Adoption of New Economy Practices by SMEs in ... - Semantic Scholar

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European Management Journal Vol. 21, No. 2, pp. 133–145, 2003  2003 Published by Elsevier Science Ltd. Printed in Great Britain doi:10.1016/S0263-2373(03)00009-4 0263-2373/03 $30.00 + 0.00

Adoption of New Economy Practices by SMEs in Eastern Europe PANAGIOTIS DAMASKOPOULOS, INSEAD, France THEODOROS EVGENIOU, INSEAD, France

We study the key drivers of adoption of e-business practices by small and medium-sized enterprises (SMEs) in Eastern Europe. We discuss the results of a survey of over 900 SME managers in four Eastern European countries and Cyprus. The survey was built on the basis of a framework for studying the adoption of new economy practices that captures the dynamic interrelationships between technological transformations, firms’ organisational and knowledge-creating capabilities, emerging market and industry structures, and public institutions and regulatory frameworks. Based on the framework and the survey results, we offer some reflections on new economy practices adoption.  2003 Published by Elsevier Science Ltd. Keywords: e-Business adoption, New economy, SMEs, Eastern Europe, Technology policy, EU enlargement, Regulatory reforms

Introduction Information and communication technologies (ICT) centred on the Internet are today generally recognised as one of the central forces in the transition toward a new economic system. During the height of the techno-enthusiasm that underpinned the dot.com phenomenon this transition tended to be identified with e-business which mostly meant the ‘transfer’ of existing business processes onto an online environment. In the meantime there is a growing realisation that such a process-oriented e-business transformation is only one aspect, albeit a central one, of a broader economic transformation that has important implications for the competitiveness of firms. The viewpoint of this paper is that for new ICT to diffuse throughout the whole economy, not just business processes, but business firms in many aspects, market European Management Journal Vol. 21, No. 2, pp. 133–145, April 2003

conditions, and the culture and institutions of society, all need to undergo substantial change. It is the dynamic interdependence of these three conditions that is the source of innovation and value creation in the new knowledge-driven economy. This is why the agenda of research on the dynamics of adoption of new economy practices, innovation, and economic growth needs to be expanded beyond the level of the firm (Castells, 2000). In this paper we seek to understand the key sets of drivers of adoption of new economy practices by small and medium-sized enterprises (SMEs) in Eastern Europe. SMEs in Eastern European occupy a strategic position since they constitute key drivers of innovation, economic stabilisation, and employment. We explore the adoption patterns of e-business practices in SMEs in four Eastern European countries, Bulgaria, Poland, Romania and Slovenia, and Cyprus. ICT broadens the geographical scope of economic activity, which means that business systems interact on a global scale. However, such interaction is conditioned by the organisational, institutional, and cultural factors in different countries. Different social formations and regions tend to generate their own organisational arrangements that support innovation and e-business practices (Berger and Dore, 1996; Castells, 2000). This is a central principle that structures our inquiry into the e-business adoption patterns in Eastern European Candidate Enlargement countries. We discuss the result of a survey of over 900 SME decision-makers. The survey produced responses to approximately 100 questions that cover technological, organisational, market, industrial, and regulatory factors which influence e-business adoption. The results presented here yield a range of insights in the area of e-business adoption at a national level, that are also valuable to anyone with an interest in marketing to, working with, or under133

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standing Eastern European SMEs that are adopting e-business practices. A limitation of this paper is that for a number of issues we discuss we lack empirical data from the survey, since the framework we use has evolved during the survey process. In these cases the analysis we make can only be used as a roadmap for future research and analysis of e-business adoption patterns in Eastern Europe. In addition, due to some inconsistency in the delivery of the survey, our research misses data only on marginal elements of the e-business environment in Bulgaria.

A Framework for Studying e-Business Adoption In the wake of the collapse of the high-tech stock bubble academic and business opinion are marked not only by uncertainty but also by scepticism as to whether the technological transformation associated with ICT and the Internet were the harbinger of a new phase in the development of the global economy or simply a temporary phenomenon that was brought about by speculation. What is in question today is whether the technological, economic and organisational changes associated with ICT amount to the formation of a new economic system, a new economy. In this context, it is imperative that research in the domain of e-business in particular and the knowledge-driven economy in general, be underpinned by explicitly articulated operating assumptions and conceptual categories. The new economy is not just about e-business and economic activity conducted through electronic net-

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works. e-Business is a central component of an economic system whose core characteristics are that it is global, it is knowledge-based, and it is networked. It is global because the key processes of production, circulation, and consumption are organised on a global scale through functional linkages among mainly financial but also organisational and institutional structures. It is knowledge-based because the productivity and competitiveness of economic organisations depend upon their ability to generate, process, and apply knowledge and information efficiently. And it is a networked economic system — and therefore not uniformly distributed globally — because productivity is generated through and competition is organised around a global network of interactions between individuals and organisations (Castells, 2000). There are therefore several structural features whose coexistence are an indispensable condition for the sustainable adoption of e-business practices. The introduction of ICT is only one of these. For example, firms’ knowledge-creating capabilities and organisational capital, market and industrial structures, inter-organisational relationships within and across networks and industries, social attitudes toward ebusiness, and regulatory and public institutional bodies are equally important. In the present section we develop a framework of analysis for studying e-business adoption based on the conceptualisation of the new economy outlined in the previous section. The framework is comprised of three interrelated levels of analysis: the level of the firm, the level of the market and industrial structures, and the regulatory environment. This is summarised in the ‘Model’:

