Determinants of Service Sector Firms’ Growth in Rwanda

Abstract

The service sector is an avenue for economic transformation as not all countries have a competitive edge in manufacturing. Findings from a micro-level research on the service sector confirm that ICT integration, firm's age, the education of the owner, the boss' attitude, family business, networks, new processes, major improvements, market share, on the job training and know-how significantly, and positively increase the probability of a firm's growth. Even though the growth rate of services is currently impressive in the Rwandan economy, no investigations have been done on the determinants of the growth of the firms in the service sector. This paper studies the development of services over the years in Rwanda's economy in detail and empirically estimates its determinants by using an econometric methodology. The empirical results are based on micro-data collected by the Rwanda Enterprise Survey (2011) and the 2014 Establishment Census. The survey has data on 241 firms and establishments. Linear and limited dependent variable techniques are employed to investigate the factors behind the development of service firms. Models are specified and estimated to assess the factors contributing to sales growth, innovations, and turnovers of service firms. The results show that the key factors driving the development of service firms in Rwanda include access to credit, application of ICT, availability of skilled labor, employee development and acquisition of fixed assets. The results suggest that the government should uphold the use of ICT in all service firms, promote access to finance to new service firms and promote on-work training in service firms to speed up Rwanda's shift from a low income to a middle-income state.