EFFECT OF EXCHANGE RATE ON FINANCIAL PERFORMANCE OF SMALL AND

MEDIUM SIZED ENTERPRISES IN MOGADISHU

ALI-KAFI AHMED ELMI

A RESEARCH PROJECT SUBMITED TO THE DEPARTMENT OF BUSINESS AND

ECONOMICS IN THE COLLEGE OF HUMAN RESOURSE DEVELOPMENT IN

PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF A

DEGREE OF MASTERS OF BUSINESS ADMINISTRATION (FINANCE) AT

JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY

AUGUST, 2016

i
 DECLARATION
This research project is my original work and has not been conducted or presented for a degree in

any other University.

Signature: ........................... Date: ................................

ALI-KAFI AHMED ELMI

HD333-C005-6174/2014

This research project has been submitted for the examination with my approval as the University
Supervisor.

Signature: …………………………… Date: …………………...........

Mr. JAMAL NOR

ii
 DEDICATION

I dedicate this work to my parents for their constant prayer and never ending love, their extreme

moral support, encouragement and patience, no personal development can ever be achieved

without the proper guidance of parents.

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 ACKNOWLEDGEMENTS
First and foremost, all praise is due to Allah for bestowing us with health, knowledge and

patience to complete this work. I seek his mercy and forgiveness. My thank goes to my

hardworking supervisor, Mr. JAMAL NOR, for his contribution, and more importantly,

supporting me with his ideas and thoughts. I have been blessed to have such a brilliant mentor to

help me navigate the research project process. He offered guidance, support, and unwavering

patience throughout this process. I am grateful to my parents, brothers and sisters for their

extreme moral support, encouragement and patience during the course of studies as well as

throughout our academic career. No personal development can ever take place without the proper

guidance of parents. Also I am sending my best thanks to my University of master’s degree

(Jomo Kenyatta University of Agriculture and technology) and the sponsor University

(University of Somalia). This research project is as a result of hard work and I would also like to

thank all those who have given me support and assistance during the execution of this research

proposal.

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TABLE OF CONTENTS
DECLARATION .......................................................................................................................... ii
DEDICATION .............................................................................................................................. ii
ACKNOWLEDGEMENTS ........................................................................................................ iii
LIST OF FIGURES .................................................................................................................... vii
LIST OF TABLES ..................................................................................................................... viii
LIST OF ACRONYMS ............................................................................................................... ix
DEFINITION OF TERMS .......................................................................................................... x
ABSTRACT ................................................................................................................................. xii
CHAPTER ONE ........................................................................................................................... 1
INTRODUCTION ........................................................................................................................ 1
1.1.Background of the Study .................................................................................................................... 1
1.2.Statement of the Problem .................................................................................................................... 6
1.3. Research objectives ............................................................................................................................ 7
1.3.1General Objective ......................................................................................................................... 7
1.3.2 Specific Objectives ...................................................................................................................... 7
1.4. Research questions ............................................................................................................................. 7
1.5. Scope of the Study ............................................................................................................................. 8
1.6. Significance of the study .................................................................................................................... 8
1.6.1.Management ..................................................................................................................................... 8
1.6.2 Policy Makers .................................................................................................................................. 9
1.6.2.Academicians and Researcher ......................................................................................................... 9
1.7 Limitations of the study ...................................................................................................................... 9
CHAPTER TWO ........................................................................................................................ 10
LITERATURE REVIEW .......................................................................................................... 10
2.1.Introduction ....................................................................................................................................... 10
2.2. Theoretical Framework .................................................................................................................... 10
2.2.1Purchasing power Theory ........................................................................................................... 10
2.2.2 Interest Rate Theory ................................................................................................................... 11
2.2.3 Product Cycle Theory ................................................................................................................ 12
2.3 Conceptual framework ...................................................................................................................... 13

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 2.3.1 Balance of payment .................................................................................................................... 14
2.3.2 Foreign Direct Investment ......................................................................................................... 15
2.3.3 Inflation ...................................................................................................................................... 16
2.3.4 Taxation ..................................................................................................................................... 17
2.3.5 Financial performance................................................................................................................ 18
2.4.Empirical review ............................................................................................................................... 20
2.5.Critique of the literature review ........................................................................................................ 22
2.6.Research Gaps................................................................................................................................... 22
2.7.Summary ........................................................................................................................................... 23
CHAPTER THREE .................................................................................................................... 24
RESEARCH METHODOLOGY .............................................................................................. 24
3.1.Introduction ....................................................................................................................................... 24
3.2.Research Design................................................................................................................................ 24
3.3 Target population .............................................................................................................................. 25
3.4.Sample Size and Sampling Technique .............................................................................................. 25
3.5. Data Collection Instruments............................................................................................................. 26
3.6. Data Collection Procedure ............................................................................................................... 27
3.7. Pilot Test .......................................................................................................................................... 27
3.7.1Reliability.................................................................................................................................... 28
3.7.2Validity ....................................................................................................................................... 28
3.8. Data Processing, Analysis ................................................................................................................ 29
3.9.Analytical Model .............................................................................................................................. 29
CHAPTER FOUR....................................................................................................................... 30
RESEARCH FINDINGS AND DISCUSSION......................................................................... 30
4.1 Introduction ............................................................................................................................. 30
4.2 Rate of Respondents ............................................................................................................... 30
4.4 Descriptive Statistics............................................................................................................... 32
4.4.3 Response of age group ................................................................................................................... 33
4.4.4 Response of level of education ...................................................................................................... 34
4.4.5 Years of existence .......................................................................................................................... 34
4.5.5 Financial performance ................................................................................................................... 39
4.6.2Analysis of Variance ....................................................................................................................... 42
4.6.3 Regression Coefficients ................................................................................................................. 43

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 4.6.5 Correlation Analysis .................................................................................................................. 44
CHAPTER FIVE ........................................................................................................................ 46
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ............................................ 46
5.1 Introduction ....................................................................................................................................... 46
5.2 Summary of Findings ........................................................................................................................ 46
5.2.1 Balance of payment .................................................................................................................... 47
5.2.2 Foreign direct investment........................................................................................................... 47
5.2.3 Inflation ...................................................................................................................................... 48
5.2.4 Taxation ..................................................................................................................................... 48
5.2.5 Financial performance................................................................................................................ 49
5.3 Conclusions ....................................................................................................................................... 50
5.4 RECOMMENDATIONS .................................................................................................................. 51
REFERENCES............................................................................................................................ 53
APPENDIX I: QUESTIONNAIRE ........................................................................................... 56

LIST OF APPENDICES

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APPENDIX I: QUESTIONNAIRE .............................................................................................. 57

LIST OF FIGURES
Figure 2.3 Conceptual Framework……………………………….................... 14

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 LIST OF TABLES
Table 3.1 Target Population……………………………………………………. 26

Table 3.2 Sample size determination……………………………………………27

Table 4.1 Reliability Statistics……………………………………………..…… 33

Table 4.2 Gender of respondents ………………………………………………. 34

Table 4.3 Age group ……………………………………………………………. 34

Table 4.4 Level of education …………………………………………………….35

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Table 4.5 Work experience …………………………...………………………….36

Table 4.6 Balance of payment on financial performance ………………….…... 37

Table 4.7 Foreign direct investment on financial performance .…..……….…... 37

Table 4.8 Inflation on financial performance .…..……,,,,,,,,,,,,,,,,,,,,,,,,,,….…... 37

Table 4.9 Taxation on financial performance .…..……,,,,,,,,,,,,,,,,,,,,,,,,,,….…... 40

Table 4.10 Financial performance .…..……,,……………,,,,,,,,,,,,,,,,,,,,,,,,….…... 41

Table 4.11 Model Summary .…..……,,……………,,,,,,,,,,,,,,,,,,,,,,,,….……….... 42

Table 4.12 Analysis of Variance .…..……,,……………,,,,,,,,,,,,,,,,,,,,,,,,….…….. 43

Table 4.13 Regression Coefficients .…..……,,……………,,,,,,,,,,,,,,,,,,,,,,,,….….. 44

Table 4.14 Correlation …………….…..……,,……………,,,,,,,,,,,,,,,,,,,,,,,,…..….. 46

LIST OF ACRONYMS
PRSP Poverty Reduction Strategy Paper

HIPC Heavily Indebted Poor Countries

SMEs Small and Medium Enterprises

PPP Purchasing power parity

IMF International Monetary Fund

OECD Organization for Economic Cooperation and Development

IIP International Investment Position

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SPSS Statistical Package for the Social Sciences

IV Independent Variable

DV Dependent Variable

CPI Consumer price index control

PLC Product life cycle

NGO Non-governmental Organizations

BOP Balance of Payment

FDI Foreign Direct Investment

DEFINITION OF TERMS
Exchange Rate: The price of a nation’s currency in terms of another currency. An exchange rate

thus has two components, the domestic currency and a foreign currency, and can be quoted either

directly or indirectly. Agu (2002)

Balance of payments: A statement that summarizes an economy’s transactions with the rest of

the world for a specified time period. The balance of payments, also known as balance of

international payments, encompasses all transactions between a country’s residents and its

nonresidents involving goods, services and income. (Lattie, 2005)

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Foreign direct investment: A foreign direct investment (FDI) is an investment made by a

company or entity based in one country, into a company or entity based in another country.