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Level 1: e-Business at the SME Firm Level Successful e-business initiatives and strategies depend on the mentalities of managers, their understanding of ICT, and the organisational implications of the introduction of the Internet. Managerial perceptions and commitment are critical factors for the successful implementation of e-business strategies. If positive perceptions and commitment to the pursuit of competitiveness and growth in the e-business environment are lacking at the upper echelons of an organisation it is unlikely that commitment and activism elsewhere within it will lead to the development of e-business strategies. However, awareness and commitment, though necessary are not the only conditions that ensure ICT uptake and success of ebusiness initiatives. The successful implementation of e-business strategies depends on the capacity of an organisation to generate synergies between technology, organisational goals and strategies, and people’s abilities and skills. On the ‘e-business at the SME firm level’ we therefore examine: 1. The general state of SME managerial perceptions 2. The state of technological readiness of SME firms 3. The state and goals of e-business strategies in SMEs 4. The availability of skills for e-business adoption in SMEs.

Level 2: e-Business at the Level of the Markets and Industry Structure Successful implementation of e-business initiatives is not exclusively a function of conditions prevailing within the firm. Conditions prevailing ‘outside’ the firm are of equal importance. Such factors include the existence of networks and technological infrastructure at the level of the market, such as telecommunications infrastructures, which directly influence the size of the online market through, for example, limiting consumer Internet penetration. At the same time, for a market to work, payment systems need to be in place and broader social attitudes to be mature. We therefore consider the state of e-payments and clearing systems, the levels of security and trust in online economic activity, and the broader social attitudes to online commerce. The dimension of financial capabilities at this level is exclusively concerned with the market components that enable the initiation and conclusion of online transactions, not the financial structure of the economies under examination. That is a separate issue which we also study. Indeed, the financial structure of any given economic system has clearly also a decisive impact on its industrial structure, the organisation of the investment process, the structure of governance of enterprises operating in it and its course of economic and social development (Gintis, 1989; Berger and Dore, 1996). As such, the financial environment of a given economy, in this sense, does not refer to the banking functions associaEuropean Management Journal Vol. 21, No. 2, pp. 133–145, April 2003

ted with business transactions. Instead, it refers to the financial structure on the basis of which investment is organised. Hence, we deem it necessary to analytically distinguish the financial elements associated with transactions from the structures that organise the investment process among Eastern European SMEs. On the ‘e-business at the market and industry level’ we therefore examine: 1. The technological infrastructure and Internet penetration 2. The state of electronic payment systems, trust, and security 3. The financial environment for investments 4. Social attitudes toward online commerce.

Level 3: e-Business at the Level of the Institutional and Regulatory Environment Popular accounts of the formation of the Internet have it that it has evolved so successfully precisely because it has escaped government intervention and thrived on self-regulation. It is true that an entrepreneurial culture is of crucial importance for the development of e-business. However, active government support has been a crucial factor both in the formation of the Internet as well as the regulatory structure on which e-business has evolved (Castells, 2000). In other words, government policy and regulation is of critical importance in the formation of e-business supportive environments. Key prerequisites are the existence of a competitive telecommunications market, regulation regarding intellectual property rights and e-signatures for trust and security, and support for entrepreneurship. On level 4 ‘e-business at the level of the institutional and regulatory environment’ we therefore examine: 1. Legal support for e-business transactions and intellectual property 2. Regulatory reform and liberalisation of telecoms 3. Support of entrepreneurship and of ‘clusters of innovation’. For the part regarding telecoms, we do not provide any statistics since the survey did not include questions regarding regulation of telecoms — which is an issue in a sense beyond the control and action plan of SME managers.

The State of SME e-Business Adoption in Eastern Europe Description of the ENLARGE Survey Study The ENLARGE survey generated a broad sampling of SMEs, which was a primary sampling goal. Most SMEs surveyed are in the tertiary sector, although 135

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many are in the secondary, and a few are in the primary sector. Some respondents indicated that they worked in the government sector, in at least one case a recently privatised service that works closely with local governments; these cases were placed in the tertiary category. Most organisations interviewed were small — fewer than 50 employees. Bulgaria was an exception in that almost 40 per cent of those interviewed worked at organisations employing 250 persons or more. The respondent profile was predominantly senior managers with almost 50 per cent toplevel executives and 80 per cent in the upper echelons of management. These managers were, on average fairly young, as almost 70 per cent of respondents were under 45 years of age, but most were above the age of 35. In Romania and Poland, however, the 45– 55 year age bracket was significantly large — almost 40 per cent. Figure 1 shows the statistics for each country. Below we present some of the results of the survey. It is important to note that for simplicity for most graphs we show only some of the measures from the survey questions. The whole survey and all the statistics derived are available upon request from the authors.

Czech Republic, and Russia) revealed a growing awareness of the potential of e-business. Our survey also indicates that Eastern European SME managers are in general agreement that the Internet and e-business represent an opportunity for their firms. The variation in response to the question of whether ebusiness represents a threat or an opportunity is relatively minor and generally follows the average pattern shown in Figure 1 for the particular case of relations with business partners — the results were similar for the questions about the implications of ebusiness for the ‘existing business relations of organisations and their business environment’, and the ‘basic existing relationships of a company to its customer, supply, and distribution networks’(Figure 2). Yet the apparent enthusiasm for the potential of the Internet is not always reflected in sustained commitment to the adoption and implementation of e-business strategies among SME managers. One of the fundamental conditions for the successful implementation of e-business strategies is serious top-level management commitment and organisational buy-in. If upper management is not commit-

e-Business at the Level of SME Firms General State of SME Managerial Perceptions It was not so long ago that Western executives of companies operating in Eastern European countries found that managers in Eastern Europe did not yet have e-business fully in their field of vision. However, perceptions of the economic potential of the Internet and e-business strategies are changing. For instance, a poll commissioned by Intel and conducted by the Pentor Opinion and Market Research Institute as early as 1999 in Poland (including Hungary, the

Figure 2 SME Management Response Pattern to the Question ‘Is e-Business More of a Threat or More of an Opportunity for your Company’s Relations with Business Partners?’

