Surviving Exogenous Shocks: Dynamic Capabilities of SMEs in Environments of Institutional Voids

Abstract This study examines how SMEs in South Africa develop and deploy dynamic capabilities in response to persistent institutional voids and how these capabilities are mobilized during exogenous shocks. In emerging markets, weak or unreliable formal institutions create chronic uncertainty and increase the costs of doing business. While such conditions are often viewed as constraints, repeated exposure may also shape the development of context-specific organizational capabilities. Drawing on the dynamic capabilities framework, we explore how SMEs sense opportunities, seize resources, and reconfigure operations through sustained engagement with institutional adversity. Using a qualitative case study of five South African SMEs operating in contexts affected by corruption, electricity shortages, and regulatory failures, we identify patterns of rapid decision-making, resource flexibility, and continuous reconfiguration that firms drew upon during the COVID-19 pandemic and that appeared to support resilience. The pandemic served as a stress test, revealing both the strengths and limitations of capabilities forged through long-term institutional strain. The study contributes to the dynamic capabilities literature by situating capability development within adverse institutional contexts and highlighting the cumulative, path-dependent nature of resilience. It demonstrates how prior exposure to systemic instability may shape SME responses to sudden exogenous shocks.