.(McIntosh, 2005)

Inflation: Inflation is the rate at which the general level of prices for goods and services is rising

and, consequently, the purchasing power of currency is falling. (Harriott, 2000)

Taxation: Tax is a central but neglected element of development policy. The structure and

administration of taxation are frequently omitted from discussion and research agenda. Questions

of a primarily redistributive nature may be deemed political, and so unsuitable for neutral

economic analysis, (Cobham, 2000)

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 ABSTRACT
The general aim of this study is to investigate the effect of exchange rate on financial
performance of small and middle-sized companies in Mogadishu.Specifically, this study
investigated the effects of Balance of payments, the effect of foreign direct investment, the
degree of Inflation and the effect of Taxation. The related theories of exchange rate are
Purchasing power Theory, Interest Rate Theory and Product Cycle Theory. This study was
conducted through a descriptive study. In addition the study employed a survey research design
in data collection. The sampling procedure of this study used non-probability sampling
procedure particularly purposive sampling or judgmental sampling, this research employed
quantitative data collection method whereby data was gathered by the use of closed ended
questionnaires which are self-administered. The data collected was analyzed using the software
called Statistical Package for the Social Sciences (SPSS) version 22 and results shown in terms
of frequency distribution and percentages, the target population of the study is 140 employees of
some merchandising companies in Mogadishu. A sample of 42 respondents was selected using
Mugenda and Mugenda’s formula. The study used primary data. Data collection methods used
included use of questionnaires. The selection sample technique was purposive or judgmental
approach. A regression model was applied to determine the relationship between Balance of
payments, foreign direct investment, inflation and Taxation as the independent variables and
financial performance for os small and medium sized enterprises as the dependent variable.

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 CHAPTER ONE

INTRODUCTION
1.1.Background of the Study

Exchange rates can depart from their equilibrium level for two reasons. First, as a result of

government intervention directly aimed at altering the real exchange rate (currency

manipulation). In this respect, governments and/or central banks possess a number of policy

instruments that can affect the real value of the exchange rate, including the introduction of

capital controls or targeted intervention in foreign exchange markets. Second, misalignments can

be the unintended side effect of macroeconomic policies aimed at achieving domestic objectives,

or the result of distortions in the international financial architecture or in domestic structural

conditions. There is an academic debate on the extent to which the real exchange rate is a

variable that policy makers can influence, see for instance, Eichengreen (2007) and Rodrik

(2008). In addition, to ascertain the root cause of a currency misalignment is often a difficult

matter in practice. The ensuing discussion will abstract from the cause of the misalignment and

will, instead, focus on its trade effects in the long- versus the short-run. Standard economic

theory defines the long-run as the period in which all prices are fully flexible. Put differently, in

the long-run prices have the time to adjust to any policy change (or other shock). In this context,

money is like a veil to the real economy, an intuition that dates back at least to David Hume's

essays on money and the balance of trade. In particular, when markets have no distortions, an

exchange rate misalignment - such as a devaluation of the currency - has no long-run effect on

trade flows or on real economic activity, as it does not change relative prices. The short-run, on

the other hand, can be different. The reason is that, if some prices in the economy take time to

1
adjust (i.e. are "sticky"), movements in nominal exchange rates can alter relative prices and

affect both the allocation of resources between non-tradable and tradable sectors and

international trade flows. The short-run trade effects of exchange rate misalignments, however,

are not straightforward; see Staiger and Sykes (2010). Recent macroeconomic literature shows

that these effects depend, among other things, on the currency in which domestic producers

invoice their products.

Exchange rate movements have been a big concern for investors, analyst, managers and

shareholders since the abolishment of the fixed exchange rate system. This system was replaced

by a floating rates system in which the price of currencies is determined by supply and demand

of money. Given the frequent changes of supply and demand influenced by numerous external

factors, this new system is responsible for currency fluctuations. These fluctuations expose

companies to foreign exchange risk. Moreover, economies are getting more and more open with

international trading constantly increasing and as a result companies become more exposed to

foreign exchange rate fluctuations. Foreign exchange exposures is the sensitivity of changes in

the real domestic currency value of assets liabilities or operating incomes to unanticipated

changes in exchange rate (Abor, 2005)

In practice, economic exposure is computed as the net sensitivity of some aggregate measure of

firm value to currency fluctuations. By focusing on the net sensitivity, economic exposure

includes the direct and indirect effects of currency fluctuations. In practice, there is little

consensus on the use of appropriate choice of aggregate measure. The focus of this paper is on

the economic exposure of UK non-financial firms. Overall, theory supports the existence of a

relationship between the value of the firm and exchange rate movements. Economic theory

suggests that changes in the exchange rate can produce a shift in stock prices, directly in the case

2
of multinational firms, exporting and importing companies, firms which import part of their

inputs and indirectly for other companies. Exchange rate movements affect both the prices of

imported finished goods and the costs of imported inputs, thus influencing indirectly those

companies that compete with such firms (Amos, 2009)Exchange rates may affect a firm through

a variety of business operation models: a firm may produce at home for export sales as well as

domestic sales, a firm may produce with imported as well as domestic components, a firm may

produce the same product or a different product at plants abroad. The model of the firm must be

broad enough to capture all of these channels. The firm described below is a multinational firm

(producing and selling at home and abroad) that uses both foreign and domestic components.

The liberalization of the exchange rate regime in 1986 has led to introduction of various

techniques with the view of finding the most appropriate method for achieving acceptable

exchange rate for Given the frequent changes of supply and demand influenced by numerous

external factors, this new system is responsible for currency fluctuations (Abor, 2005). These

fluctuations expose companies to foreign exchange risk. Moreover, economies are getting more

and more open with international trading constantly increasing and as a result companies become

more exposed to foreign exchange rate fluctuations.

Foreign exchange rate risk refers to the sensitivity of a firms cash flows, real domestic currency

value of assets, liabilities, or operating incomes to unanticipated changes in exchange rates,

Generally, companies are exposed to three types of foreign exchange risk: accounting

(translation) exposure, transaction (commitment) exposure and economic(operational,

competitive or cash flow) exposure (Eiteman et al., 2006).The high volatility of exchange rates is

a fact of life faced by every company engaged in international business, bringing in uncertainties

3
in their bottom line. In recent years, a variation in value of Kenya shilling has been very

impulsive and unpredictable. defines foreign exchange risk as the risk of change (gain or loss) in

the company`s future economic value due change of foreign exchange rates. It is manifested by

exposure, the degree to which a company performance is affected by exchange rate changes.

Thus, Shapiro (2006) suggests adherence to foreign exchange risk management, which involves

currency assessment (identification and quantification) and designed counter-strategies against

foreign exchange risk.

Trade and investment in a country are likely to be impacted by the happenings in the foreign

exchange market. This means therefore that a stable exchange rate, is likely to have positive

effects on household incomes and consumption; firms‟ investment, import and employment

decisions; government’s fiscal, debt and monetary policies; and trade balance (Adebiyi, 2006).

Moreover, exchange rate stability is likely to discourage capital flight and speculation in the

foreign exchange market. It has been established that foreign exchange developments affect all

aspects of an open economy including its financial markets. Charles (2006) for instance

established that floating exchange rate appreciation reduces the competitiveness of export

markets; and has a negative effect on the domestic stock market of export dominated economies.

However, it has positive effect on the stock market by lowering input costs, for an import

dominated country. In effect countries such as Kenya which is import oriented can experience

price instability in the face of exchange rate volatility because its economy is heavily dependent

on imports of raw materials, capital goods and consumer goods, hence, the need to manage the

foreign exchange market.

4
Exchange rate therefore plays an increasingly significant role in any economy as it directly

affects domestic price level, profitability of traded goods and services, allocation of resources

and investment decision. The impact of exchange rate volatility on trade has been studied more

in industrialized countries than in less developed economies. Agu (2002) state that this lack of

attention in developing countries is caused by insufficient time series data, according to Gachua

(2011) there is a need for this kind of empirical studies to be undertaken in developing countries

such as Kenya with time-variant exchange rates in order to counter this prevalent ambiguity in

the literature and fill the research vacuum in less developed countries. This study therefore seeks

to fill this gap by examining the effects of foreign exchange rate volatility on the financial

performance of oil marketing companies in Kenya.

In the context of Somalia, There is no specific period that can be traced the starting era of the use

of money metallic coins in Somalia, but from the history the researcher acknowledged that the

trade relations between the neighboring countries in the exchange of goods were based with the

currencies used by those inhabitants of the region namely in the Arabian Peninsula and in India.

The history of the Somali currency or the monetary system it is important even briefly to

mention the developed stage of civilization achieved by the different societies of the different

regions of Somalia. Among the oldest cities flourished with trade can be quoted: Zeila, BuloHar,

Berbera, Warsheikh, Mogadishu, Brava and Kismayo. Bronze. This new coins had exchange rate

with one the Maria Theresa Thaler to 150 cents.

In the same year the Italian Administration injected into circulation coins made by nickel with an

exchange rate of 25 cents each, the Administration’s currency policy had not procured

satisfactory results and in 1909 it was introduced new currency in different denomination of

coins “Italian Pesa” divided in one, two and four Pesas, with an exchange rate of 150 Pesas per

5
one Maria Theresa Thaler. The Moroccan explorer, Ibn Batuta, who visited Somalia’s coasts,

and in his memorable book which he wrote during his long journey along the Somali coasts,

revealed that he has landed Mogadishu describing widely that the city was big, booming and

with several small industries and handcrafts artisans. The principal form of currency in Somalia

has been based metallic coins, usually silver, and by the first half of the 19th century the main

unit of currency was the Maria Theresa Thaler which was known in Somalia “Sharuq”. It was a

coin containing four parts silver and one part copper, and has been issued by the Austrian

Empire, in honor of the Empress Maria Theresa, who ruled Austria, Hungary and Bohemia from

1740 to 1780. It had gained acceptance in the Arabia Peninsula and in the Horn of Africa,

Somalia, Ethiopia and Eritrea, as its high silver content satisfied the people’s desire for base.