Figure 1 (a) Distribution of SMEs Surveyed According to the Industrial Sector. (b) Percentage of SME Size (Employees). (c) Respondent Profile — Management Levels. (d) Age Group of Respondents

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Figure 3 Percentage of SMEs for which More Than 5% of the Operating Budget is Applied to e-Business (Data for Other, Lower Percentages of Budget are Not Shown for Simplicity)

ted to a company’s e-business strategy it is unlikely that other company stakeholders will be. However, it is often the case that such commitment is often lacking among SME managers. One way to capture the managerial commitment is through measuring the size of the budget allocated to e-business initiatives: the premise is that commitment implies larger budget allocations. Figure 3 shows the expenditure levels dedicated to the development of e-business. Polish SMEs report the highest expenditure levels consistent with their frequent deployment of e-business technologies (see sub-section below). This result is interesting in another way because the Polish SMEs were the most likely to be in the primary (agriculture, mining, etc.) or secondary economic (industrial production, construction, etc.) and the least likely to be in tertiary services. SMEs in Slovenia and Cyprus report the lowest expenditure rates for e-business initiatives, which is interesting since these are two of the most advanced countries in terms of e-business adoption. This is yet one more indication that one has to look beyond the firm level to see what facilitates or not the adoption of e-business and new economy practices. The State of Technological Readiness of SME Firms In terms of the technological readiness of SMEs the emerging picture is one of variation across different countries, as shown in Figures 4 and 5. Notice that Slovenia, commonly considered the most advanced of the countries surveyed here in terms of adoption of e-business practices, does not have the highest score in these figures. Adoption of e-business prac-

Figure 4 Percentage of SMEs that have an Intranet


Figure 5 Percentage of SMEs where More Than 50% of the Employees Regularly Use the Internet

tices is by no means equivalent to technological ereadiness, as we discussed in the previous section. The State and Goals of e-Business Strategies in SMEs The existence of computers and other aspects of ICT do not necessarily mean that Eastern European SMEs have fully developed e-business strategies. For instance, in Poland research conducted by the European Business Inquiry in 2001 shows that only 17 per cent of SMEs have an e-business strategy. These findings are consistent with our survey results which demonstrate that despite the introduction of Internet technologies, including websites and Intranets, fewer than half the SMEs had actual e-business plans, as shown in Figure 6. There are fairly wide variations across the countries, and this difference did not correlate with company size. In fact, company size, at the SME level, did not have any impact on the likelihood of having an e-business plan. Notice that despite the fact that Slovenia scored low in Figures 3–5, it scores the highest in Figure 6: a larger number of SMEs adopted e-business strategies in Slovenia, even if the technology and the budgets allocated to e-business is relatively lower there. Existing research suggests that the reason Eastern European companies most frequently give for moving into e-business is to reach more customers. Other significant motives are information gathering, communication, the desire for greater competitiveness, quality of services for customers, implementation of new marketing channels, cost reduction, improved efficiency, match the moves of the competition,

Figure 6 Percentage of SMEs that have an e-Business Plan

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Table 1 Reasons Website

for

Establishing

a

Company

Slovenia Poland Romania Cyprus Bulgaria (%) (%) (%) (%) (%) Competition Parent company Partners/ suppliers New markets Cost reduction Other

28 7

24 19

63 21

43 6

33 8

14

10

11

8

11

19 26 6

0 43 5

4 2 0

27 16 0

33 11 3

reduce the length of the order cycle, or simply the belief that the company’s future is on the net. Our research shows that intensified competition is instead the major motive for adoption of e-business practices. Table 1 shows the results by country. Overall, competition appears to be the main factor. Cost reduction was only a top factor in Poland. Addressing new markets (reaching new customers) is of high interest only in Cyprus, Bulgaria, and Slovenia, but not in Poland or Romania. Table 1 also shows that the influence of partners and suppliers regarding the motives for e-business adoption is larger in Slovenia. In a networked economy, the adoption of e-business practices by members of the economic ecosystem of a firm plays an important role in the development of e-business practices within a firm. We investigate this further in Figure 7, which shows how many SMEs have business partners that use e-commerce. In Slovenia, many companies report that a majority of their business partners are engaged in e-commerce, while in most other countries only a few business partners do so. This is an interesting finding that may partly explain why there is a relatively accelerated rate of e-business adoption in Slovenia: network dynamics provide an extra motivation for adoption of e-business. The introduction of e-business can impact all aspects

Figure 7 Percentage of SMEs for which the Majority of Business Partners use e-Commerce

