic challenges, transparency of government toward its citizens, and degree to which bureaucracy hinders economic development (Gaur & Lu, 2007; Gaur et al., 2007). In our Cuban context, the entrepreneurs rated the importance of four institutional and/or normative and regulatory obstacles and/or problems for their business such as too much bureaucracy and regulation by the state, complicated processes to set up and register the business, a complex and confusing (and changing) tax structure, and corruption.

Business performance

Perceptual scales are a frequent approach to performance measurement in business and management (Katsikeas et al., 2016). We used five widely used indicators capturing different aspects of business success. The entrepreneurs were asked about the success of their business in comparison with their expectation in terms of turnover, number of customers, profits, market share compared to its closest competitors, and popularity of the business. Economic and non-economic measures of business performance are frequently used in the small-firm context (e.g., Pindado & Requejo, 2015).

Controls

We included five controls at the firm level and six dealing with the entrepreneur to partial out the effects of other factors potentially affecting the two endogenous constructs. Firm size (number of employees), age (year of creation), ownership (number of owners), competitors (number of similar businesses), and foreign customers (percentage on a 6-point scale) were included in the model to control for characteristics of the firm, the partners, and the market. Manager age, income, and education were controlled as relevant features of the entrepreneurs. Income and education affect self-employment participation (Fisher & Lewin, 2018) and may have an impact on business performance. Social capital (number of relatives or friends providing advice in the opening and start up in business) and business capital (number of business ties providing advice) were included to consider the effect of different types of ties in the creation of the firm. Social ties and family can affect opportunity identification, the decision to create a new venture, and access to resources (Aldrich & Cliff, 2003; Aldrich & Kim, 2007). Finally, we also controlled for the origin of the business idea—that is, whether it was induced by previous professional experience.

Endogeneity tests

We modeled the correlation between the endogenous variables and the error terms. We applied the Gaussian copula approach to test for endogeneity (Park & Gupta, 2012). As a first step, we used the Kolmogorov-Smirnov test with Lilliefors correction on the latent variable scores of the three potentially endogenous variables (Hult et al., 2018). The results revealed that managerial capabilities (p < .000), political and legal challenges (p < .000), and supply-chain problems (p < .000) are not normally distributed, respecting the requirements of the Gaussian copula approach. Second, we estimated Gaussian copulas for the effects of managerial capabilities, political and legal challenges, and supply-chain problems.

The empirical tests yielded nonsignificant results for the Gaussian copulas of managerial capabilities and (a) supply-chain problems (p < .205) and (b) business performance (p < .499); political and legal challenges and (c) supply-chain problems (<0.198), and (d) business performance (p < .222) and for the Gaussian copulas of supply-chain problems and business performance (p < .386). These results imply that managerial capabilities, supply-chain problems, and business performance are not endogenous.

Data analysis

We used SEM-PLS to estimate the model. The four constructs in the research model are in line with a composite measurement model (Henseler, 2021) and identifying the factors explaining business performance is important to inform practitioners about the tools they can use to enhance and predict small firms’ business performance. PLS-SEM is a widely used statistical technique in social sciences (Sarstedt et al., 2022). PLS-SEM has positive characteristics such as types of measurement scales that can be used, small sample size requirements, convergence (Henseler, 2010), and data distribution (Hair et al., 2014). The software we used was SmartPLS 4 (Ringle et al., 2022).

We studied first the measurement model in terms of item and construct reliability and convergent and discriminant validity. All the items except “corruption” (0.64) showed individual reliabilities over the 0.7 threshold (see Table 1). We decided to keep it within its scale measuring “political and legal challenges” in view of its face validity, acceptable construct reliability and convergent validity, and the fact that its inclusion or exclusion from the model did not affect the significance of the relationships hypothesized in the structural model.

Construct reliability, measured in terms of composite reliability, ranges between 0.79 and 0.90, suggesting suitable reliability. Similarly, the average variance extracted (AVE) used to measure convergent validity is clearly over the 0.5 threshold. Finally, discriminant validity is achieved as demonstrated by comparing (see Table 2) the square root of AVE with the constructs’ correlations (Fornell & Larcker, 1981) and by estimating the heterotrait-monotrait (HTMT) ratios (Henseler et al., 2015).

Table 2. Correlation matrix (N = 108).