1.2.Statement of the Problem

According to our knowledge every organization is apparently aware that they face hasty change

in the future. This signal of future oriented ambiguity, attached with individual demands for

increased complaints at all levels of the organization, has dramatically changed insights of

exchange rate. Economic activity is globally unified today to an unprecedented degree. Changes

in one nation’s economy are rapidly transmitted to that nation’s trading partners. These

fluctuations in economic activity are reflected, almost immediately, in fluctuations in currency

values. Consequently, multinational corporations, with their integrated cross-border production

and marketing operations, continually face devaluation or revaluation worries somewhere in the

world. Sekine, Toshitaka. 2006.

According to the researcher’s knowledge and awareness it seems that there are no strong

functioning central banks that carry out monetary policy for controlling and regulating the

current exchange rate and supply of money in order to achieve predetermined macroeconomic

6
goals and all SMEs tend to look for their profitability basing on the inflation and deflation of

foreign exchange rates. However in My best awareness, the effect of exchange rate on financial

performance in Mogadishu seems to be unclear and no other researcher tried to observe the

situation and conduct a research so, I saw a big gap that needs to be covered. Therefore this study

investigated the effect of exchange rate on financial performance of SMEs in Mogadishu.

1.3. Research objectives

1.3.1General Objective

The general objective of this study was to assess the effects of exchange rate on the financial

performance of SMEs in Mogadishu

1.3.2 Specific Objectives

1. To analyze how balance of payments affects financial performance of SMEs in

Mogadishu.

2. To evaluate the effect of foreign direct investment on the financial performance of

SMEs in Mogadishu.

3. To assess how inflation affects on the financial performance of SMEs in Mogadishu.

4. To find out the effect of taxation on the financial performance of SMEs in

Mogadishu.

1.4. Research questions

1. How does balance of payments affect financial performance of SMEs in Mogadishu?

2. What effects does foreign direct investment have on the financial performance of SMEs

in Mogadishu?

3. How does inflation influence financial performance of SMEs in Mogadishu?

7
 4. What effect does taxation have on the financial performance of SMEs in Mogadishu?

1.5. Scope of the Study

This study particularly searched for the effect of exchange rate on the financial performance of

SMEs in Mogadishu and this study was conducted Bakara market in Banadir region the time of

this study was limited within only four months and the tools used for this study was to make

observations towards Mogadishu markets and other relating places.

1.6. Significance of the study

The study is important in that firms were able to evaluate the effects of foreign exchange rate

on firms’ profitability in Somalia. While there exists numerous studies on Foreign Exchange

rates, these have been undertaken in developed Countries which have well developed

financial institutions whose information is easy to access. The effects of these foreign

exchange rates and their relationship to firms’ profitability of companies is scanty, thus the

researcher found out that there is a need for the current study to be conducted.

When this study was complete, it will be of benefit to the following;

1.6.1. Management

The findings of this study are important to create awareness to managers of aforementioned

organization about the most determinant variables that can influence the profitability level of

their organizations.

8
1.6.2 Policy Makers

This study will also have a huge importance to policy makers who are always engaged to setting

policies for the whole business, especially who are very much interested in how SMEs conduct

their financial performance.

1.6.2. Academicians and Researcher

It could also be helpful for individuals who want to conduct further studies in related topics and

other organizations those faces similar problems.

1.7 Limitations of the study

It is essential to note a number of limitations of this study. The possible limitation of this

research is the trustworthiness of the data found and lack of security. Inaccurate results could be

a result of the investigation respondents misunderstanding the questions or terminology and

language barrier. Also there is difficulty towards the accessibility of the scene and the

availability of fast internet is hard as our local internet is poor, In addition, Aggarwal (2000)

points out that responses to study by individuals in large companies don’t always reflect the

practices used throughout the sector, this is so because people have got different tastes and

feelings hence, resulting in them acting differently. Also, the fact that the effects of exchange

rate that are not observed can result in making conclusions on incorrect information since the

researcher is only depending on the information provided by companies’ employees.

9
 CHAPTER TWO

LITERATURE REVIEW
2.1.Introduction

This chapter contains theoretical review, conceptual framework, empirical review, critique of the

literature review, research gap and summary.

2.2. Theoretical Framework

2.2.1Purchasing power Theory

Purchasing power parity (PPP) is a disarmingly simple theory that holds that the nominal

exchange rate between two currencies should be equal to the ratio of aggregate price levels

between the two countries, so that a unit of currency of one country will have the same

purchasing power in a foreign country. All of our surveys are nationally representative and cover

both rural and urban households. In contrast, the ICP collected only urban prices in a number of

countries, including most of Latin America, but also in China, while, in India, urban outlets were

overrepresented in the price surveys. For the urban only countries, we need a measure of the

price of consumption in rural relative to urban, and for this we follow Chen and Ravallion (2010)

and use the ratio of rural to urban poverty lines in those countries. While it is a big assumption

that the ratio of the poverty lines correctly measures the relative price levels, there is no other

obvious source of such information, and some correction is necessary. For countries where the

adjustment is made, we adjust our surveys prior to the calculations by converting all household

expenditures to urban prices by scaling up per capita household expenditure for each rural

household by the ratio of the urban to rural poverty line. Once this adjustment is made, the

sectors are ignored, and the survey treated as a single national sample to which the global

poverty line, converted at the urban PPP, can be applied to calculate expenditure weights and

counts of the numbers in poverty. India is treated somewhat differently. First, to take account of
10
the fact that, although the ICP collected both urban and rural prices, the former were

overrepresented; and second, to recognize that the ratio of official urban to rural poverty lines is

implausibly high, and has long been suspected to be the result of a computational error (Deaton

2003). Deaton and Dupriez (2009)

2.2.2 Interest Rate Theory

Interest Rate Parity is a no-arbitrage condition representing an equilibrium state under which

investors will be indifferent to interest rates available on bank deposits in two countries. The fact

that this condition does not always hold allows for potential opportunities to earn riskless profits

from covered interest arbitrage. Two assumptions central to interest rate parity are capital

mobility and perfect substitutability of domestic and foreign assets. Given foreign exchange

market equilibrium, the interest rate parity condition implies that the expected return on domestic

assets will equal the exchange rate-adjusted expected return on foreign currency assets. Investors

then cannot earn arbitrage profits by borrowing in a country with a lower interest rate,

exchanging for foreign currency, and investing in a foreign country with a higher interest rate,

due to gains or losses from exchanging back to their domestic currency at maturity. Interest rate

parity takes on two distinctive forms: uncovered interest rate parity refers to the parity condition

in which exposure to foreign exchange risk(unanticipated changes in exchange rates) is

uninhibited, whereas covered interest rate parity refers to the condition in which a forward

contract has been used to cover (eliminate exposure to) exchange rate risk. Each form of the

parity condition demonstrates a unique relationship with implications for the forecasting of

future exchange rates: the forward exchange rate and the future spot exchange rate (Feenstra,

2008).Economists have found empirical evidence that covered interest rate parity generally

holds, though not with precision due to the effects of various risks, costs, taxation, and ultimate

11
differences in liquidity. When both covered and uncovered interest rate parity hold, they expose

a relationship suggesting that the forward rate is an unbiased predictor of the future spot rate.

This relationship can be employed to test whether uncovered interest rate parity holds, for which

economists have found, mixed results. When uncovered interest rate parity and purchasing power

parity hold together, they illuminate a relationship named real interest rate parity, which suggests

that expected real interest rates represent expected adjustments in the real exchange rate. This

relationship generally holds strongly over longer terms and among emerging market countries.

(Mishkin, 2006)

2.2.3 Product Cycle Theory

The Product Life Cycle (PLC) concept is a well-known marketing strategy and planning tool.

The concept is based on a simple biological analogy of stages over a product’s “life,” which is

intuitively appealing, but unfortunately has limited utility in practice. For such a prominent

marketing tool, the lack of both a focus on consumers and a theoretical basis is surprising.

Diffusion of innovation models and theory offer considerable promise to provide a theoretical

basis for the PLC. To date, diffusion models have been limited to explaining and forecasting

PLC sales patterns. This paper consolidates this literature to develop an over-arching conceptual

PLC model and managerial tool for consumer durables. The approach defines the new PLC

phases based on some key consumer trends during product market evolution, resulting in a four-

phased PLC model: Innovation → Imitation → Repeat→ Substitute. New marketing strategy

implications emerge for each phase due to this additional focus on consumers. The model is

operationalized using diffusion models, thereby providing a basis for both identifying and

predicting PLC transitions. The types of data that need to be collected to fully operationalize and

test this PLC model are discussed. The new PLC model does not ignore variations in PLC sales

12
patterns. Rather, it provides an opportunity to explain such sales pattern variations and determine

the underlying conditions that lead to different PLC shapes. An empirical illustration of the new

PLC model is presented. The PLC literature centers around what can be termed the “traditional

PLC concept,” a version of which can be found in almost any general marketing text (e.g. Kotler,

2000).Though it is assumed that the reader is familiar with this concept, it is useful to re-examine

its underlying assumptions.

2.3 Conceptual framework

Balance of payments
 International trade
 Investment income
2.3Conceptual
FinancialFramework
transactions

Foreign direct investment

 Global economic
partnership
 External Financing
Financial performance

 Market share
Inflation  profitability
 Return on asset
 Consumer price index
 Employment cost index

Taxation
 Progressive tax
 Regressive tax
 Proportional tax
Independent Variables


Independent Variable Dependent Variable

Figure 2.1 Conceptual Framework

13
2.3.1 Balance of payment

A country’s balance of payments is commonly defined as the record of transactions between its

residents and foreign residents over a specified period. Each transaction is recorded in

accordance with the principles of double-entry book-keeping, meaning that the amount involved

is entered on each of the two sides of the balance-of-payments accounts. The balance of

payments (BOP) is a summary of economic activities between the residents of a country and the

rest of the world during a given period, usually one year. The main purpose of keeping these

records is to inform government authorities of the overall international economic position of the

country in order to assist them in arriving at decisions on monetary and fiscal policy, on the one

hand, and trade and payments policy on the other. Balance of payments statistics are therefore

helpful to government authorities charged with maintaining macroeconomic stability. Balance of

payments accounting is governed by a set of principles and conventions that ensures the

systematic and coherent recording of transactions, which are consistent across countries and over

time. These principles and concepts will be discussed and where necessary practical examples

will be used to elucidate the concepts.(Lattie, 2005)

The balance of payments is constructed according to the principles of double-entry bookkeeping.