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Figure 8 Areas of SME Company Structure Change after the Introduction of e-Business

of an organisation’s structure. Fig. 8 shows which areas of SMEs had to change after the introduction of e-business practices. Marketing/sales was the most frequently impacted area, and manufacturing was the least impacted. In other words, e-business affects first the boundaries of the firm with the market in which it operates: the relationships of the firm first with its customers, and then suppliers and partners. The Availability of Skills for e-Business Adoption in SMEs Insufficient knowledge about Internet applications is an important barrier to the adoption of e-business practices among SMEs. Research indicates that many SME managers consider the Internet is useful but mostly for the operations of big companies. As a result, they do not see compelling reasons for e-business adoption in SMEs. At the same time, high numbers of managers consider that they do not have the necessary skills and knowledge to take advantage of the potential of the Internet and in leading an e-business strategy in the transparent environment of the Internet, as shown in Figure 9. The underlying perception is that e-business applications are quite complex and require dedicated personnel and skills. Indeed, extant research and surveys point to a strong concern among many SME managers that the implementation of e-business will present problems because they lack a critical mass of employees with the relevant e-business and e-commerce skills. Skills are key in knowledge-intensive processes, such as those involved in e-business initiatives, so the lack of them as well as the lack of training or access to them

Figure 9 Percentage of SMEs that Rate the Skills Composition of their Organisation and its Preparedness for the Successful Implementation of an e-Business Strategy as Good or Very Good


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Figure 10 Percentage of SMEs that have Addressed Organisational Development Through Training

Figure 11 Percentage of SME Managers that Consider their Country’s Technical Infrastructure Mature

can be seen as important factors for the lack of or unsuccessful e-business adoption.

munications infrastructure has been the pace of liberalisation, and particularly the introduction of competition.

Skills, especially in the context of generally high levels of education that characterise most Eastern European countries, can of course be developed through training. However, many SME managers say that their organisations have neither the time nor the budgets to send their employees to education or training on information technologies and for the acquisition of skills necessary for e-business. For instance, as Figure 10 indicates, with the exception of Slovenia, relatively low numbers report that they have in place training schemes. On the other hand, the cost of employing skilled e-business personnel varies considerably across countries with substantial numbers of SME managers reporting that such cost is ‘high’ or ‘very high’(Table 2). e-Business at the Level of Eastern European Markets and Industries Technological Infrastructure and Internet Penetration The state of the telecommunications infrastructure in many countries is fast evolving. For example, mobile phones are almost as common on the streets of many major Eastern European cities as they are in their Western counterparts. And the proportions of households with Internet connections in Slovakia and Slovenia are comparable to those of Spain or Switzerland (Financial Times, 2000). However, it is a far from universal success story. The most important factor setting the pace of development of the region’s telecomTable 2 Ratings of the Cost Specialised e-Business Personnel Slovenia (%) 1— Very low 2 3 4 5 — Very high Don’t know

Poland (%)

of

Employing

Romania Cyprus Bulgaria (%) (%) (%)

0

0

2

0

3

2 24 38 12

17 24 21 33

9 26 34 18

8 28 44 14

14 41 27 2

24

5

10

7

12


Our research shows that significant numbers of SME managers are relatively dissatisfied with the cost of networking facilities in their countries. Yet, the emerging picture covers a spectrum where a significant 48 per cent of Polish SME managers rated such cost as ‘very high’ whereas a negligible 7 per cent did so in Cyprus and 8 per cent in Slovenia. Table 3 Ratings of the Cost of Network Facilities by Country

1—- Very low 2 3 4 5 — Very high Don’t know

Slovenia (%)

Poland (%)

Romania Cyprus (%) (%)

0 13 45 27 8 6

0 5 17 14 48 17

1 8 24 38 19 10

3 15 40 34 7 0

Moreover, our research demonstrates that the development of the technological infrastructure across countries remains uneven. As shown in Figure 11 SME managers in Slovenia and Bulgaria represent opposite ends of the perception spectrum, with the former rating the country’s technological infrastructure as relatively ‘mature’ while the latter as fairly undeveloped. The rest of the SME managers surveyed in the other countries occupy the middle of the perception spectrum. The maturity of the technical infrastructure has a direct effect on Internet penetration, which is very important for the growth of e-business particularly in terms of B2C commerce. Our survey did not capture this, since there are numerous statistics on Internet penetration per country (i.e. the Economist Intelligence Unit). From such surveys we point out that much of Eastern Europe remains in single figures, excepting Slovenia and the Czech Republic that have penetration rates comparable to those of some EU member states. In large measure, this is statistically correlated with relatively low per capita incomes and 139

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an underdeveloped telecommunications infrastructure, which makes it expensive for average citizens in the region to become active Internet users. In addition, a profound language gap further adds to economic and infrastructure obstacles. Electronic Payment Systems, Trust, and Security The key payment barriers to the development of ebusiness on the level of the interface of SMEs with their market environment can be grouped into two categories. The first is related to the existing technological and payments infrastructure and it concerns the relative availability of credit cards and e-payments systems. The second is related to issues of trust and security and broader societal attitudes regarding e-commerce. The imperfection of the banking system, the relative underdevelopment of electronic clearing systems, and the lack of credit cards impedes the speedy development of e-commerce. In many Eastern European countries, with the possible exception of Slovenia, the amount of people with credit cards remains low. Furthermore, commercial credit is still relatively undeveloped and as a result economies continue to be very much cash-based. Generally, the emerging picture in terms of the existence of payment schemes for online activities is far from universal. As Figure 12 shows the perceived maturity of the financial sector in each country varies considerably with Slovenian and Cypriot SMEs indicating confidence in their country’s banking systems’ capacity to support epayments while managers in Poland, Romania, and Bulgaria expressing considerable concerns. Security and trust in online transactions is the other indispensable condition for the development of ecommerce. These issues are likely to be addressed especially in light of the entry of these countries into the EU. Nonetheless, as Table 4 indicates, there are considerable concerns among SME managers when it comes to the issues of trust and security of online transactions. This is more the case in Poland and Romania and less in Slovenia and Cyprus. Online fraud, for instance, is quite high in Romania. Such concerns are likely to constrain the development of e-business until the proper technological, legal and