Construct	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)	(13)	(14)	(15)
(1) Managerial capabilities	0.82	0.47	0.48	0.16
(2) Supply-chain problems	0.31**	0.75	0.64	0.30
(3) Political and legal challenges	0.39**	0.51**	0.77	0.22
(4) Business performance	0.09	−0.21*	−0.15	0.80
(5) Firm size (number of employees)	0.25*	0.10	0.06	0.06	1
(6) Firm age (year of creation)	0.09	−0.14	−0.24*	−0.02	0.18	1
(7) Firm ownership	0.03	0.01	0.04	0.12	0.05	0.22*	1
(8) Firm competitors	−0.07	−0.05	0.06	−0.13	−0.13	−0.06	−0.12	1
(9) Foreign customers	−0.04	−0.12	−0.18	0.21	0.14	−0.06	0.11	0.11	1
(10) Manager age	−0.12	−0.03	0.19*	0.04	0.00	−0.27**	−0.01	0.06	−0.00	1
(11) Manager income	−0.03	−0.15	−0.05	0.20*	0.20	0.10	0.11	−0.04	0.29	0.16	1
(12) Manager education	0.12	0.14	0.09	−0.10	−0.05	0.00	0.05	−0.09	0.12	−0.08	0.28**	1
(13) Social capital	0.10	−0.24*	−0.05	−0.10	−0.01	0.08	0.04	−0.20*	−0.04	−0.21*	−0.13	−0.01	1
(14) Business capital	0.23*	−0.10	−0.06	0.10	0.12	0.19*	0.39**	−0.06	−0.06	−0.01	−0.06	−0.07	0.26**	1
(15) Business idea origin	0.02	−0.01	−0.01	0.11	0.05	−0.04	0.05	0.05	−0.18	−0.04	0.01	−0.12	−0.12	0.14	1

*p < .05; **p < .01(level of confidence, two-tailed tests).

Diagonal values in bold are the square roots of the variance shared between the constructs and their measures.

Over the diagonal, the HTMT ratios in italics assess constructs’ discriminant validity.

Findings

Concerning the structural model (see Figure 3 and Table 3), a 10,000-sample bootstrap revealed that managerial capabilities have (a) a statistically significant impact on business performance (Hypothesis 2) (β = 0.24, p = .056, f² = 0.05) although only at 10% confidence level (which we use considering the small sample size) and (b) no effect on supply-chain problems (Hypothesis 1) (β = 0.12, p = .204, f² = 0.02). On the contrary, political and legal challenges have a significant relationship with supply-chain problems (Hypothesis 3) (β = 0.43, p = .001, f² = 0.20) but no direct significant effect on business performance (Hypothesis 4) (β = −0.09, p = .267, f² = 0.01). Finally, supply-chain problems have a significant influence on business performance (β = −0.24, p = .045, f² = 0.04). Thus, while managerial capabilities may enhance the business performance of Cuban small firms, political and legal challenges imply supply-chain problems that, in turn, deteriorate business performance.

Figure 3. Managerial and institutional determinants of business performance. Findings.

Table 3. Direct effects, effect sizes, and explained variances.

Effects on endogenous variables	Direct effect	t value (p value)		f^2	R^2	Adjusted R^2
Effects on supply-chain problems					0.41	0.32
Managerial capabilities	0.12 n.s	0.827	(0.204)	0.02
Political and legal challenges	0.43***	3.206	(0.001)	0.20
Firm size	0.09 n.s.	0.826	(0.205)	0.01
Firm age	−0.06 n.s.	0.476	(0.317)	0.00
Firm ownership	0.02 n.s.	0.179	(0.429)	0.00
Firm competitors	−0.10 Ϯ	1.424	(0.077)	0.02
Foreign customers	−0.03 n.s.	0.204	(0.419)	0.00
Manager age	−0.13 n.s.	1.129	(0.129)	0.02
Manager income	−0.18 n.s.	1.179	(0.119)	0.04
Manager education	0.12 n.s.	1.133	(0.129)	0.02
Social capital	−0.29***	3.427	(0.000)	0.12
Business capital	−0.04 n.s.	0.328	(0.371)	0.00
Business idea origin	−0.04 n.s.	0.374	(0.354)	0.00
Effects on business performance					0.23	0.12
Managerial capabilities	0.24 Ϯ	1.594	(0.056)	0.05
Supply-chain problems	−0.24*	1.694	(0.045)	0.04
Political and legal challenges	−0.09 n.s.	0.622	(0.267)	0.01
Firm size	−0.05 n.s.	0.337	(0.368)	0.00
Firm age	−0.11 n.s.	0.794	(0.214)	0.01
Firm ownership	0.08 n.s.	0.691	(0.245)	0.01
Firm competitors	−0.19*	2.121	(0.017)	0.04
Foreign customers	0.18 n.s.	1.218	(0.112)	0.03
Manager age	−0.01 n.s.	0.136	(0.446)	0.00
Manager income	0.14 n.s.	0.967	(0.167)	0.02
Manager education	−0.16 Ϯ	1.594	(0.055)	0.03
Social capital	−0.20*	1.722	(0.043)	0.04
Business capital	0.04 n.s.	0.374	(0.354)	0.00
Business-idea origin	0.08 n.s.	0.867	(0.193)	0.01

