Informal institutions and environmental sustainability in SMEs in polluting sectors in low-income developing countries

Overview

Small and medium-sized enterprises (SMEs) in polluting sectors, such as mining, leather processing, ship-breaking, and textile dyeing, are crucial to the economies of low-income developing countries (LIDCs). They provide jobs, alleviate poverty and drive economic growth. However, poor environmental practices in these sectors contribute significantly to pollution and long-term ecological damage. This proposed PhD research will explore the challenges such SMEs face in balancing environmental sustainability with their socio-economic roles, with a particular focus on the role of informal institutions.

Institutional voids, first defined by Khanna and Palepu (1997), refer to poorly functioning or absent institutional arrangements that create uncertainty, inhibit market participation, and raise transaction costs. In developing countries, these voids arise due to weak formal institutions and inadequate enforcement of rules (Mair & Martí, 2009). While developed countries generally benefit from strong legal and regulatory frameworks, LIDCs often rely on informal institutions—such as social networks, cultural norms and traditional practices—to address gaps in formal governance (Dang et al., 2020; Wiener, 2006).

Informal institutions play a critical role in navigating the challenges posed by formal institutional voids. In polluting sectors in LIDCs, they can either help or hinder SMEs in tackling environmental issues. In some cases, societal norms and relationships with key actors compensate for weak formal rules, while in others, these norms perpetuate exclusion and inequity, such as caste-based barriers to market participation in South Asia (Thapa et al., 2021; De Soto, 2006). The influence of these informal mechanisms is amplified in LIDCs, where uncertainty and unpredictability are more pronounced compared to Western countries (Peng et al., 2008; Zhu & Sardana, 2020).

This proposed PhD could explore how informal institutions influence the environmental practices of SMEs in polluting sectors within LIDCs. Key areas of exploration might include:

• How do informal institutions, such as cultural norms and social networks, compensate for gaps in formal governance
• The role of institutional voids and informal institutions in creating opportunities or barriers for SMEs to improve environmental outcomes.
• The interplay between formal and informal institutions in shaping SMEs’ environmental and social practices.
• Strategies for leveraging informal institutions to foster eco-innovation and sustainability.

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