Bridging Institutional Voids in a Volatile Emerging Economy: Role of Regulatory Cultural Stewardship as a Dynamic Capability for Sustainable AI-Enabled Digital Transformation in SMEs

This study develops and validates the concept of Regulatory Cultural Stewardship (RCS) as a dynamic capability that enables small and medium-sized enterprises (SMEs) to achieve sustainable AI-enabled digital transformation (AIEDT) in a volatile emerging economy. RCS empowers SMEs to harmonize regulatory compliance with cultural legitimacy, a critical nexus for fostering sustainable business practices and long-term resilience (economic viability and social legitimacy), in line with the global sustainable objectives. Using survey data from 391 Pakistani SMEs and Partial Least Squares Structural Equation Modeling (PLS-SEM), we find that four key AIEDT drivers explain 65.1% of the variance in AI innovation, with Technological Infrastructure and Policy and Ecosystem Support as dominant enablers. AI innovation fully mediates the relationship between AIEDT drivers and sustainable business performance. RCS not only enhances SME performance directly but also strengthens the AI innovation–business performance linkage as a significant moderator. Sectoral analysis reveals that services benefit most from Socio-Cultural Readiness, while manufacturing and primary sectors depend more on policy infrastructure and RCS. Significantly, RCS is validated as a distinct construct, integrating compliance and cultural alignment, rather than a subset of existing factors like policy support or cultural readiness. The study emphasizes the importance of scalable AI infrastructure, workforce upskilling, and internal cultural adaptation, while urging policymakers to stabilize AI governance frameworks to ensure a sustainable and equitable digital transition. The findings advance theory by conceptualizing RCS as a meta-capability bridging institutional voids and socio-cultural dynamics and offer practical insights for policymakers and managers seeking to implement ethically aligned and sustainable AIEDT strategies in emerging markets. At a conceptual level, RCS is ethically grounded in global AI principles, including fairness, accountability, and transparency, ensuring that cultural alignment never overrides human-centered values.