Beyond belief: how religiosity shapes SME innovation

Purpose This study investigates the nexus between societal religiosity and SME innovation across 13 nations. It examines the transmission channels, including social trust and governance quality and explores how formal institutional quality moderates the impact of informal religious norms on firm-level innovative output. Design/methodology/approach Utilizing a panel dataset of SMEs from 2006 to 2023, we employ Probit and linear probability models (LPM) with firm, industry, country and year fixed effects. Endogeneity concerns, including simultaneity and omitted variable bias, are addressed using instrumental variable (IV) estimations and macroeconomic covariates. Findings Results reveal a positive and significant association between religiosity and SME innovation, driven by enhanced social trust and internal governance. A substitution effect emerges wherein religiosity acts as a supportive informal governance mechanism for SMEs, particularly in environments with weak formal institutions. Additionally, we uncover denominational heterogeneity: Christianity correlates positively with innovation, whereas divergent associations appear in regions dominated by Islam, Buddhism and Hinduism. Originality/value Advancing Institutional Theory, this research demonstrates how informal institutions mitigate institutional voids for resource-constrained SMEs. Focusing specifically on the SME context, the study suggests that religious ethics can act as a supportive informal mechanism associated with discipline, long-term orientation and social capital, which may facilitate technological advancement when formal legal incentives are insufficient.