Under this system a transaction is represented in the balance of payment by two entries with

equal values. One of these entries is designated a credit and the other a debit. There are some

basic rules governing how entries are recorded in the balance of payments. A credit entry is

recorded when the transaction gives rise to a receipt by a domestic resident from a foreign

resident. The receipt itself may take the form of an increase in the residents’ foreign assets or

balances of foreign currencies. Whatever its form, the receipt is recorded as a debit entry.

Conversely, any transaction that gives rise to a payment by a resident to a foreign resident is

14
recorded as a debit entry. The payment that results from this transaction is recorded as a credit

entry.(Robinson, 2004)

2.3.2 Foreign Direct Investment

According to the IMF and OECD definitions, direct investment reflects the aim of obtaining a

lasting interest by a resident entity of one economy (direct investor) in an enterprise that is

resident in another economy (the direct investment enterprise). The “lasting interest” implies the

existence of a long-term relationship between the direct investor and the direct investment

enterprise and a significant degree of influence on the management of the latter. Direct

investment involves both the initial transaction establishing the relationship between the investor

and the enterprise and all subsequent capital transactions between them and among affiliated

enterprises4, both incorporated and unincorporated. It should be noted that capital transactions

which do not give rise to any settlement, e.g. an interchange of shares among affiliated

companies, must also be recorded in the Balance of Payments and in the IIP. Concerning the

terms direct investor and direct investment enterprise, the IMF and the OECD define them as

follows. A direct investor may be an individual, an incorporated or unincorporated private or

public enterprise, a government, a group of related individuals, or a group of related incorporated

and/or unincorporated enterprises which have a direct investment enterprise, operating in a

country other than the country of residence of the direct investor.(McIntosh, 2005)

A direct investment enterprise is an incorporated or unincorporated enterprise in which a foreign

investor owns 10% or more of the ordinary shares or voting power of an incorporated enterprise

or the equivalent of an unincorporated enterprise. Direct investment enterprises may be

15
subsidiaries, associates or branches. A subsidiary is an incorporated enterprise in which the

foreign investor controls directly or indirectly (through another subsidiary) more than 50% of the

shareholders’ voting power. An associate is an enterprise where the direct investor and its

subsidiaries control between 10% and 50% of the voting shares. A branch is a wholly or jointly

owned unincorporated enterprise. It should be noted that the choice between setting up either a

subsidiary/associate or a branch in a foreign country is dependent, among other factors, upon the

existing regulations in the host country (and sometimes in its own country, too). National

regulations are often more restrictive for subsidiaries than for branches but this is not always the

case (Maitena, 2003).

2.3.3 Inflation

Inflation is the continuing increase in the general price level that is upward movement in the

prices of the majority of goods and services. Inflation may arise from a variety of factors but the

basic reason for inflation is having too much money competing to buy the available goods

at their existing prices, allowing those prices to rise. Bank of Jamaica (BOJ), the country’s

central bank, has the primary objective of ensuring price stability in the economy. In other

words, the Bank is mandated to keep inflation in check. But why has BOJ been given this

mandate? The ultimate goal of economic policy is to ensure a sustainable increase in the standard

of living of Jamaican citizens. Keeping inflation under control to avoid a loss of purchasing

power of earnings and savings is an important means to this end. Price stability also makes it

easier to plan over relatively long time horizons and therefore encourages saving and investment.

Inflation is measured through the use of the Consumer Price Index (CPI), which captures the rate

of price change for goods and services consumed in Jamaica. It is the most widely used indicator

of inflation in Jamaica. The Statistical Institute of Jamaica (STATIN) measures the CPI on a

16
monthly basis. The CPI measures the average price change in a selected set of goods and

services that is purchased by the representative Jamaican in a certain income range. To the

extent that the goods and services consumed by each particular individual differ from the set of

goods monitored by STATIN, the price changes published by STATIN will not precisely

measure the price changes faced by every Jamaican.(Harriott, 2000)

2.3.4 Taxation

Tax is a central but neglected element of development policy. The structure and administration

of taxation are frequently omitted from discussion and research agenda. Questions of a primarily

redistributive nature may be deemed political, and so unsuitable for neutral economic analysis,

and moreover as questions to be resolved by the democratic process in individual countries. On

the other hand, many questions are posed in terms of system reform and these may instead be

considered as purely ‘technical’ – matters of economic and bureaucratic efficiency to be settled

by experts. As a result, tax generates neither the sort of attention given by independent empirical

academic research to e.g. questions of optimal exchange rate arrangements, nor the level of NGO

advocacy focus devoted to e.g. multinational investment behavior. This twin neglect may explain

how an element of such importance for human development has such a low profile – and

possibly why its contribution may have been damaging. This neglect, it is argued, has led to two

main developments. First, the treatment of tax as a specialist area, with a resultant focus on

‘efficiency’ rather than theoretical analysis or practical research, has contributed to a lack of

knowledge of potentially important peculiarities of individual countries. This in turn has

contributed to treatment of poor countries’ systems as simply underdeveloped versions of rich

country equivalents. Technical assistance has then focused on helping the former to reach ‘our

level’, rather than a more careful and constructive engagement. (Cobham, 2000)

17
Kenya has grown direct and sales taxes together, seeking to address persistent revenue shortfalls

as Cheeseman and Griffiths (2005) detail, and to this end have also managed during the 1990s to

reverse the slide in trade tax revenues (albeit not to the levels of the 1980s and 1970s).It is of

concern that poorer countries are not only less able to raise revenue in absolute terms, but

moreover that they appear less able proportionally also. Teera (2002) has calculated, following

Goode (1984), measures of ‘tax effort’ – a static measure of a country’s utilization of its tax

capacity, and of ‘tax buoyancy’ – a dynamic measure capturing the elasticity of tax revenue with

response to policy changes and growth.

2.3.5 Financial performance

Finance always being disregarded in financial decision making since it involves investment and

financing in short-term period. Further, also act as a restrain in financial performance, since it

does not contribute to return on equity. A well designed and implemented financial management

is expected to contribute positively to the creation of a firm’s value (Padachi, 2006). Dilemma in

financial management is to achieve desired tradeoff between liquidity, solvency and profitability

(Lazaridis et al., 2007). Management of working capital in terms of liquidity and profitability

management is essential for sound financial recital as it has a direct impact on profitability of the

company (Rajesh and Ramana Reddy, 2011). The crucial part in managing working capital is

required maintaining its liquidity inday-to-day operation to ensure its smooth running and meets

its obligation (Eljelly, 2004). Ultimate goal of profitability can be achieved by efficient use of

resources. It is concerned with maximization of shareholders or owners wealth (Panwala, 2009).

It can be attained through financial performance analysis. Financial performance means firm's

overall financial health over a given period of time. A bank is a financial intermediary that

18
accepts deposits and channels those deposits into lending activities. Banks are a fundamental

component of the financial system, and are also active players in financial markets. The essential

role of a bank is to connect those who have capital (such as investors or depositors), with those

who seek capital (such as individuals wanting a loan, or businesses wanting to grow) (DUFERA,

2010)

Various groups of individuals are particularly interested in evaluating bank performance. First

and foremost, bank shareholders are directly affected by bank performance. Investors take

advantage of bank information to develop expectations concerning future performance that can

be used to help price common shares (in addition to capital notes and debentures that may be

issued by the bank). Second, bank management traditionally is evaluated on the basis of how

well the bank performs relative to previous years and compared with similar (or peer group)

banks. Hence, employees’ salaries and promotions are frequently tied to the performance of the

bank. Bankers also need to be informed about the condition of other banks with which they have

business dealings. Third, regulators, concerned about the safety and soundness of the banking

system and the preservation of public confidence, monitor banks using on site examinations and

computer based “early warning systems” to keep track of bank performance. Fourth, depositors

may also be interested in evaluating the performance of the bank, as the nominal values of their

deposits are not guaranteed. Fifth, and last the business community and general public should be

concerned about their banks’ performance to the extent that their access to credit and other

financial services is linked to the success or failure of their bank (Benton and James2005).

If the financial market were efficient, market price for banks' stock price would be one of the

most appropriate tools for measuring banks' performances. The alternative to the market

19
approach is the accounting-based financial ratio approach, which has commonly been used for

measuring the financial performance of firms (Abdu, 2004).

2.4.Empirical review

The first issue is the nature of the market model used to estimate corporate foreign exchange

exposure. The focus of this paper is not the validity or efficiency of the various asset pricing

models, but instead, based on prior studies, the research focus on how foreign exchange exposure

is estimated. Earlier studies used a monthly, contemporaneous horizon to measure exposure.

initial research in this area focused on whether corporations are exposed to foreign exchange

risk. Another issue in developing foreign exchange exposure estimates has to do with portfolio

size. Generally, there are two major choices in this regard. The first method is to estimate

exposure on the firm level and the other method is to estimate the exposure for portfolio

groupings, formed either by size, industry, level of international activity, or another criteria.

