Determinants of SME profitability in the service sector: An empirical investigation from Poland

Abstract

Objective: The article aims to verify profitability and its determinants in SME service firms. Research Design & Methods: We conducted a critical literature review and analysed empirical data based on a linear mixed model. The research sample comprises 1851 SMEs representing the service sector. Findings: An analysis of the determinants of SME profitability in the service sector indicates the significance of such factors as belonging to a given industry, debt levels, asset structure, company size, and financial liquidity. Implications & Recommendations: The financial success of SMEs in the service sector results mainly from belonging to a specific industry. The profitability of a business activity is determined by a given sector’s internal competition, entry and exit barriers, technological advancement, and the structure of the market and business environment. Moreover, the profitability of SME service companies also depends on their size. On the other hand, such variables as indebtedness, asset structure, and financial liquidity negatively impact profitability. Contribution & Value Added: An analysis of SME profitability in the service sector is the first such undertaking in Eastern Europe. It is also true of the verification of profitability determinants in the service sector. The article also empirically verifies the profitability of different activities in the service sector.