Do institutions matter to the strategic posture and performance of SMEs? Lessons from an emerging economy

Abstract

Can the institutional environment explain why some SMEs are more entrepreneurial and better performers than others? This study seeks answers to this question by developing and testing measurement and structural models of formal institutions as they relate to the strategic posture and organisational performance of small and medium enterprises (SMEs) in an emerging economy context. Guided by institutional theory, the study proposes a set of formal institutions which reflects the SMEs' institutional environment at the sub-national or city-level as opposed to the more common institutional analyses with country-wide focus. The study involves a survey of 955 owners and/or managers of SMEs in two cities in the Philippines. The study attempts to determine the owners'/managers' perceptions on how the formal institutional environment impacts their firms' overall entrepreneurial strategic posture, and consequently, the firms' overall organisational performance. The empirical analysis makes use of structural equation modelling (SEM) to examine the measurement and structural models to test the hypothesised relationships in the institutions-strategic posture-organisational performance nexus. The study’s results show that four types of formal institutions are significantly associated with an entrepreneurial strategic posture and that the latter is positively associated with higher levels of organisational performance. Our analysis also demonstrates the partial mediating role of strategic posture in the majority of the formal institutions - organisational performance relationships. Implications of the results and future research directions are discussed with strong emphasis on the lessons that may be applicable to small firms or SMEs in developed economies like Australia and New Zealand.