Foreign exchange risks, foreign exchange risk management strategies and participation of small and medium enterprises in international trade. A case study of traders in the central business district of Kampala

Abstract

This study was an exploration of mediating effect of foreign risk management strategies on the effect of foreign exchange risks on the level of participation of small and medium enterprises in international trade. It sought to address four objectives; (i) to examine the common foreign exchange risks faced by SMEs dealing in international trade, (ii) to examine the common management practices used to mitigate Foreign Exchange Risks among SMEs dealing in international trade, (iii) to explore strategies for managing foreign exchange risk amongst Small and Medium Enterprises located in the business district of Kampala and (iv) to establish the mediating effect of foreign risk management strategies on the relationship between foreign exchange risks and the level of participation of SMEs in international trade. The study was guided by Modern Portfolio Theory (MPT). The study adopted a cross–sectional survey research design rooted towards a quantitative and qualitative approaches where data was gathered using questionnaires and interviews from a sample of 384 respondents selected through simple random sampling and stratified sampling techniques. The study used both quantitative and qualitative data analysis techniques supported by SPSS (23.0). From the analysis the study established that the major foreign exchange risks that affect SMEs dealing in international trade are contingency risks, transactional risks, and translation risks of which these risks have significant negative influence on the level of participation of SMEs. Furthermore, the study established that the foreign risk management strategies used by SMEs are; minimizing any engagement in risky ventures and engaging suppliers into future contracts. The study further established that risk management strategies have a significant positive influence on the level of participation. Lastly, it was established that foreign exchange risk management strategies have a significant mediating effect on the relationship between foreign exchange risks and the level of participation. It was therefore recommended that the owners and management of SMEs should develop and update their risk maps so as to have a clear understanding of the potential risks that may have a likely impact in their level of participation in international trade and to develop risk management strategies and practices that may be helpful in dealing with the consequences of the potential risks. For instance, they may consider avoiding high risky trading activities or consider less risky mode of participation.