- Formal political-legal institutions and informal cultural systems of meaning are at the core of understanding enterprise development and performance. Devolution, the decentralization of government and redistribution of power to the local level, has been hailed as a way to make political-legal and economic institutions more inclusive, and provide a more nurturing environment for companies. However, the process of devolution in Kenya led to a theoretical puzzle – while the intention of this decentralization approach was to make government more inclusive for entrepreneurs across the country, entrepreneurs appeared to lose out in the process. Comparing five firms in the IT-sector, we found that the effects of devolution and responses of enterprises to it, particularly with regard to the development of their networks, differed widely. Our findings show how and why networks and institutions can dynamically interact, under different conditions, over time. We show that while contemporary models might work well in more homogenous societies, they might not be able to capture institutional change in more fragmented societies. We contribute to institutional theory a fine-grained differentiation between inclusive and extractive elements, and the conditions under which decentralization can become more inclusive (digitization) or more extractive (tribal divisions). Second, our study contributes to elucidating the interaction between formal and informal institutions in the emerging economy context, and a deeper understanding of the interaction between institutions and networks in ethnically fragmented contexts.