This study examines the recent dynamics in the rapidly growing handmade paper industry in Nepal. The paper argues that the industry is sustainable from social responsibility as well as natural resources and economic perspectives. Five principle sources of socially responsible practices are identified: (1) traditional commitment to community development, (2) fair trade codes of conduct, (3) corporate social responsibility, (4) the industry's business service organization (Nepal Handmade Paper Association), and (5) the general policy and legal framework. The paper concludes with a discussion of this industry as a case study of "positive deviance" and with lessons for contemporary innovation systems theory and for development policy and practice.