The Effects of Institutional Quality on Employment Dynamics of SMEs: Evidence from Nangarhar Province – Afghanistan

Abstract

The study employs regression analysis to look at the effect of Institutional Quality and Access to Credit on SME's Employment. SMEs are known to create employment and contribute to the economic development, particularly in developing countries where unemployment and underemployment are still significant issues. The primary purpose of the study is to examine the relationship between the institutional and financial factors and employment in SMEs. Analysis results show that Institutional Quality and Access to Credit have a positive and statistically significant impact on SME employment. The institutional quality indicator is significantly and strongly related to SME employment (β = 0.697, p < .01), indicating that the improvement of the effectiveness and efficiency of governance, regulatory quality, transparency, accountability and institutional efficiency positively and significantly affects job creation in SMEs. This means that reliable institutions help to decrease uncertainty, foster the business environment, and promote investment, growth, and entrepreneurship. Access to Credit is also positively correlated with SME employment, though this correlation is not statistically significant (β = 0.113, p > .05), suggesting that better access to financial capital allows SMEs to grow their production, invest in assets, and employ more people. The comparative analysis of standardized coefficients, however, shows that Institutional Quality has a much greater influence on the employment of SMEs than Access to Credit, thereby indicating that the governance and institutional frameworks are a more powerful driver of employment outcomes of SMEs. The results support institutional theory as well as financial development theory, which have been associated with the importance of effective institutions and access to finance for economic growth and job creation.