DETERMINANTS OF INVESTMENT DECISIONS IN SMALL AND MEDIUM ENTERPRISES: EVIDENCE FROM KHYBER PAKHTUNKHWA, PAKISTAN

Abstract

Small and medium-sized enterprises (SMEs) are really important for the economic growth and development; however, their investment behavior is influenced by such factors as psychological traits, ability to take risks (financial capacity), the larger economic picture (macroeconomic environment), and the institutional background, especially in some regions like Khyber Pakhtunkhwa where there is a high level of uncertainty. The main purpose of this study is to explore the influence of all the mentioned factors, i.e., psychological, economic, financial, and government policy, on the investment determinations of small and medium enterprises. It also tests the mediation of risk perception, which is essential in the context of SMEs due to their usual way of assessing the potential of an opportunity, that is, through subjective means rather than objectively. A quantitative cross-sectional design was the chosen research design, with 356 SMEs owner-managers who were the respondents from whom the data were collected. The data were analyzed through the use of Partial Least Squares Structural Equation Modeling (PLS-SEM) in the testing of both measurement and structural models. The results disclose that both psychological and financial factors are the main drivers of investment decisions; nonetheless, the government's practice is the third most important driver, but through risk perception. Economic factors are also a major player, but in a less significant way vis-à-vis the psychological and financial factors. That the risk perception plays a part in the determination of the magnitude of the relationships is well evident from the results of the mediation analysis. It is, however, also very interesting to note that the effect of the government policy on the investment is largely, if not all, mediated by the risk perception. The relationship between risk perception and decision-making is also a direct one; hence, the risk perception is frequently the principal factor in the mechanisms that govern the choices of the new entrepreneurs. In sum, the study proves through a process that integrates behavior and structure that SME investment behavior is an integrated-behavioral-structural process, with the implication that policy stability, enhanced financial access, and confidence-building measures can encourage the investment of emerging countries by developing economies.