Trade sanctions, institutions, and firm exit: A conceptual framework for SME strategic responses

Trade Sanctions, Institutions, and Firm Exit: A Conceptual Framework for SME Strategic Responses
Trade sanctions have become a central instrument to manage geopolitical conflicts, reshaping the conditions under which firms engage in international business. While existing research has focused predominantly on multinational enterprises, far less is known about how small and medium-sized enterprises (SMEs) experience and respond to sanction-induced institutional disruptions. This paper develops a conceptual framework grounded in the institution-based view to explain how SMEs navigate trade sanctions as abrupt coercive shocks that reconfigure market access, supply chains, and compliance obligations. Drawing on illustrative cases from Australia and New Zealand, we theorize SME responses along a continuum ranging from compliance or exit, through avoidance and compromise, to defiance. Advancing sanctions scholarship, we develop five propositions that explain how SMEs’ strategic responses diverge not simply by exposure but by asymmetric institutional constraints, intermediated network dependence, perceived enforcement salience, and dynamic capabilities, revealing when sanction compliance generates trade-offs between short-term survival and long-term legal and legitimacy risks. This study contributes to international business research on sanctions, non-market strategy, and sustainability by demonstrating how geopolitical instruments produce uneven firm-level effects and unintended consequences for SMEs. The paper concludes with implications for theory, policy, and practice, emphasizing the need for sanction regimes that balance effective enforcement with institutional sensitivity to SME constraints.