Navigating Challenges: The Impact of External Factors on SME Profitability

Abstract This study aims to examine the influence of some of the external environmental factors such as corruption (CO), tough competition (TC), informal economy (IE), law enforcement (LE), and tax evasion (TE) on the profitability of SMEs measured by the net profit of SMEs. To examine the influence of these factors, the study has adopted the quantitative approach to evaluate the data gathered through the online form from 336 respondents via a random selection sample. To achieve this objective, the data analysis was carried out by applying the multinomial regression model to evaluate the influence of external factors on the net profit according to the input of the managers or entrepreneurs. Econometric results revealed that CO and TC have a significant positive influence on the net profit of SMEs, whilst the IE has a negative influence. TE and LE showed surprising results as they did not provide a significant impact. Understanding factors that influence net profit can provide entrepreneurs with more insight into issues affecting the future of their business. Increased profitability offers greater opportunities for SMEs to become more competitive and pushes them toward growth and development. In terms of bringing new value and originality, the study provides new evidence through an econometric approach, which delivers answers through empirical evidence and will instigate constructive debate and discussion between researchers.