Figure 12 Percentage of SME Managers that Perceive their Country’s Banking Sector to Support Electronic Financial Transactions as Mature

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Table 4 Perceived State of Trust and Security in Electronic Transactions by Country Slovenia (%) 1 — Very high 2 3 4 5 — Very low Don’t know

Poland (%)

Romania (%)

Cyprus (%)

3

0

2

4

18 44 13 2 19

0 14 36 50 0

6 29 21 25 17

18 36 18 15 8

regulatory structure emerges. However, on a positive note, the volume of fraud is at least growing more slowly than that of payments (The Economist Intelligence Unit, 2001). The Financial Environment for Investments A central feature of the transition to the new economy is the interplay between information technology and finance. It is this interplay that allows for the creation of the economic dynamism that underpins successful e-business development in the new economy. In the context of SMEs in Eastern Europe, this is not a question of technological uptake alone but also one of financial reform and the formation of an open and transparent capital market suitable to the needs of SMEs and entrepreneurship. The Eastern European economies are marked by a predominantly bank-based financial environment that is not conducive to high-risk entrepreneurial activity. Though many Western and Eastern European banks have taken steps to address the financing needs of new start-up enterprises and SMEs many suggest that bank-based credit is not entirely appropriate for the current needs of SMEs. Traditional deep and wide capital markets and venture capital financing of Internet start-ups are far less developed and affordable than in more advanced Western economies. Over the past few years investment funds, venture capital firms and merchant banks have been trying to establish a base in Eastern European regional Internet markets. Our research shows that financing e-business initiatives among SMEs has a variety of sources whose relative importance varies across countries, as shown in Table 5, but SME managers report that between two-thirds and three-quarters of the e-business initiatives were still self-financed. The European Union was a significant funding source in Poland, and parent companies provided capital most often in Romania, Cyprus, and Bulgaria. It is noteworthy that venture capital is a particularly marginal source of funds for e-business. Bank credit is also a relatively unimportant source except in Poland and Slovenia. In contrast, parent companies, government funds, and the EU are the main sources for most countries. The relative underdevelopment of capital markets European Management Journal Vol. 21, No. 2, pp. 133–145, April 2003

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Table 5 Frequency of Financing other than SelfFinancing for e-Business Slovenia Poland Romania Cyprus Bulgaria (%) (%) (%) (%) (%) Venture Capital Parent Company European Union Government Bank

1

0

1

4

13

5

3

13

16

13

2 6 7

15 8 10

0 3 5

6 13 0

2 1 3

and/or a more efficient and risk-taking banking system means that many SMEs experience considerable difficulties in raising funds to finance e-business initiatives. Figure 13 summarises these results. It shows that these difficulties are particularly prominent in Poland, Romania and Bulgaria and slightly less so in Slovenia and Cyprus. Social Attitudes Toward e-Business Finally, at a market level, social attitudes toward ebusiness are embedded in the fabric of a society and they affect social interest in technology innovation, embracing of B2C, etc. For many segments of the society, ICT, e-business, and the digital economy continue to be seen as distant future realities. For some social segments this has to do with unfamiliarity with IT and a general digital illiteracy. The perceived maturity of each country’s social predispositions toward e-business is depicted in Figure 14. SME managers in Cyprus and Slovenia report that the prevailing social attitudes toward e-business in their countries are mature or well developed, whereas significant numbers of their counterparts in Bulgaria, Poland and Romania perceive such attitudes in their countries as relatively immature and in some cases even undeveloped. We note that these were simple unguided ratings, i.e. no guidelines for maturity were provided; the responses are simply each respondent’s personal assessment.

Figure 14 Percentage of SME Managers that Perceive their Country’s Societal Attitudes Toward Internet and e-Business as Mature

e-Business at the Level of the Institutional and Regulatory Environment Legal Support for e-Business Transactions and Intellectual Property A commonly accepted fundamental obstacle to the development of e-business in Eastern Europe is the insufficient and slow change of the regulatory environment — the regulatory environment has not changed fast enough to accommodate the quick pace of Internet developments. One area where regulatory measures need to proceed is legislation regarding the protection of e-commerce both at the level of transactions as well as at the level of protecting intellectual property, a central aspect in the knowledge economy especially because of the greater transparency brought with the adoption of e-business. In some Eastern European countries governments have moved relatively quickly to establish a legal framework supportive of e-business and e-commerce. For instance, in Slovenia a specific law on e-commerce was passed in the first half of 2000. The Act of the electronic commerce and electronic signature regulates the operation of the economic subjects, citizens, and State organs (Government of the Republic of Slovenia, 2000). However, as our study summarised in Tables 6 and 7 indicates, Slovenia and to a much less extent Cyprus, are the exception. In other countries regulation is still far from being satisfactory: for example in Poland and Romania almost half the respondents consider the regulatory environment to be completely unsatisfactory. Table 6 ‘Do you Think that the Legal Framework in your Country is Adequate for Supporting eCommercial Transactions?’ Slovenia Poland Romania Cyprus (%) (%) (%) (%)

Figure 13 Percentage of SME Managers which Responded which it was Difficult to Obtain Financing for their e-Business Initiative


1 — Highly satisfactory 2 3 4 5 — Nonsatisfactory Don’t know

2

0

3

0

27 37 6 8

19 14 16 47

4 12 23 45

10 28 26 24

23

5

16

11

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Table 7 ‘How Would You Rate the Current State of Property, Commercial and Contract Law in Your Country – Especially when it comes to the Protection of Intellectual Property Rights?’

