How does the interaction between organizational dynamic capabilities and multi-level institutional pressures impact the sustainable transformation of SMEs in developing countries.

Abstract

Small and medium-sized enterprises (SMEs) in developing countries are in a paradoxical position with regard to governance of global sustainability. They are also expected to deal with increasingly stringent international demands for environmental and social compliance, which are cascaded down global value chains, as well as with domestic institutional environments characterized by regulatory gaps, a limited financial system, weak enforcement mechanisms, and poor environmental infrastructure. While the challenge of sustainability transformation is pressing in contexts of scarce resources, important knowledge gaps exist regarding the interaction between institutional pressures and organizational dynamic capabilities in driving transformation trajectories. In this study, the interaction between multi-level institutional pressures and organizational dynamic capacities is examined, and its influence on sustainable transformations of SMEs in developing countries is discussed. This study adopts a qualitative approach based on multiple case studies with in-depth interviews with the owner-managers of manufacturing and craft enterprises that are involved in export trade. It is rooted in an integrated theoretical framework, which combines the institutional theory, the dynamic capabilities perspective, and the study on sustainability transformation. Cross-case comparative synthesis and rigorous theme coding are used to analyze the data. The findings reveal that international, national, and industry-level institutional pressures interact, and an institutional duality exists that enables some structural obstacles to the progression of transformation, regardless of the individual enterprise effort, as domestic institutional failures and demands by buyers for corporate sustainability compliance happen at the same time. Consequently, despite the same institutional structure, companies develop a variety of different mixes of detecting, seizing and reconfiguring capacities that account for the heterogeneity in the nature of the transformation process. Three types of adaptive seizing are identified under a resource constraint scenario: collective seizing by sharing sustainability investments with industry partners; symbolic seizing by provisional certification to demonstrate intent before actual certification; and progressive seizing by a step-by-step process of investing. Intermediary organisations are key actors and at the same time disseminate global sustainability standards and co-develop firms' capabilities to respond. The study proposes that sustainability transformation in developing country SMEs should be conceptualized as a capacity journey that is institutionally shaped through successive stages where internal capacities either enable or constrain the ability to respond and external demands call for change.