This paper addresses impacts of the institutional framework on small and medium-sized enterprise (SME) innovation and networking practices. Through an explorative study of a domestic SME-dominated sector in Vietnam, we find that the institutional framework limits incentives for long-term investments, resulting in exploitative cost-control strategies rather than product-oriented innovation. Due to dominating social norms, SMEs form trust-based friendship networks, potentially limiting knowledge acquisition and weakening business rationality. Institutional pressures reinforce negative influences on SMEs' incentives to develop innovation ambidexterity. The findings suggest that new institutional economic sociology provides a promising foundation for understanding how institutional frameworks influence SMEs' innovation practices in emerging economies.