1 — Excellent 2 3 4 5 — Nonexistent Don’t know

Slovenia (%)

Poland (%)

Romania (%)

Cyprus (%)

0 21 44 13 1

0 7 37 46 7

0 9 18 54 11

2 8 25 35 22

21

2

8

10

Regulatory Reform and Liberalisation of Telecoms Beyond the introduction of e-signature laws a more fundamental question concerning the regulatory environment of e-business in Eastern Europe has to do with the decentralisation and liberalisation of the national telecommunications industry. Our study has not covered this important aspect. We include this aspect here because we believe it is central to the study of e-business adoption, and we refer the reader to other studies regarding the liberalisation of telecoms in Eastern Europe and Cyprus (Financial Times, 2000). This is in many ways the backbone of dynamic e-business environments since it tends to lead to higher competition and hence greater efficiencies and lower costs in e-commerce and e-business practices. As we discussed at the market and industry level, high network costs are a concern for SME managers, shown in Table 3. However, the pace of reform in this crucial area is slow and uneven across Eastern European countries. Liberalisation of telecoms is a thorny political issue which has significant disruptive social consequences. The social and political nature of the process of liberalisation in the utilities markets has been pointed out in recent research by the European Commission which notes that ‘The future growth in utility services will depend on the progress toward liberalisation and privatisation in these areas. Telecommunications and transport in particular — being key service areas with cross-cutting functions across the economy as a whole — will improve significantly in performance if the privatisation policy is maintained. The crucial problem is that currently there are still many people employed in (public) utility services, but their productivity is comparatively low (as is the wage level). Upgrading will therefore confront the issue of reallocation of the workforce and/or unemployment’ (European Commission, 1999). Support for Entrepreneurship and of ‘Clusters of Innovation’ A key question for companies, especially SMEs and public, regional, and national authorities, is how to create a business and institutional environment supportive of innovation and entrepreneurship. Such an 142

Table 8 SME Management Perceptions of Support by National Government for Entrepreneurial Activities in General and e-Business Initiatives in Particular Slovenia Poland Romania Cyprus Bulgaria (%) (%) (%) (%) (%) 1 = Highly supportive 2 3 4 5 = Nonexistent Don’t know Mean of responses

1 16 32 20

0 0 17 39

0 3 11 39

1 6 17 32

0 4 17 32

5 27

37 7

35 11

33 12

42 4

3.21

4.21

4.19

4.05

4.17

environment would need to be the product of coordinated programs on the part of public authorities and government agencies at both national and regionallocal levels. However, as Tables 8 and 9 show, with the possible exception of Slovenia, SME managers in virtually all other countries consider the support they receive from national governments and regional– local public poor. Polish, Romanian, and Bulgarian SMEs give the most negative evaluations of the level of support received from their national governments for entrepreneurial activities in general, and e-business in particular. Regional and local governments were rated as providing even less support, with the ordering across the countries being roughly consistent with the national evaluation. The situation is significantly better in Slovenia. For instance, even though it is a small country, Slovenia has big ambitions in information technology, especially in software engineering. Its successes in this domain already include one of Central and Eastern Europe’s biggest software houses, Hermes Softlab, which recently raised 10 million Euro in an international equity placement, which, including the new capital, valued the group at 54 million Euro. The government Table 9 SME Management Perceptions of Support by Regional/Local Government for Entrepreneurial Activities in General and e-Business Initiatives in Particular Slovenia Poland Romania Cyprus Bulgaria (%) (%) (%) (%) (%) 1 = Highly supportive 2 3 4 5 = Nonexistent Don’t know Mean of responses

2 14 23 26

0 0 12 38

0 2 8 37

1 4 13 35

0 2 12 24

10 27

36 14

47 6

35 14

52 9

3.46

4.28

4.38

4.18

4.39


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wants to further build on these successes: a post of Minister for Information Society was created in 2001, whose main objective is to bring together traditional telecommunications policy with novel ideas for promoting the development of IT in the country. It is worth noting here that Slovenian officials and executives claim they have some additional advantages in comparison with other Eastern European countries: geographical proximity to important Western markets such as Germany and the discipline and ability to work together in teams (Financial Times, 2001). How about the general support of SMEs for e-business adoption? Are Eastern European economies on their way to forming sustainable ‘clusters of innovation’ that could accelerate the adoption of e-business practices in SMEs and contribute to their transition toward the new economy? The evidence gathered from SME managers, presented in skeletal form in Table 10 is patchy. The table shows the relaTable 10 Effectiveness of Different Organisations in Facilitating the Adoption of e-Business Slovenia Poland Romania Cyprus (%) (%) (%) (%) Government agencies Highly effective = 1 25 2 28 3 27 4 16 Not effective = 5 5 IT industry Highly effective = 1 41 2 41 3 15 4 3 Not effective = 5 0 International organisations Highly effective = 1 12 2 29 3 39 4 16 Not effective = 5 4 Universities/Research Institutes Highly effective = 1 27 2 37 3 25 4 8 Not effective = 5 3 Trade or Industry Associations Highly effective = 1 13 2 30 3 39 4 14 Not effective = 5 4 Financial Institutions Highly effective = 1 27 2 33 3 28 4 9 Not effective = 5 2