Many studies assess both the firm level and portfolio level exposures. As indicated earlier, prior

studies have focused on exposures of internationally involved or multinational firms. Using a

large sample of firms from many different countries, Doidge, Griffin and Williamson (2002) find

that foreign exchange exposure is related to the level of foreign activity. They also find that large

firms exhibit more foreign exchange exposure than smaller firms after controlling for the level of

foreign activity.Find an increase in equity volatility following the breakdown of the Bretton

Woods agreement and increased exchange rate volatility but equity risks increased much more

for firms with a multinational presence than it did for a control sample of domestic firms. As has

been noted in theoretical studies, industry effects also seem important in estimating foreign

exchange rate exposure. Using a sample of firms in the automotive industry in the US and Japan,

Williamson (2001) found that foreign sales are a major determinant of exposure but there is

20
considerable time variation in exchange rate exposure. However, Griffin and Stulz (2001) find

the effect of exchange rate shocks is minimal in explaining relative US industry performance and

is even smaller in other countries that are more open to trade finding that industry effects are

more significant than exchange rate effects. While there may be some differences in empirical

findings, foreign exchange exposure most likely depends on the competitive structure in an

industry. Additional firm characteristics have also been assessed as to their impact on foreign

exchange exposure. Koutmos and Martin (2003) used industry sector portfolios from four

countries and find that exchange rate exposure is asymmetric over different appreciation

depreciation periods. Furthermore, these asymmetries are more pronounced in the financial and

non-cyclical sectors. Overall, studies of foreign exchange exposure find that multinational

corporations and corporations with extensive foreign business have significant foreign exchange

exposure. However, most studies find that this estimated exposure is less than expected by

economic theory perhaps due to operational and financial hedges used by companies facing

foreign exchange exposure. While a few studies have included domestic firms without foreign

activity and generally found them not to be exposed to foreign exchange risk, no prior study has

addressed the determinants of foreign exchange exposure of domestic firms. It is common

practice among firms to use a combination of production and marketing strategies across the

firm‘s different operating units, operational hedges to manage long term exposure, whereas

foreign exchange derivatives, financial hedges are more often used for managing short term

exposure. Long-term operating policy adjustments are costly and difficult to reverse hence they

are most effective when the firm possesses a network of multiple operating units that span many

business and geographic areas.

21
2.5.Critique of the literature review

Purchasing power theory is a weak theory because it doesn’t directly distinguish the difference of

the nominal exchange rate between two currencies, also a few empirically literate economists

take PPP seriously as a short-term proposition, most instinctively believe in some variant of

purchasing power parity as a weak for long-run real exchange rates Interest rate parity is a no-

arbitrage condition representing an equilibrium state under which investors will be indifferent to

interest rates available on bank deposits in two countries. The fact that this condition does not

always hold allows for potential opportunities to earn riskless profits from covered interest

arbitrage. Product cycle theory always doesn’t satisfy the rate of sufficient production because

the production process changes overtime and economies of scale prevalent, tastes differ

according to income and products cannot be standardized at various income levels.

2.6.Research Gaps

Somalia doesn’t have strong functioning central banks that carry out monetary policy for

controlling and regulating the current exchange rate and supply of money in order to achieve

predetermined macroeconomic goals and all SMEs tend to look for their profitability basing on

the inflation and deflation of foreign exchange rates. This has significant implications on the

exchange rate market. Some well documented and applicable instrument of managing foreign

rate exchange fluctuations risks must be developed markets should be under utilized in Somalia.

Research gap thus exists in analyzing the instruments that can be applied locally in management

of this currency risks and the extent of their applicability in our international transactions

exchanges.

22
2.7.Summary

The researcher discovered the research result and findings derived from the distributed

questionnaires. The main purpose of this study was to identify the different factors influencing

the effect of exchange rate and to examine the relationship between exchange rate and financial

performance of small and medium enterprises in Mogadishu Somalia. So the researcher found

that exchange rate has a great influence on financial performance. Some of the specific findings

in this regard are: That lack of effective Government caused price fluctuation and political

conflicts also caused exchange rate fluctuation. Researchers also found out that whenever

exchange rate increases there is difficulty against import and that when exchange rate goes high

the demand of imported goods.

23
 CHAPTER THREE

RESEARCH METHODOLOGY
3.1.Introduction

This chapter discusses the research design and data collection methods that will be used by the

researcher in the study. It discusses the aspects such as research design, study population, data

collection instruments, and data collection procedures and analysis.

3.2.Research Design

This is an empirical study that analyzed the impact of foreign exchange rates on a firm’s

financial performance. The study answered the puzzle on the effect of foreign exchange on the

firm’s financial performance of listed companies in Mogadishu that has been of a concern. The

research is a descriptive research design which generally describes the characteristics of a

particular situation, event or case. It involves both qualitative and quantitative data which this

research used. As defined by Glass & Hopkins (1984), descriptive research design involves

gathering data that describe events and then organizes, tabulates, depicts, and describes the data

collection and often uses visual aids such as graphs and charts to help the reader in understanding

data distribution. A descriptive survey focuses on the research design and is concerned with

addressing the particular characteristics of a specific population of subjects, either at a fixed

point in time or at varying times for comparative purposes. As such they do not share the

emphasis in analytic designs upon control but they do share a concern to secure a representative

sample of the relevant population. This is to ensure that any subsequent assessments of the

attributes of that population are accurate and the findings are generalizable – in other words, they

have population validity (John & et al, 2002). According to Lavrakas (2008), a research design is

24
a general plan or strategy for conducting a research study to examine specific testable research

questions of interest.

3.3 Target population

The target population of this study was conducted employee of some small merchandising

companies in Mogadishu which are: Textile companies and Electronics companies because we

are more dependent on SMEs and they are a good source of information to analyze the topic.

Burns & Grove (2003) states that population includes all elements that meet certain criteria for

inclusion in a study.

Table: 3.1 Population

Two business Companies Target Population

Textile companies 100

Electronics companies 40

Total 140

3.4.Sample Size and Sampling Technique

Sampling is the process of selecting a number of individuals for a study. A sampling design is a

defined plan determined before any data is collected for obtaining a sample from a given

population. The selected number of individuals was as a representative of the whole population

under study. The sample method which was used this study was 30% of employee of business

companies in Mogadishu according to Mugenda and Mugenda (2003). The main objective of

25
using this sample was to obtain accurate and reliable information within minimum cost, time and

energy.

The sample is as follows:

Table 3.2 Sample size

Two companies Target Population Percentage Sample Size

Textile companies 100 30 30

Electronics company 40 30 12

Total 140 30 42

Non-probability sampling (or non-random sampling) provided a range of alternative techniques

to select samples based on your subjective judgment (Saunders, &et al, 2009). The researchers

used judgmental sampling techniques of non-probability sampling because the researchers

cannot obtain the list business companies' employee. Therefore, data was collected from those

people who are conveniently available and willing to co-operate. Purposive sampling was also

convenient because the sample selected was small and the ideas of the population were needed in

a shorter period.

3.5. Data Collection Instruments

Data collection methods used included questionnaire. Data was analyzed quantitatively and

presented descriptively and illustrated by using of tables and charts. The selection of these tools

have been guided by the nature of data to be collected, the time available as well as by the

26
objectives of the study. Kothari (2004) defines a questionnaire as a document that consists of a

number of questions printed or typed in a definite order on a form or set of forms. And according

to Dawson (2002), there are two basic types of questionnaires; closed ended and open-ended.

Closed ended questionnaires are used to generate statistics in quantitative research while open-

ended questionnaires are used in qualitative research, although some researchers quantify the

answers during the analysis stage.

3.6. Data Collection Procedure

In development of a survey questionnaire, the variables for which information needs to be

collected have to be identified followed by their operational definition. Primary data was

collected through self administrator of questionnaires to business companies’ employees. This

study used questionnaires to obtain quantitative data for analysis. Yang (2008) states that the

questions in a study directly related to the research questions. Burns and Grove (2003) define

data collection as the precise, systematic gathering of information relevant to the research

problem, using methods such as participant observations, distribution of questionnaire, narratives

and case histories. Kothari (2004) describes primary data as those which will be collected afresh

and for the first time, and thus will happen to be original in character. Morrison et,al. (2007).

3.7. Pilot Test

According to Holloway and Wheeler (2002), pilot studies also known as pre-test exercises are

not usually used in qualitative studies but are used by novice researchers who often conduct

interviews to get used to the type of data collection for their research. Newing (2011) states that

the importance of field piloting cannot be overemphasized; the researcher will almost always

find that there are questions that people fail to understand or interpret in different ways, places in

the questionnaire where they are not sure where to go next, and questions that turn out simply not

27
to elicit useful information. According to Polit and et al, (2003), a pilot study is a small scale

version, or trial run, done in preparation for a major study. Polit and et al, (2003) states that the

purpose of a pilot study is not so much to test research hypotheses, but rather to test protocols,

data collection instruments, sample recruitment strategies, and other aspects of a study in

preparation for a larger study. For this study the researcher used two subjects in the pilot study

drawn in proportional numbers from the strata on categories and star rating.

3.7.1 Reliability

Testing of the reliability of the scale is very important as it shows the extent to which a scale

produces consistent results if measurements are made repeatedly. This is done by determining

the association in between scores obtained from different administrations of the scale. If the

association is high, the scale yields consistent results, thus it is reliable. Cronbach’s alpha is used

to determine the internal reliability of the questionnaire used in this study. Values range between

0 and 1.0; while 1.0 indicates perfect reliability, the value 0.70 is deemed to be the lower level of

acceptability (Hair, Black, Barry, Anderson, & Tatham, 2006).

3.7.2 Validity

Validity is the degree to which results obtained for the analysis of the data actually represent the

phenomena under study. It indicates how accurate the data obtained in the study represent the

variables of the study (Mugenda & Mugenda, 2003). The researcher used the most common

internal consistency measure known as cronbach alpha (α). It may be mentioned that its value

varies from 0 to 1 but, satisfactorily value is required to be more than 0.6 for the scale to be

reliable. (Malhotra, 2002). The recommended value of 0.7 is used as a cut off of reliability.

