Institutional Support and SME Financial Performance in an Emerging Economy: A Sequential Mediation Model of Entrepreneurial Competency and Behavioral Finance
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Abstract
This study investigates the role of institutional support in enhancing SME financial performance in an emerging economy by uncovering the underlying micro-foundational mechanisms. While prior research suggests that access to external resources such as bank finance and government support improves firm performance, empirical evidence remains inconsistent. This study addresses this gap by proposing a sequential mediation model that explains how institutional support is transformed into financial performance through entrepreneurial competency and financial decision-making behavior.
Using a cross-sectional survey of 245 SMEs in Indonesia and applying Partial Least Squares Structural Equation Modeling (PLS-SEM), the findings reveal that institutional support does not exert a strong direct effect on financial performance. Instead, its impact operates indirectly through a multi-stage mechanism: institutional support enhances entrepreneurial competency, which improves financial decision-making behavior, ultimately leading to superior financial performance.
This study contributes to the literature by integrating institutional theory, capability-based view, and behavioral finance into a unified framework. It advances the micro-foundational perspective by demonstrating that resource availability must be activated through internal competencies and behavioral mechanisms to generate economic value. The findings also provide policy implications, emphasizing that SME support programs should prioritize capability development and behavioral financial literacy rather than relying solely on financial disbursement.
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