0 0 28 35 38

2 5 19 34 39

3 16 28 25 28

29 37 27 5 2

16 30 30 18 7

14 39 37 10 1

0 0 33 31 36

10 25 26 24 16

11 41 39 8 1

29 26 33 5 7

7 27 27 25 14

9 41 37 12 1

0 5 32 34 29

7 13 27 30 24

4 30 49 14 3

0 12 32 27 29

9 23 31 25 12

16 32 37 11 3


tive assessments of how effective different — mostly non-governmental — organisations are in facilitating the adoption of e-business in each country. On average, the IT industry and universities/research institutes were judged the most helpful, scoring an average across countries of 2.3 and 2.6 respectively, while government agencies and trade/industry associations were viewed as the least helpful, scoring 3.6 and 3.2 respectively. Slovenia is an exception: it views governmental agencies as effective, although the IT industry was perceived as even more effective. Polish and Romanian SMEs felt the IT industry was the most effective of the choices. In Cyprus, both the IT industry and international organisations were judged to be the most effective.

Implications and Change Needs We first summarise what we believe are some important findings that emerge from the survey results, and then we briefly discuss the implications about changes that can facilitate e-business adoption. We briefly discuss the training needs as these were identified by SME managers.

Summary of Key Findings The figures and tables presented in section 3 indicate a number of hypotheses and findings. A rigorous statistical analysis of the survey results is beyond the scope of this paper and the subject of future research. However, it is important to emphasise some observations that we believe are important and can form the basis for future research in this area. Combining these observations with the general acceptance that Slovenia and Cyprus are more advanced than Romania, Bulgaria, and Poland in terms of e-business adoption (Slovenia being more advanced than Cyprus) can lead to an immediate hypothesis regarding which factors are key for enabling e-business adoption. Therefore the observations below can also be rephrased to form such hypothesis. Our observations can be summarised as follows: ❖ Adoption of e-business practices is by no means equivalent to technological e-readiness. For example Slovenia, considered the most advanced country in terms of e-business adoption as Figure 6 also indicates, is far from being a technology leader as shown in Figures 4–5. ❖ Factors beyond the level of the firm seem to be more important for e-business adoption than factors at the firm level. For example, a larger number of SMEs adopted e-business strategies in Slovenia, even if the technology and the budgets allocated to e-business are relatively low there. On the other hand, Slovenia is more advanced at the market, industry and regulatory levels, as is consistently 143

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❖

❖

❖

❖

❖

❖

❖

❖

indicated in the tables and figures in the corresponding sections above. Availability of skills is an important factor for ebusiness adoption. For example, Slovenia has the highest perceived skills composition. Moreover, with the exception of Slovenia, relatively low numbers in the other countries report that they have training schemes in place for their employees. There are considerable concerns among SME managers when it comes to the issues of trust and security of online transactions. This is more the case in Poland and Romania than in Slovenia and Cyprus. The cost of telecommunication networks varies significantly across leaders and laggards. Although SME managers are relatively dissatisfied with the cost of networking facilities in their countries, the emerging picture covers a spectrum where a significant 48 per cent of Polish SME managers rated such costs as ‘very high’ whereas a negligible 7 per cent did so in Cyprus and 8 per cent in Slovenia. Moreover, generally SME managers in Slovenia rate the country’s technological infrastructure relatively ‘mature’, while in Bulgaria as fairly undeveloped. The rest of the SME managers surveyed in the other countries occupy the middle of the perception spectrum. Slovenia, and to a much less extent Cyprus, is also the ‘leader’ in terms of regulation that is supportive to e-business. With the possible exception of Slovenia, SME managers in virtually all other countries consider the support they receive from national governments and regional/local public poor. The perceived maturity of the financial sector in each country varies considerably with Slovenian and Cypriot SMEs again indicating confidence in their country’s banking systems’ capacity to support e-payments while managers in Poland, Romania and Bulgaria express considerable concerns. Difficulties in raising funds to finance e-business initiatives are particularly prominent in Poland, Romania and Bulgaria and slightly less so in Slovenia and Cyprus. SME managers in Cyprus and Slovenia report that the prevailing social attitudes toward e-business in their countries are mature or well developed, whereas significant numbers of their counterparts in Bulgaria, Poland and Romania perceive such attitudes in their countries as relatively immature and in some cases even undeveloped. Competition appears to be the main motivation for e-business initiatives. Cost reduction was only the top factor in Poland. Addressing new markets is of high interest in Cyprus, Bulgaria, and Slovenia, but not in Poland or Romania. Moreover, the existence of partners with e-business initiatives is more important as a factor in Slovenia, which is also the only country where many SMEs report that a majority of their business partners are engaged in

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e-commerce, while in most other countries only a few business partners do so. ❖ Marketing/sales were the most frequently impacted area, and manufacturing was the least impacted. In other words, e-business affects first the boundaries of the firm with the market in which it operates: the relationships of the firm first with its customers, and then suppliers and partners.