28
3.8. Data Processing, Analysis

Data analysis is a process of analyzing all the information and evaluating the relevant

information that can be helpful in better decision making, Silvia and Skilling (2006). The data

collected was analyzed using the software called Statistical Package for the Social Sciences

(SPSS) version 16 and results shown in terms of frequency distribution and percentages. The

data was tabulated and classified according to their common characteristics.

3.9.Analytical Model

A regression model was applied to determine the effects of each of the variables with respect to

financial performance. Regression is concerned with describing and evaluating the relationship

between a given variable and one or more other variables. More specifically, regression is an

attempt to explain movements in a variable by reference to movements in one or more other

variables.

Y = α + β1X1 + β2 X2 + β3X3 +β3X4+ɛ

Where Y: is the financial performance.

X1: is Balance of payments.

X2: is foreign direct investment.

X3: is Inflation.

X4: is a government regulation.

Ɛ: Error term

29
 CHAPTER FOUR

RESEARCH FINDINGS AND DISCUSSION

4.1 Introduction

In this chapter, raw data from the questionnaires was analyzed and interpreted. Various tests

were used to test the relationship between variables, level of significance, reliability and random

distribution of data. Specifically, descriptive statistics the independent variables of the study

were balance of payments, foreign direct investment, inflation and taxation and how they

affected the dependent variable which was financial performance of small and medium sized

enterprises in Mogadishu.

4.2 Rate of Respondents

From the data collected, all 42 questionnaires were filled and returned, which represent 100 %

response rate. This response rate is considered satisfactory to make conclusions for the study.

Mugenda and Mugenda (2003) observed that a 50% response rate is adequate, 60% is good,

while 70% rated very good. This implies that based on this assertion, the response rate in this

case of 100% is therefore very good. The recorded high response rate can be attributed to the

data collection procedures for instance, the researcher pre-notified the potential participants for

the survey, the researcher administered the questionnaire with the help of research assistants

through drop and pick method and follow up calls were also made to clarify queries as well as to

prompt the respondents to fill the questionnaire. These methods facilitated the whole process of

data collection hence the high response rate.

30
4.3 Reliability and Validity

Prior to exploring and describing the relationship between balance of payment, foreign direct

investment, inflation, taxation and financial performance for merchandising companies in

Mogadishu, Somalia, the measures were examined and assessed to gauge reliability and validity.

4.3.1 Reliability analysis

Cronbach’s alpha was used to determine the internal reliability of the questionnaire used in this

study. Values range between 0 and 1.0; while 1.0 indicates perfect reliability, the value 0.70 is

deemed to be the lower level of acceptability (Hair, Black, Barry, Anderson, & Tatham, 2006).

The reliability statistic for each of the identified factors is presented in Table 4.1. It is evident

from Table 4.1 that Cronbach’s alpha for each of the identified factors is well above the lower

limit of acceptability of 0.70. The findings indicated that foreign direct investment had a

coefficient of 0.823, balance of payments had a coefficient of 0.792, taxation had a coefficient of

0.720, while inflation obtained a coefficient of 0.715. and financial performance had 0.70 The

results indicate that the questionnaire used in this study had a high level of reliability. These

tables indicate that each of the items relates to the identified factor and that the coefficient alpha

value of the identified factor will not increase if some of the items are left out. Basically,

reliability coefficients of 0.7 or more are considered adequate for studies (Hair, Black, Barry,

Anderson, & Tatham, 2006; Malhotra, 2002).

31
Table 4.1: Reliability Statistics

Variables Cronbach's Alpha Comments

Foreign direct investment 0.823 Accepted

Balance of payments 0.792 Accepted

Taxation 0.720 Accepted

Inflation 0.715 Accepted

4.4 Descriptive Statistics

This section outlines the demographic data, gender, years of existence and key players in the

industry.

4.4.1 Demographic data

The study required to establish the demographic data of the respondents. The researcher began

by a general analysis on the demographic data obtained from the respondents which included; the

gender, duration of existence and the key players in the industry. This research targeted 42

participants in regard to establishing the effect of exchange rate on financial performance of

small and medium sized enterprises in Mogadishu, Somalia and all 42 questionnaires were

generated.

4.4.2 Response of Gender distribution

Table 4.1 below indicated that 38 (90.5%) of the respondents were men while the remaining 4

(9.5%) were women, this clearly shows that the industry is male dominated.

32
Table 4.2 Gender of respondents

Gender Frequency Percent

Male 38 90.5

Female 4 9.5

Total 42 100.0

4.4.3 Response of age group

Table 4.2, shows that 14 (33.3%) of respondents have been working here for at least 20-30 years,

14 (33.3%) have been working here for 30-40 years 9 (21.4%) have been working here for 40-50

years and 5(11.9%) have been working here for above 50 years.

Table 4.3 age group

Duration Frequency Percentage

20-30 14 33.3

30-40 14 33.3

40-50 9 21.4

Above50 5 11.9

Total 45 100.0

33
4.4.4 Response of level of education

The descriptive statistics of the study Table 4.3 indicated that there are numerous level of

education in these firms. Least of the respondents 6 (14.3%) were secondary schools graduates.7

(16.7%) were diploma holders while 17 (40.5%) of the respondents were bachelors degree and

the remaining 12 (28.6%) claimed they were Masters Degree. These results show respondents'

opinion and the level of education in the firms.

Table 4.4 level of education

Level Frequency Percentage

Secondary 6 14.3

Diploma 7 16.7

Bachelor 17 40.5

Master 12 28.6

Total 42 100.0

4.4.5 Years of existence

From the Table 4.5, shows that 19 (45.2%) have been in existence for at least 1-5 years, 12

(28.6%) have been in existence for 5-10 years, 7 (16.7%) have been existence for10-15 years and

4 (9.5%) have been existence for above 15 years.

34
Table 4.5 work experience

Duration Frequency Percentage

1-5 19 45.2

5-10 12 28.6

10-15 7 16.7

Above 15 4 9.5

Total 42 100.0

4.5 Study variables Findings

The following presents the findings on the various study variables.

4.5.1 Balance of payment on financial performance

The study required to investigate the effects of Balance of payment on financial performance.

Table 4.6 summarizes respondents' level of agreement on how Balance of payment affects

financial performance of SMEs. Most of the respondents agreed that International trade has a

direct effect on the financial performance of the company as shown by a mean of 1.83. Most of

the respondents also agreed to the fact that Company owners think they can create high profit for

the company if they gain investment income, reporting a mean of 2.17. Company managers are

always responsible when companies fail to implement financial transactions reported a mean of

2.31. the receipt is recorded as a debit entry. Conversely, any transaction that gives rise to a

payment by a resident to a foreign resident is recorded as a debit entry. The payment that results

from this transaction is recorded as a credit entry.(Robinson, 2004).

35
 Table 4.6 Balance of payment on financial performance

Statement N Mean S.D

International trade has a direct effect on the 42 1.83 .881

financial performance of the company

Company owners think they can create high profit 42 2.17 .824

for the company if they gain investment income

Most businesses do well when they adopt financial

transactions. 42 2.33 .816

Company managers are always responsible when

companies fail to implement financial transactions. 42 2.31 1.199

4.5.2 Foreign direct investment on financial performance

The study sought to establish the effects of foreign direct investment on financial performance

From the findings indicated in table 4.7 most of the respondents agreed that Global economic

partnership has a higher risk to your company with a mean of 1.93 being obtained. The results

also conquer with the findings on the question that was asked whether Business entities generate

profits by taking advantage of the external financing.. The findings on this question obtained a

mean of 2.00. Some of the respondents agreed that economic partnership is a very good way to

get profit, with a mean of 2.10. The findings on external financing makes analyzing risks

difficult obtained a mean of 2.36. A direct investor may be an individual, an incorporated or

unincorporated private or public enterprise, a government, a group of related individuals, or a

36
group of related incorporated and/or unincorporated enterprises which have a direct investment

enterprise, operating in a country other than the country of residence of the direct

investor.(McIntosh, 2005)

Table 4.7 Foreign direct investment on financial performance

Statement N Mean S.D

Global economic partnership has a higher risk to your 42 1.93 .838

company.

Global economic partnership is a very good way to get 42 2.10 1.078

profit

external financing makes analyzing risks difficult 42 2.36 1.100

Business entities generate profits by taking advantage of 42 2.00 1.126

the external financing.

4.5.3 Inflation on financial performance

The study sought to establish the effects of Inflation on financial performance. Respondents

agreed that Consumer price index affects the profitability and long-term strategy of the

organization as represented by a mean of 1.86, most of the respondents agreed that the ability of

profit levels have decreased over the last years as shown by a mean of 2.02 and a mean of 2.14

was obtained on the question whether Finance officers and owners take decisions related

Consumer price index control. The CPI measures the average price change in a selected set of

goods and services that is purchased by the representative Jamaican in a certain income range.

37
To the extent that the goods and services consumed by each particular individual differ from the

set of goods monitored by STATIN, the price changes published by STATIN will not precisely

measure the price changes.(Harriott, 2000)

Table 4.8 Inflation on financial performance

Statement N Mean S.D

Consumer price index affects the profitability and long- 42 1.86 .814

term strategy of the organization.

The ability of profit levels have decreased over the last 42 2.02 .975

years.