n.s. = not significant; Ϯ = p < 0,10; * = p < .05; ** = p < .01; *** = p < .001 (based on a one-tailed Student t(9,999) distribution).

Three controls are significantly associated with the endogenous constructs. On the one hand, social capital (β = −0.29, p = .000) and firm competitors (β = −0.10, p = .077) (at 10% confidence level) have a negative effect on supply-chain problems (i.e., as expected, they alleviate supply-chain problems). On the other hand, firm competitors (β = −0.19, p = .017), manager education (β = −0.16, p = .055) (at 10% confidence level), and social capital (β = −0.20, p = .043) have a negative impact on business performance.

Our structural model’s standardized root mean square residual (SRMR) fit index is 0.072, and the variance explained of the endogenous constructs (R²) is 0.41 for supply-chain problems and 0.23 for business performance.

Discussion and implications

Discussion and theoretical contributions

Our aim is to explore the determinants of small firms’ business performance in a particularly turbulent transitional economy— namely, Cuba. Because of this unique context, our findings have theoretical implications for drivers of business performance when small firms face volatile institutional and supply-chain challenges. We contribute to the small-firm and entrepreneurship literature by contextualizing capabilities and institutional perspectives and identifying the critical role that managerial capabilities and supply-chain problems play in explaining business performance in an economy where supply is constrained for various historical and political reasons.

We discuss our findings following the same order in which we presented our hypotheses—that is, we start with outcomes of managerial capabilities, continue with effects of the institutional challenges, and finish with the impact of supply-chain problems. First, our findings show that managerial capabilities cannot alleviate supply-chain problems. Managerial capabilities contribute to supply-chain management in other contexts (e.g., Roh et al., 2022) but not in Cuba. Managerial capabilities, however, have a direct impact on business performance. Our contribution to capabilities perspective is that managerial capabilities are still important in transition economies such as Cuba where these capabilities are held with disdain and where the institutional environment is unstable and often unsupportive of entrepreneurs. Consistent with Welter (2011), this shows that context matters and is more pronounced in turbulent transitional economies. Thus, capabilities perspective needs to consider the influence of the external environment to understand the drivers of supply-chain problems and the determinants of business performance in such contexts. Despite the hurdles and turbulent economic environment, entrepreneurs emerge; some thrive while others struggle to earn a living. The spirit of entrepreneurship endures even in the most challenging and inhospitable contexts showing that “impossible is nothing.”

The reason why managerial capabilities cannot alleviate supply-chain problems may be that, in Cuba, getting supplies for businesses is challenging (Gimmon & Felzensztein, 2021). In fact, the government is part of the supply-chain problems rather than playing a support role for entrepreneurs. The state-managed supply chain is very inefficient, with major constraints related to poor physical, technology, and human capital and a limited view of inter-organizational structure, very similar to the situation of previous communist countries in their transition to open economies, such as the case of Romania (Glaser-Segura et al., 2006), Russia (Lorentza & Ghauri, 2010), and other Central and Eastern European countries (Liesbeth et al., 2009). Consistent with Gimmon and Felzensztein’s (2021) study in Cuba, the significant results for our control reveal that an effective mechanism to alleviate supply-chain problems is social capital. Having the right contacts through family and friends has a significant effect on the performance of the supply chain. In a market characterized by restrictions, scarcity, and institutional challenges, close and trusted contacts offer credit and financing services and access to critical supplies. As Gimmon and Felzensztein (2021) and Haeffele and Hobson (2019) found, entrepreneurs in Cuba rely on remittances from relatives abroad to finance their businesses.