Change and Training Needs for Faster e-Business Adoption As part of the survey we asked SME managers to prioritise the areas of the highest need for managerial training that can facilitate e-business adoption. Table 11 summarises the results. The priorities are in general agreement with the key observations discussed above. In particular, it is important to notice that among the top five needs only two are at the firm level (‘Developing a business plan’ and ‘Developing an e-business strategy’), while the other three locate the issues at the market and the regulatory levels. Security and trust is the most important issue. The state of e-business in Eastern Europe reveals the need for a large effort to increase security of commercial activity of the Internet, both by technical means and co-ordinated legal actions, as the countries of the region produce not only good programmers, but also sophisticated hackers. Financing e-business initiatives is also among the key training concerns of managers. We discussed this Table 11 Priorities for Training as Perceived by SME Managers Across the Countries Studied. Top 5 and Bottom 5 Priorities are Shown in Order of Significance (Top to Bottom). The Other Options are Indicated in the Middle Section Addressing security and privacy concerns Developing a business plan Developing an e-business strategy Understanding of electronic payment methods Financing e-business initiatives Personalisation and customer relationship management on the Internet Sourcing e-business solutions and expertise Developing the right partnerships for e-business Training in technology management Implementation of e-business strategy Learning how to collect marketing intelligence online Crafting the right business model for the internet Developing marketing strategies for the internet Collecting marketing intelligence online Opportunities and pitfalls of online advertising Understanding mobile commerce Devising a sustainable revenue model Understanding business-to-business marketplaces and virtual value chains


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issue in the previous section. We only emphasise it here with a quote from the conclusions of the Lisbon European Council: ‘Efficient and transparent financial markets foster growth and employment by better allocating capital and reducing its costs. They therefore play an essential role in fuelling new ideas, supporting an entrepreneurial culture and promoting access to and use of new technologies.’ (Presidency Conclusions Lisbon European Council, 2000). As a general note regarding training that can facilitate e-business adoption, we close with a quote from a recent European Commission report on the ‘wider picture’ on European enlargement: It is important to notice that the science and technology systems of all these countries have suffered major shocks as a consequence of a decline of both government support and industrial investment in research. As a result around half of the industrial researchers have been lost to the systems. Although the situation now appears to be stabilised it is not clear if recovery will be rapid, nor is it clear if the remaining system is well attuned to the needs of the emerging innovative and technologically advanced industries. In particular it can be doubted that the university system has the capacity to provide high quality teaching needed to support the transition to a knowledge economy. Institutional reforms have to go further to bridge more effectively the gap between industrial requirements, science and technology outputs and an adequate supply of well-trained scientists. In particular entrepreneurial and management skills are lacking. The key questions are how to achieve these changes, how to achieve them rapidly (European Commission, 1999).

Eastern European countries generally have skilled workforces with skills needed to build the Information Economy. Against this background the introduction of information technology, which is the backbone of e-business, presents the potential to leapfrog stages of transition and convergence to the new knowledge-driven economy. Nonetheless, even in this domain, which is of paramount importance for the transition to the new knowledge-driven econ-

PANAGIOTIS DAMASKOPOULOS, Technology Management Department, INSEAD, Boulevard de Constance, 77305, Fontainebleau, Cedex, France. E-mail: pan agiotis.damaskopoulos@inse ad.edu Panagiotis Damaskopoulos is Senior Research Fellow at INSEAD. His research interests include technological and organisational dynamics of business innovation under conditions of global financial markets, and the management of intangible corporate assets and intellectual capital.


omy, the challenges confronted by Eastern European countries should not be underestimated, as accurately captured by the quote above.

Acknowledgements This work was conducted in the context of the ENLARGE research project. ENLARGE is part of the European Commission Information Societies Technology (IST) Research Programme. The objective of the project is to promote the integration of EU Eastern European Candidate Enlargement Countries through the development and application of a methodology for designing and implementing e-business strategies in SMEs. The ENLARGE research consortium under which this research was conducted is composed of the following institutions: the Athens Laboratory of Business Administration (ALBA), (Greece), Planet Ernst & Young (Greece), INSEAD (France), the Central Laboratory for Parallel Processing (CLPP) of the Bulgarian Academy of Science (Bulgaria), the University of Cyprus (Cyprus), the National Institute for Research and Development Informatics (ICI) (Romania), the University of Maribor (Slovenia), and the Academy of Entrepreneurship and Management (LKAEM) (Poland). We generously acknowledge permission from the consortium to publish some of the research findings in the present paper.

References Berger, S. and Dore, R. (1996) National Diversity and Global Capitalism. Cornell University Press, Ithaca, NY. Castells, M. (2000) The Information Age I-III. Oxford University Press, Oxford. The Economist Intelligence Unit (2001) October 18. European Commission (1999) The Wider Picture: Enlargement and Cohesion in Europe. Futures Report Series 15. World Trade Center, Isla de la Cartuja, Seville, Spain. Financial Times (2000) Survey: Central and Eastern Europe focus, October 24. Gintis, H. (1989) Financial markets and the political structure of the enterprise. Journal of Economic Behavior and Organization, 11. Government of the Republic of Slovenia, Centre for Informatics (2000) Electronic Commerce and Electronic Signature Act, Lubljana, June.

THEODOROS EVGENIOU, Technology Management Department, INSEAD, Boulevard de Constance, 77305, Fontainebleau, Cedex, France. Email: theodoros.evgeniou @insead.edu Theodoros Evgeniou is Assistant Professor of the Information Systems at INSEAD. His current research interests lie in developing and implementing information-based strategies, data-mining and business intelligence, and new business models and related economic modelling applied to value creation in the networked economy.

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