Our company has a policy towards Employment cost 42 2.50 1.018

index

Finance officers and owners take decisions related 42 2.14 1.117

Consumer price index control

4.5.4 Taxation on financial performance

The study sought to establish the effects of Taxation on financial performance. Respondents

agreed that Company managers always try to ignore paying the tax as represented by a mean of

1.81, some of the respondents agreed that Management of the company adopts to pay low tax so

as to keep owners’ wealth maximization as shown by a mean of 2.02 and a mean of 2.07 was

obtained on the question whether Paying the tax will enable decision makers to feel free from

any government intervention and some other respondents admitted that The tax guides the

company to perform well and gain high profit as indicated by a mean of 2.24. the treatment of

38
tax as a specialist area, with a resultant focus on ‘efficiency’ rather than theoretical analysis or

practical research, has contributed to a lack of knowledge of potentially important peculiarities of

individual countries. This in turn has contributed to treatment of poor countries’ systems as

simply underdeveloped versions of rich country equivalents. Technical assistance has then

focused on helping the former to reach ‘our level’, rather than a more careful and constructive

engagement. (Cobham, 2000).

Table 4.9 Taxation on financial performance

Statement N Mean S.D

Company managers always try to ignore paying 42 1.81 .969

the tax

The tax guides the company to perform well and 42 2.24 1.265

gain high profit.

Paying the tax will enable decision makers to feel 42 2.07 1.091

free from any government intervention

Management of the company adopts to pay low 42 2.02 .780

tax so as to keep owners’ wealth maximization.

4.5.5 Financial performance

A number of questions were asked to determine how financial performance was conducted in

SMEs in Mogadishu, Somalia. Respondents agreed that The shareholders are interested in the

financial growth of the company, obtaining a mean of 1. 93. The respondent agreed that some

39
companies are risk averse because they are afraid of loss obtaining a mean of 2.02 and a mean of

2.24 was obtained on the question whether Market share allows financial managers upper hand

in taking firm’s overall decisions. Also some respondents agreed that Profitability is measured by

measuring the rate of foreign exchange obtaining a mean of 2.31. Management of working

capital in terms of liquidity and profitability management is essential for sound financial recital

as it has a direct impact on profitability of the company (Rajesh and Ramana Reddy, 2011).

Table 4.10 Financial performance

Statement N Mean S.D

Market share allows financial managers upper 42 2.24 .906

hand in taking firm’s overall decisions

Profitability is measured by measuring the rate 42 2.31 .897

of foreign exchange.

Some companies are risk averse because they 42 2.02 1.070

are afraid of loss

The shareholders are interested in the financial 42 1.93 1.091

growth of the company.

4.6 Multiple Regression Analysis

Multiple regression analysis was performed to evaluate the relationship between the dependent

variable (financial performance) and the independent variables (balance of payment, foreign

direct investment, inflation and taxation) and to test the research on the factors affecting financial

performance for merchandise companies in Mogadishu, Somalia. Standard multiple regression

40
analysis was conducted for hypotheses testing (Cooper & Schindler, 2013; Sekaran, 2008), while

stepwise multiple regression analysis was conducted in order to establish the best combination of

independent (predictor) variables would be to predict the dependent (predicted) variable and to

establish the best model of the study (Cooper & Schindler, 2013).

4.6.1 Model Summary

Model summary is a summery that describes how far the in dependent variables explain the

dependent variables that mean the greater R value has the great number the greater independent

variables explain with dependent variable. In order to test the research, a standard multiple

regression analysis was conducted using financial performance as the dependent variable, and

the four determinants of financial performance: balance of payment, foreign direct investment,

inflation and taxation as the predicting variables. Tables 4.10, 4.11 and 4.12 present the

regression results. From the model summary in table 4.10, it is clear that the adjusted R 2 was 0.

642 indicating that a combination of balance of payment, foreign direct investment, inflation and

taxation explained 64.2% of the variation in the financial performance of SMEs in Mogadishu.

Table 4.11 Model Summary

Model R R2 Adjusted R2

1 .823 .677 .642

41
4.6.2 Analysis of Variance

Analysis of Variance (ANOVA), as the name implies, is a statistical technique that is intended to

analyze variability in data in order to infer the inequality among population means. This may

sound illogical, but there is more to this idea than just what the name implies. The ANOVA

technique extends what an independent-samples t test can do to multiple means. The null

hypothesis examined by the independent samples t test is that two population means are equal. If

more than two means are compared, repeated use of the independent-samples t test will lead to a

higher Type I error rate (the experiment-wise α level) than the α level set for each t test.

Table 4.12 Analysis of Variance

ANOVA

Model Sum of Squares df Mean Square F Sig.

Regression 12.115 4 3.029 19.351 .000

Residual 5.791 37 .157

Total 17.906 41

From the ANOVA table 4.12, it is clear that the overall standard multiple regression model (the

model involving constant, balance of payment, foreign direct investment, inflation and taxation)

is significant in predicting how balance of payment, foreign direct investment, inflation and

taxation determine financial performance of SMEs in Mogadishu, Somalia. The regression

model achieves a high degree of fit as reflected by an R2 of 0. 642 (F = 19.351; P = 0.00 < 0.05).

42
4.6.3 Regression Coefficients

Table 4.12 presents the regression results on how balance of payment, foreign direct investment,

inflation and taxation determine financial performance of SMEs in Mogadishu, Somalia. The

multiple regression equation was that: Y= β0+β1X1+β2X2+ β3X3 + β4X4+ ε and the multiple

regression equation became: Y = -.075-.237X1+.680X2 + -.030X3 +.161X4 .As depicted in table

4.13, there was positive and significant effects of FDI on financial performance (β = .660; t =

4.378; p < 0.05). There was positive and significant effects of taxation on financial performance

(β = .140; t = 1.111; p < 0.05). There was a weak positive and significant effects of balance of

payment (β = .209; t = 2.076; p < 0.05) However, there was negative but insignificant effects of

inflation on financial performance (β = -.024; t = -.196; p > 0.05).

Table 4.13 Regression Coefficients

Model Unstandardized Standardized T Sig.

Coefficients Coefficients

B Std. Error Beta

(Constant) -.075 .345 -.218 .828

Balance of
.237 .114 .209 2.076 .045
payment
FDI .680 .155 .660 4.378 .000

Inflation -.030 .153 -.024 -.197 .845

taxation .161 .145 .140 1.111 .274

a. Dependent variable: Financial performance

43
4.6.5 Correlation Analysis

Pearson Bivariate correlation coefficient was used to compute the correlation between the

dependent variable financial performances) and the independent variables (balance of payment,

foreign direct investment, inflation and taxation). According to Sekaran (2008), this relationship

is assumed to be linear and the correlation coefficient ranges from -1.0 (perfect negative

correlation) to +1.0 (perfect positive relationship). The correlation coefficient was calculated to

determine the strength of the relationship between dependent and independent variables (Kothari,

2013). From table 4.14, the results generally indicate that independent variables (balance of

payment, foreign direct investment, inflation and taxation) were found to have positive

significant correlations on financial performance at 5% level of significance. There was a strong

positive and highly significant correlation between foreign direct investment and financial

performance (r = .780, P > 0.05). There was a strong positive and highly significant correlation

between Taxation and financial performance (r = .621, P < 0.05). There was a moderate positive

and significant correlation between inflation and financial performance (r = .454, P < 0.01).

There was a moderate positive and significant correlation between balance of payment and

financial performance (r = .411, P < 0.05). The results imply that balance of payment, foreign

direct investment, inflation and taxation significantly influenced financial performance in SMEs

in Mogadishu, Somalia.

44
Table 4.14 Correlation

balance FDI inflati Taxatio financial

payment on n performance

balance payment Pearson 1 .232 .063 .361* .411**

Correlation

Sig. (2-tailed) .140 .691 .019 .007

N 42 42 42 42 42

FDI Pearson .232 1 .640** .627** .780**

Correlation

Sig. (2-tailed) .140 .000 .000 .000

N 42 42 42 42 42

Inflation Pearson .063 .640* 1 .307* .454**

*
Correlation

Sig. (2-tailed) .691 .000 .048 .003

N 42 42 42 42 42

Taxation Pearson .361* .627* .307* 1 .621**

*
Correlation

Sig. (2-tailed) .019 .000 .048 .000

N 42 42 42 42 42

Financial Pearson .411** .780* .454** .621** 1

*
performance Correlation

Sig. (2-tailed) .007 .000 .003 .000

N 42 42 42 42 42

45
 CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This chapter consequently summarizes the findings in line with the objectives; it also draws

conclusions and makes the necessary recommendations. Areas of further study that may enrich

the study area are also suggested.

5.2 Summary of Findings

The common objective of this study was to investigate the effect of exchange rate on financial

performance of SMEs in Mogadishu, Somalia. Specifically; this study investigated the effects of

balance of payment, foreign direct investment, inflation and taxation on financial performance of

SMEs in Mogadishu, Somalia. The study employed a survey research design in data collection.

This research employed quantitative data collection method whereby data was gathered by the

use of closed ended questionnaires which were self-administered. Factor analysis was used to

assess the validity and Cronbach alpha to assess reliability of the questionnaire. Multiple

regression analysis was performed to assess the relationship between the dependent variable

(financial performance) and the independent variables (balance of payment, foreign direct

investment, inflation and taxation) and to test the research on the determinants of financial

performance of SMEs in Mogadishu with specific focus on small and medium sized enterprises

in Mogadishu, Somalia.

46
5.2.1 Balance of payment

A country’s balance of payments is commonly defined as the record of transactions between its

residents and foreign residents over a specified period. Each transaction is recorded in

accordance with the principles of double-entry book-keeping, meaning that the amount involved

is entered on each of the two sides of the balance-of-payments accounts. The balance of

payments (BOP) is a summary of economic activities between the residents of a country and the

rest of the world during a given period, usually one year. The balance of payments, also known

as balance of international payments, encompasses all transactions between a country’s residents

and its nonresidents involving goods, services and income. (Lattie, 2005). There are some basic

rules governing how entries are recorded in the balance of payments. A credit entry is recorded

when the transaction gives rise to a receipt by a domestic resident from a foreign resident. The

receipt itself may take the form of an increase in the residents’ foreign assets or balances of

foreign currencies. Whatever its form, the receipt is recorded as a debit entry. Conversely, any

transaction that gives rise to a payment by a resident to a foreign resident is recorded as a debit

entry. The payment that results from this transaction is recorded as a credit entry.(Robinson,

2004).