Second, our findings also reveal that the political and legal challenges worsen the supply-chain problems but have no significant impact on business performance. One explanation for why political and legal challenges have no significant impact on business performance could be the critical role played by supply-chain problems in the Cuban context as an indirect path connecting both constructs. Our contribution to institutional theory is that we show how bureaucratic and unsupportive institutions can create hurdles for entrepreneurs to overcome such as the creation and registration of businesses, complex tax systems, and corruption, which worsen supply-chain problems. Our study uncovers the fact that firms in a turbulent transitional environment are confronted with distinct institutional pressures and will need other ways to cope with rapidly changing environments and improve business performance. Thus, institutional theory needs to consider the influence of both the internal environment and the external environment to understand the determinants of business performance in such contexts. By considering both the firm’s capabilities and the institutional context, we advance understanding of how capabilities and institutional perspectives complement each other to grasp the unique determinants that explain business performance in a turbulent transitional context.

Third, our findings are consistent with studies showing the significant impact of supply-chain management on business performance (e.g., Yeniyurt et al., 2019). This is a finding that can therefore be extended from developed and stable countries to a turbulent context. Lastly, the negative impacts of manager education and social capital on the business performance of small business in Cuba are intriguing as the level of education is an antecedent to the rate of entrepreneurial activity across countries (Dheer, 2017) and most entrepreneurship literature advocates for positive relationships. Consistent with Chetty and Agndal (2007), Debrulle et al. (2023), Eklinder-Frick et al. (2011), and Ngoasong and Kimbu (2019), the negative effect of social capital confirms that it can also be a liability in small firms. These firms could become overembedded in closed networks that discourage the flow of new information or they might be locked into underperforming relationships.

Practical implications

Since the institutional and social contexts present opportunities and set boundary conditions for how entrepreneurs should behave (Welter, 2011) in a volatile economic environment such as Cuba, the practical implications need to be relevant for this context. Thus, these practical implications encourage entrepreneurs to create an informal supportive network for entrepreneurs to develop their managerial capabilities and to address their supply-chain problems. Since entrepreneurs rely on their families for financial assistance to help them start and develop their businesses (Gimmon & Felzensztein, 2021; Haeffele & Hobson, 2019), entrepreneurs should foster their family networks to help alleviate the ongoing political and legal challenges and supply-chain problems that they encounter.

While social capital is a critical resource for entrepreneurs, there is a lack of intergenerational transfer of entrepreneurial knowledge in Cuba that is regrettable given their inherent creativity for “doing more with less.” Cubans possess skills to stretch their limited resources creatively and efficiently and guarantee their effective use, which is relevant when facing supply-chain problems. Informal interactions in communities and mentoring could be encouraged within the entrepreneur’s social and business networks to facilitate intergenerational transfer of entrepreneurial knowledge. To alleviate the boundary conditions for entrepreneurs’ actions in Cuba, individuals could arrange informal social events to share their experiences in using scarce resources and overcoming business challenges. Since entrepreneurs often face unexpected challenges, practicing improvisation on how to use scarce resources will enable them to adapt quickly to unanticipated situations (Balachandra, 2019). In addition, through informal collaboration and social events in communities for the purpose of sharing experiences, entrepreneurs could encourage each other to be flexible and adjust resources when there are rapid changes in the environment and could learn from each other about how to cope with supply-chain shortages.

Entrepreneurs could tap into their family and social ties to connect with universities and policy makers to develop and maintain informal collaborations that provide a supporting ecosystem for entrepreneurship. As Welter (2011) states, there is a two-way link between entrepreneurship and context and thus entrepreneurship can also have an impact on the context. Hence, through their informal supportive ecosystem entrepreneurs could influence the institutional and social context in Cuba. Entrepreneurs could look for institutional arbitrage (Perkmann et al., 2022) opportunities to bridge the social context such as an informal supportive ecosystem and the institutional context, such as formal institutions involving universities and policymakers.

