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Background: Supportive policies alone may not guarantee sustainable outcomes for small and medium enterprises (SMEs) in developing economies, where fragmented institutions and weak enforcement are common. This research explored whether network embeddedness influences the link between policy and institutional arrangements (PIA) and socio-ecological value creation (SEVC) among SMEs in Nairobi County, Kenya. It combined the Natural Resource-Based View with Embeddedness Theory (ET) to describe how firms leverage relational capital in a hybrid formal-informal economy. Methods: Using a pragmatist approach and a primarily quantitative mixed-methods design, the study surveyed 232 SMEs randomly selected from the 553 firms on KPMG's Top 100 Mid-Sized Companies list or in related databases. It also included four Key Informant Interviews with senior policy experts. Results: Structural Equation Modeling (SEM) in SPSS AMOS showed a significant interaction effect (B = 0.056, β = .11, t = 2.939, p = .003) and a strong direct impact of network embeddedness on SEVC (B = 0.771, β = .76, t = 18.759, p < .001). However, a hierarchical moderated regression analysis did not confirm the interaction, suggesting the moderation is modest and dependent on how it is measured. Qualitative themes such as trust, access to resources, power relations, and network maintenance costs provided context for these findings. Conclusions: The results imply policy effectiveness depends on the strength of SMEs' embedded relationships, with informal networks filling implementation gaps. Limitations include a focus on formal mid-sized firms, which limits the generalizability of the findings; future research should include informal businesses, other African settings, and longitudinal studies to understand causality better.