Impact of ethical practices on small and medium enterprises’ performance in Saudi Arabia: An Partial Least Squares-Structural Equation Modeling analysis

Abstract

Purpose: The real challenge of establishing and maintaining business ethics in small and medium enterprises (SMEs) has become a global issue. We investigated the driving forces of ethical practices (EP) and its contribution to the overall performance in businesses.

Design/methodology/approach: This study collected primary data from 117 small and medium enterprises (SMEs) in Saudi Arabia by using a well-designed questionnaire survey amongst SMEs and draw inferences using the structural equation modelling (SEM) analysis.

Findings/results: Findings suggested that top management’s characters and ethical commitment, ethical policy and culture of the organisation and external pressure positively influence the ethical practice in the organisation, which leads to a significant positive impact on both financial and non-financial performances of SMEs. But the level of fraud and corruption and the level of monitoring show a mixed moderating effect on the relationships between ethical practice in the organisation and business performance.

Practical implications: The findings of this research will help SMEs’ administrators and managers, as well as the companies to instil workplace ethics, which manages the level of business performance. The policymakers and other relevant authorities can also utilise the outcomes of this study to develop ethical policy guidelines and frameworks to improve SMEs’ competitiveness and sustain their companies in the long run.

Originality/value: The unique feature of this research is that both the causes and effects of EP are considered in one integrated model. This gives a more vivid picture of the ethical issue in a business organisation.