Risk Management Strategies and Competitiveness of Small and Medium Enterprises in Kenya

Abstract

Risk management strategies are essential for organizational competitiveness, yet many SMEs in Kenya lack these crucial elements, which hampers their growth. Despite the acknowledged importance of effective risk management, there is a notable scarcity of research on this topic within the Kenyan context. This study aims to address this gap by examining the influence of risk management strategies on the competitiveness of SMEs in Kenya, specifically risk avoidance, risk transfer, risk retention, and risk mitigation strategies. Additionally, the study explores the moderating effect of firm size on these relationships. Utilizing a pragmatic research philosophy, the study employed a mixed-methods design with a cross-sectional approach. The target population comprised 16,164 SMEs registered with the City of Kisumu. A stratified sampling technique was used to select a representative sample, and data were collected through questionnaires. The collected quantitative data were analyzed using both descriptive and inferential statistics, including multiple regression analysis. The study’s model examined the following equations: Competitiveness = α + β1(Risk Avoidance) + ϵ; Competitiveness = α + β2(Risk Transfer) + ϵ; Competitiveness = α + β3(Risk Retention) + ϵ; and Competitiveness = α + β4(Risk Mitigation) + ϵ. The combined effect of all risk management strategies was analyzed using the model: Competitiveness = α + β1(Risk Avoidance) + β2(Risk Transfer) + β3(Risk Retention) + β4(Risk Mitigation) + ϵ. The results revealed a significant positive relationship between the adoption of risk management strategies and the competitiveness of SMEs. Specifically, effective risk management was found to enhance SME performance, with industry dynamics and regulatory environments playing influential roles. The study also integrated various theoretical perspectives, including the Resource-Based View, Markowitz Portfolio Theory, Porter’s Five Forces Framework, and Opportunity Cost Theory, offering practical insights for SMEs aiming to improve their resilience and market positioning. The findings showed that risk avoidance, transfer, retention, and mitigation strategies collectively increased SME competitiveness, with risk mitigation, particularly involving management decision-making, demonstrating a strong impact. The multiple regression model indicated that the joint effect of these strategies exceeded their individual contributions. Consequently, the study concludes that SME owners and managers should embrace comprehensive risk management practices to enhance market competitiveness. Recommendations include investing in research and development, continuously reviewing and improving risk management strategies, and applying all four strategies in concert. Additionally, it is advised that the government support SMEs by reducing tariffs, levies, and licenses, improving internet infrastructure, and providing capacity-building programs to facilitate effective risk management adoption. Future research should consider longitudinal studies to capture the evolving nature of risk management strategies and their sustained impact on SME competitiveness in dynamic business environments.