5.2.2 Foreign direct investment

A foreign direct investment (FDI) is an investment made by a company or entity based in one

country, into a company or entity based in another country. .(McIntosh, 2005). It should be noted

that capital transactions which do not give rise to any settlement, e.g. an interchange of shares

among affiliated companies, must also be recorded in the Balance of Payments and in the IIP.

Concerning the terms direct investor and direct investment enterprise, the IMF define them as

47
follows. A direct investor may be an individual, an incorporated or unincorporated private or

public enterprise, a government, a group of related individuals, or a group of related incorporated

and/or unincorporated enterprises which have a direct investment enterprise, operating in a

country other than the country of residence of the direct investor.(McIntosh, 2005)

5.2.3 Inflation

Inflation is the continuing increase in the general price level that is upward movement in the

prices of the majority of goods and services. Inflation may arise from a variety of factors but the

basic reason for inflation is having too much money competing to buy the available goods at

their existing prices, allowing those prices to rise. Inflation is the rate at which the general level

of prices for goods and services is rising and, consequently, the purchasing power of currency is

falling. (Harriott, 2000). Keeping inflation under control to avoid a loss of purchasing power of

earnings and savings is an important means to this end. Price stability also makes it easier to plan

over relatively long time horizons and therefore encourages saving and investment.

Inflation is measured through the use of the Consumer Price Index (CPI), which captures the rate

of price change for goods and services consumed. It is the most widely used indicator of

inflation.

5.2.4 Taxation

As questions to be resolved by the democratic process in individual countries many questions are

posed in terms of system reform and these may instead be considered as purely ‘technical’ –

matters of economic and bureaucratic efficiency to be settled by experts. As a result, tax

generates neither the sort of attention given by independent empirical academic research to e.g.

questions of optimal exchange rate arrangements, nor the level of NGO advocacy focus devoted

48
to e.g. multinational investment behavior. This twin neglect may explain how an element of such

importance for human development has such a low profile – and possibly why its contribution

may have been damaging. This neglect, it is argued, has led to two main developments. First, the

treatment of tax as a specialist area, with a resultant focus on ‘efficiency’ rather than theoretical

analysis or practical research, has contributed to a lack of knowledge of potentially important

peculiarities of individual countries. This in turn has contributed to treatment of poor countries’

systems as simply underdeveloped versions of rich country equivalents. Technical assistance has

then focused on helping the former to reach ‘our level’, rather than a more careful and

constructive engagement. (Cobham, 2000). Tax is a central but neglected element of

development policy. The structure and administration of taxation are frequently omitted from

discussion and research agenda. Questions of a primarily redistributive nature may be deemed

political, and so unsuitable for neutral economic analysis, (Cobham, 2000)

5.2.5 Financial performance

Finance always being disregarded in financial decision making since it involves investment and

financing in short-term period. Further, also act as a restrain in financial performance, since it

does not contribute to return on equity. A well designed and implemented financial management

is expected to contribute positively to the creation of a firm’s value (Padachi, 2006). Dilemma in

financial management is to achieve desired tradeoff between liquidity, solvency and profitability

(Lazaridis et al., 2007). Management of working capital in terms of liquidity and profitability

management is essential for sound financial recital as it has a direct impact on profitability of the

company (Rajesh and Ramana Reddy, 2011). The crucial part in managing working capital is

required maintaining its liquidity in day-to-day operation to ensure its smooth running and meets

49
its obligation (Eljelly, 2004). Ultimate goal of profitability can be achieved by efficient use of

resources. It is concerned with maximization of shareholders or owners wealth (Panwala, 2009).

5.3 Conclusions

Financial performance has a strong positive and highly significant correlation on balance of

payment, foreign direct investment, it also has a moderate positive significance on inflation and

taxation. Financial performance has been seen as an important factor influencing other factors.

Since the four independent variables (balance of payment, foreign direct investment, inflation

and taxation) that the researcher applied indicated that there is positive relationship among these

variables and the dependent variable: (financial performance). Also the results showed that

balance of payment and foreign direct investment had strong positive significant with financial

performance in SMEs in Mogadishu, while inflation and taxation also had moderate positive

significant with financial performance, which can lead positive and negative impacts on financial

performance of SMEs in Mogadishu.

The positive side is that it provides positive effects on financial performance of employees and

results into enhancing their employee morals, and on the other hand it has moderate impacts

which may lead to an overall lack of control and guidelines over employees, it also avoids

decision making and problem solving.

A prior study indicates that balance of payment and foreign direct investment have great

influence in financial performance and are the most effective factors of financial performance,

while taxation has a moderate influence on financial performance and inflation has a weaker

influence, it is not very effective factor in financial performance, but this study found out that

50
foreign direct investment is the most effective factor and has the greatest influence on financial

performance in SMEs in Mogadishu.

5.4 RECOMMENDATIONS

According to the findings after doing the study which was the effect of exchange rate on

financial performance of SMEs in Mogadishu Somalia, the researchers found out that exchange

rate has a significant relation with the financial performance of SMEs in Mogadishu Somalia.

Therefore the researchers recommended that:

1. Researchers’ Firs recommendation is that the Somali Shilling is mal-functioning inside our

country because all traders use only dollar by selling and buying any Goods and in the

markets people use only Dollar by the time there isn’t a central government which controls

all the monetary system so, we recommend that Somali people should use Somali shillings in

all domestic activities so as to increase the value of their money.

2. The researcher’s second recommendation is that SMEs in Mogadishu should look for more FDIs

although foreign direct investment has a positive significance on their financial performance, it can

also enhance the moral of the employees, so managers should engage in obtaining FDI.

3. Also top management of small and medium sized enterprises should adopt using balance of payment,

because it has a positive effect on their financial performance, management should also encourage

their employees so as to improve the financial performance.

51
5.5 FURTHER RESEARCH

First this study used quantitative approach as a research method of collecting primary data and

objectivity of the questions that had effect overall results of the study. So the combination of

both quantitative and qualitative data collection approaches might produce significant results.

Second based on small and medium sized enterprises could affect the findings, therefore adding

other institutions and taken a large sample size might generate a significant results and also the

study employed as research instrument questionnaire instead of interview, so using other tool

such interview would be good. Finally, this research focused on the effect of exchange rate on

financial performance of SMEs in Mogadishu.

52
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55
 APPENDIX I: QUESTIONNAIRE
This questionnaire is a designed to the study the effect of exchange rate on financial performance

on merchandising companies. Because you are one who can give us correct answer that helps

finding correct picture. Your response will be kept strictly confidential. Thank you very much for

your time and cooperation. We greatly appreciate the help of your organization and yourself in

furthering this research endeavor.

Section (A):

Please tick in the blanks provided as your response.

1.Gender: Male ( )Female ( )

2.Age:

20– 30 ( ) 30 – 40 ( )

30 – 40( ) 50 and above ( )

3. Education : Secondary ( ) Diploma ( )

Bachelor ( ) Master ( )

4. Title of respondent: Employee ( ) Mangers ( ) Investors ( )

5. Experience: How long have you worked in these companies?

1-5 yrs ( ) 5-10 yrs ( )

10-15 yrs ( ) Above 15 yrs ( )

Section (B):

Please write your rating on the space before each option which corresponds to your best choice.

Kindly use the scoring system below:

Response Mode Rating Description Legend

Strongly Agree (1) Very high SA

56
 Agree (2) High A
Neutral (3) N
Disagree (4) Low DA
Strongly Disagree (5) Very low SD

SA A N SD D
SECTION C: BALANCE OF PAYMENTS
International trade has a direct effect on the financial
performance of the company.
Company owners think they can create high profit for the
company if they gain investment income
Most businesses do well when they adopt financial transactions.
Company managers are always responsible when companies fail
to implement financial transactions.
SECTION D: FOREIGN DIRECT INVESTMENT
Global economic partnership has a higher risk to your company.
Global economic partnership is a very good way to get profit
external financing makes analyzing risks difficult
Business entities generate profits by taking advantage of the
external financing.
SECTION E:INFLATION
Consumer price index affects the profitability and long-term
strategy of the organization.
The ability of profit levels have increased over the last years.

Our company has a policy towards Employment cost index

Finance officers and owners take decisions related Consumer

price index control

SECTION F:TAXATION

Company managers always try to ignore paying the tax

The tax guides the company to perform well and gain high
profit.

57
.
Paying the tax will enable decision makers to feel free from any
government intervention

Management of the company adopts to pay low tax so as to keep

owners’ wealth maximization.

SECTION G: FINANCIAL PERFORMANCE

Market share allows financial managers upper hand in taking

firm’s overall decisions

Profitability is measured by measuring the rate of foreign

exchange.
Some companies are risk averse because they are afraid of loss

The shareholders are interested in the financial growth of the

company.

58
 APPENDIX II: WORK PLAN

DATES

# Task Feb March April May June July Aug Sept

2016 2016 2016 2016 2016 2016 2016 2016

1 Search of

related articles

2 Proposal

writing

3 Proposal

presentation

4 Data collection

5 Data analysis

6 Presentation of

the project

7 Submission of

the project

59
 APPENDIX III: BUDGET

NO Item Estimated Cost ($)

1. Literature search 50

2. Transportation 110

3. Printing and Photo copies 120

4. Stationeries 60

5. Research assistances / Data collection 150

6. Miscellaneous expenses 90

7. Internet services 100

8. Proof reading cost 60

9. Project production 150

10. Total 890

60