Impact of institutional voids on the performance of small and medium-sized enterprises

Abstract

PurposeThere is a critical gap in assessing how institutional voids affect SMEs' growth, investment commitment and reputation. The purpose of this paper is to explain how institutional void affects these three dimensions of SME performance; and to develop an institutional void-SME performance framework that can be applied for strategising, resourcing and competency acquisition for better performance.Design/methodology/approachThe study used the Enterprise Survey Data of the World Bank, consisting of 118,763 firms from 140 countries. The structural equation modelling (SEM) is used to analyse the data, validate our analytical model and investigate the imposed theoretical claims of causality as indicated by specific research questions through correlation/covariation between the constructs of institutional void and SME performance.FindingsEvidence suggests that there is a strong positive correlation between formal institutional infrastructure (independent variable) and SMEs' reputation (dependent variable). Among the institutional sub-constructs, tax administration, business licensing and permits, access to a bigger market and skilled labour and informal competition are significant for the SME performance constructs. We find similar results while comparing SMEs with large businesses.Practical implicationsThe institutional void-SME performance framework developed from our findings will allow SMEs to manage institutional voids affecting their performance. The analytical framework can also be the foundation for future empirical research.Originality/valueThe originality of the study is embedded in its investigation of SMEs' investment commitment and reputation in relation to institutional voids. The latent relationship between the sub-constructs of institutional voids and SME performance adds new knowledge to the dynamic relationship between institutions and firm performance.