Furthermore, Cuban’s learn about entrepreneurship from other sources, such as universities in Cuba, and they learn about business by working in large foreign companies operating in Cuba. As Yeganegi et al. (2019) found, this experience from large organizations provides certain individuals with the entrepreneurial skills to start up their own businesses. Similar to postsocialist economies in Europe, universities play a critical role in fostering entrepreneurship in transition economies when the institutional environment is inadequate (Guerrero et al., 2018). In fact, in Cuba, universities are starting to teach a growing number of business-related courses.

Policymakers need to understand the context of economic transition, particularly the attributes that hinder entrepreneurship, and to develop programs to encourage and train entrepreneurs so that they can adapt to rapidly changing market conditions. Entrepreneurs could be taught networking skills, financial management, and supply-chain management. Universities, government, and large businesses could work jointly with the entrepreneurs’ informal support networks to develop appropriate training programs for small businesses. This could include business mentoring and business networking opportunities for participants to collaborate and share their knowledge and gain access to resources. The institutional environment should be conducive to supporting entrepreneurship so that it can flourish and help grow the economy.

As regards managerial capabilities, more opportunities should be provided to gain these capabilities outside the state sector through training programs. The state needs to provide safety nets, such as emergency funds, for entrepreneurs who experience difficulties because of unstable market conditions in a transition economy. Supporting institutions could provide training on how to manage employees and predict future costs and sales when faced with high uncertainty. Contrary to capabilities perspective of path dependency, firms should be encouraged to be forward thinking about adapting and implementing their capabilities to deal with the unexpected in turbulent transitional environments. Entrepreneurs should have input on how the infrastructure—for example, electricity, water and transport—could be improved so that entrepreneurship can thrive.

Limitations and future research

The limitations of this study concern, first, our focus on small firms, which was made necessary due to the restrictions on the size of firms that can legally operate in Cuba. This provides the opportunity for future researchers to study large firms and also small firms in other transition economies and from different industry sectors. Second, our quantitative study provides an opportunity for future researchers to conduct longitudinal qualitative research in turbulent transitional economies to capture the process of how firms tap into the institutional challenges to create profitable business opportunities and, subsequently, influence the institutional environment. Such a study will delve deeply into understanding the interconnection between the firm and the institutional environment, in particular, how the institutional context influences the firm’s actions and behavior and how the firm’s capabilities influence the institutional context. While the current institutional environment in Cuba has changed significantly since we did our study, a follow-up study could capture the impact of these changes on business performance. Third, we do not control for foreign governments’ policies toward Cuba. For instance, the different U.S. administrations have constrained or alleviated entrepreneurship and supply-chain problems in Cuba through economic policies. Future studies should account for this factor and measure the extent to which it can explain supply-chain problems and moderate the impact of political and legal challenges on supply-chain problems and the impact of managerial capabilities on business performance.

Conclusions

We combine capabilities and institutional perspective on entrepreneurship to explain small firms’ business performance in Cuba, which is a turbulent transitional market. Specifically, we suggest that managerial capabilities, supply-chain problems, and institutional factors explain small firms’ business performance. Our theoretical contribution is that we address the weaknesses of capabilities (internal focus) and institutional theories (external focus) by emphasizing the importance of context, which is particularly pronounced in Cuba where there are constant rapid changes to the institutional environment. These institutional changes stipulate strict rules and regulations that provide the boundary conditions for how businesses can operate, and this has an impact on the determinants of business performance.

Our study helps to advance understanding of how the historical, temporal, and institutional context in Cuba creates opportunities and challenges for entrepreneurs and how entrepreneurs help to shape the context. Hence, regarding the criticism about the internal focus for dynamic capabilities versus external focus for institutional perspective, we consider that the perspectives complement each other by offsetting their individual weaknesses.

Acknowledgments

We wish to thank the International Business sector of the Department of Business Studies of Uppsala University; the Institute for Advanced Research in Business and Economics (INARBE) of the Public University of Navarre; and the Center for International Business Studies (CIBS), Gothenburg University, for the valuable comments on drafts presented at the Uppsala Seminars in International Business (USIB), the INARBE Research Seminars, and the CIBS Research Seminars.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

The work was supported by the Agencia Española de Cooperación Internacional para el Desarrollo [A/4633/5] and the Agencia Estatal de Investigación [PID2019-105198GB-I00/AEI/10.13039/501100011033].