Culture, business environment and SMEs' profitability: Evidence from European Countries

This paper aims to examine whether and how, certain country-specific characteristics shape the profitability of SMEs. Using a large sample of around 40,000 firms operating in 25 EU countries over the period 2006–2014 we find that freedom from corruption, a better environment in terms of the conditions that could contribute to the ease of getting credit, and fewer government regulation related to the starting, operating, and closing a business, enhance profitability. The dimensions of national culture also play an important role. Our results show that individualism, masculinity, and long-term orientation have a positive impact on profitability, whereas power distance and uncertainty avoidance have the opposite effect. We also find that the magnitude of the impact of national culture on profitability depends on political stability and institutional quality.