Impact of Risk Management Practices on Investment Decision-Making in Pakistan’s SME Sector

Abstract

Pakistan economy is highly important in the small and medium enterprises (SMEs) since it is one of the most important in terms of creation of employment, innovation and growth in GDP. Despite the importance of SMEs, they face enormous uncertainty in the business environment because of insufficient financial resources, unpredictable market, and operational problems among others, and this leads to inefficient investment decisions, in most instances. The paper has examined how the risk management practices impact investment decisions in the SME sector in Pakistan. The adapted research method was the quantitative one and the collected primary data in the form of the structured questionnaires that had 200 SME owners and managers employed in Rawalpindi and Islamabad. The risk management practices were operationalized under four dimensions which included risk identification, risk assessment, risk mitigation and risk monitoring. The analysis of data was done on the basis of Structural Equation Modeling (SEM) logic including descriptive statistics, correlation analysis and multiple regression modeling. The result of the study revealed that both the risk management practices and investment decision- making showed positive correlation which is statistically significant. The dimensions of risk management significantly influenced the decisions to invest, whereas the risk monitoring and risk mitigation were the most significant predictors. Conclusions made suggest that SMEs that adopt systematic risk management processes are better placed in making informed investment decisions as well as achieving improved financial performance. The article contributes to the limited theoretical evidence on SME risk management in Pakistan and provides the SME owners, policymakers, and financial institutions with the application to make investments and sustainability over the long-term.