Organizational cronyism is profoundly ingrained in South Asian small and medium scale business and is responsible for eliciting a variety of negative individual- and organizational-level outcomes. It is a practice where management grants favour to certain employees based on personal relationships forming an “in-group” and discriminates “out-group” employees without regard to merit. This study attempts to improve understanding of the way organizational cronyism impacts the success of small and medium scale business in Pakistan through reduced employee task performance and the moderating role of egoistic climate plays in strengthening the organizational cronyism and task performance association. In addition, this study aimed to examine the complex in-group and out-group dynamics created by organizational cronyism and its subsequent outcomes. We employed an explanatory sequential mixed-method design and data were collected across two studies, i.e., a quantitative survey (n = 321, 4 waves) and a qualitative inquiry (n = 23) from employees working in small and medium scale enterprises of Pakistan. The results of the survey proved the direct and moderation hypotheses, while mediation hypotheses were partially substantiated. Semi-structured interviews affirmed the presence of in-groups and out-groups based on organizational cronyism in SMEs and revealed that organizational cronyism results in negative task performance regardless of the group membership and declines SMEs’ success. The overall results suggest that small and medium scale businesses in Pakistan should maintain fair and transparent business practices in order to avoid cronyism and thrive successfully.
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