Determinants of profit reinvestment undertaken by SMEs in the small island countries

Abstract

This study investigates the factors that have potential to affect profit reinvestment decisions of small- and medium-sized enterprises (SMEs) in small island countries. Using World Bank Enterprise Surveys data, and Generalised Least Square regression model, we report that access to bank loans and overdraft facilities increases profit reinvestment by SMEs by approximately 5 percent and 8 percent, respectively. Fair Judiciary also increases profit reinvestment by approximately 6 percent, whereas government expropriation leads to a reduction in reinvestment by 0.9 percent. Therefore, the policymakers in these small island countries should make an effort to improve the quality of the judiciary, and implement policies that lead to a reduction in corruption levels. Also, it is important to introduce more external finance sources for SMEs.