Relative profitability between East African community trading and non-trading small and medium agribusiness enterprises in Rwanda

Abstract

The creation of customs Union in the East African Community (EAC) block was supposed to enhance and smoothen trade, enable traders to gain more profit from their business and encourage formal trade. However, Non-Tariff Barriers (NTBs) continue to exist and affect trade within the region. The aim of this study was to analyse relative profitability between EAC trading and Non-trading Rwanda Small and Medium Agribusiness Enterprises (SMAEs) and factors that influence the participation in the EAC cross border trade. Specifically, the present study aims at determining factors influencing SMAEs’s decisions to participate in cross-border trade, to compare profits between EAC trading and non-trading SMAEs and to analyse the effect of NTBs and transport cost on profitability of SMAEs participating in EAC cross border trade. The results from binary logistic regression show that the decision to participate is significantly influenced by distance from the border, age of the firm, number of employees, management and ownership status of the firm and decision to start the business. Results from gross margin analysis show that gross margin per kilogram of beans, Irish potato, carrot and onion is greater when they are sold in the EAC market than gross margin per unit when those commodities are sold in the domestic market. In addition, results from T-test confirmed that there is significant difference between the gross margin for beans, Irish potato and onion for EAC trading when compared with non-trading. Results from multiple linear regression proved that the profit for EAC trading SMAEs is significantly affected by transport cost, clearing fees, customs charges and bribes. Therefore, EAC trading is more profitable than non-trading. However, high transport cost and Non-Tariff barriers affect the profitability of EAC trading enterprises. Furthermore, SMAEs should be confident to participate in the EAC trade and Rwanda Ministry of Trade and Industry should enhance strategies for supporting cross border export.