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Objective: The study examined the influence of policy and institutional arrangements on socio-ecological value creation among small and medium-sized enterprises (SMEs) in Nairobi, Kenya. Methods/Approach: The study was grounded in a post-positivist research philosophy and adopted a mixed-methods design. The quantitative component employed a cross-sectional survey of 232 SMEs randomly selected from the 553 firms listed in the KPMG Top Mid-Sized Companies. The qualitative component comprised informant interviews with policy experts from the Kenya Industrial Estate and the Women Enterprise Fund. Structural Equation Modelling (SEM) using SPSS-AMOS was applied to examine the relationships among policy frameworks, institutional arrangements, and socio-ecological value creation. Statistical assumptions were assessed prior to analysis, including normality, multicollinearity (VIF < 5), and heteroscedasticity using the Breusch-Pagan test, thereby confirming the robustness of the model estimates. Results: The descriptive results indicated high levels of compliance with formal legal requirements (M = 6.06), regulatory policies (M = 5.90), and cognitive institutional practices (M = 5.83), suggesting that SMEs align their operational activities with prevailing legal and institutional expectations. Further, the Structural Equation Modelling (SEM) results demonstrated that policy and institutional exert a statistically significant positive influence on socio-ecological value creation among SMEs in Kenya (β = .47, t = 7.63, p<.05). The model’s coefficient of determination (R2 = .47) indicates that policy and institutional frameworks explain 47% of the variance in socio-ecological value creation. Model fit indices indicated that the SEM model exhibited acceptable fit (CFI = 0.899, RMSEA = 0.0819, X2/df = 1.96), supporting the robustness of the estimated relationships. Insights from key informant interviews further corroborated the quantitative findings, highlighting that financial inclusion policies, infrastructure support, and government-backed initiatives play a critical role in enhancing the sustainability practices of SMEs. Conclusions: This study provides empirical support for Institutional Theory by demonstrating its relevance in framing policy and institutional arrangements, including formal laws, regulatory policies, and cognitive practices. The significance of the hypothesised relationship between policy and institutional arrangements and SMEs’ socio-ecological value creation further validates the theory. Consequently, the findings offer a meaningful contribution to theory development in the fields of strategic management and organisational studies, guiding scholars in designing strategies to mitigate value-reducing institutional constraints. For policymakers, including the Micro and Small Enterprises Authority MSEA), the Ministry of Trade, Industrialisation and Cooperatives, and the Ministry of ICT, Innovation and Youth Affairs, the demonstrated positive and significant relationship underscores the importance of prioritising value-enhancing laws and policies to strengthen the SME sector.