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Chapter I ICT adoption, economic performance and internationalisation of SMEs

ICT adoption, economic performance and internationalisation of SMEs

Today there is a strong need to collect more revealing data on ICT utilization and
its impact on SMEs, the need for more rigorous analysis of how ICT investment and
use affects innovation, and the need for better understanding of how this complex
translates into productivity increases and enhanced competitiveness. Accordingly, the
main research questions are as follows:
What is the contribution of ICT adoption to the economic performance of
SMEs?
What is the contribution of ICT adoption to innovation in SMEs?
What are the enablers, barriers, and constraints for ICT utilization?
Through statistical analysis it is possible to make a comparison with findings from
different studies conducted for Europe and the United States, to ascertain whether there
are any particular characteristics of ICT adoption and its various impacts. In addition to
providing reliable data and analysis of ICT utilization and its effects, the study
identifies a set of recommendations that can guide decision-making at firm and
government levels. How to correlate SMEs in the internationalisation processes or
whether they only function as suppliers in global value chains, dominated by large-scale
transnational enterprises, is an open question. Without doubt, the current wave of
internationalisation is accelerating the diffusion of innovation across industries. Yet it is
unclear whether SMEs are driven by globalisation or whether they are a driving force in
this process.
Efficiency criteria

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Chapter I ICT adoption, economic performance and internationalisation of SMEs

This book provides some methods from various empirical surveys to enrich the
on-going discussion, focusing on innovation and internationalisation in SMEs. In our
survey we considered enterprises which either employ less than 250 employees or have
a turnover of less than 50 m Euro.
ICT is a technology of growing importance in all countries surveyed. Access to
the Internet is almost universal among the firms surveyed (99 percent of all firms).
About 98 percent of all enterprises used e-mail and 44 percent used an Intranet
provision. Local area networks are also rather popular (74 percent). However, the
nature of the access and its use are very different among the firms, as summarized in the
Figure below. It is mainly the less advanced ICT that is quickly spread in the region,
rather than the most recent generations. The latter is very much dependent on the
technical infrastructure available within the individual countries, which was found to
vary greatly in the sample. Nevertheless, perhaps contrary to expectations, companies
do not find the technical infrastructure (defined as network reliability, network
flexibility, and range of available services or geographic coverage) disturbing and
hampering their activities. About 70 percent of the companies surveyed state that
telecommunication prices do not inhibit the use of ICT. Moreover, companies use ICT
to serve customers and markets. About half of the companies in the survey place a high
priority on two interrelated business areas: purchasing and procurement, and marketing
and sales. Firms actively use computer networks for these activities and almost all of
them are using the Internet to buy and sell goods and services. The Internet is a
common means for servicing customers, providing them with information on products
and services, contact facilities and often after-sales support. Market/customer related
activities are automated within half of the firms. This seems to be the primary driving
force for automation and ICT use in other business areas such as procurement and
purchasing, finance (especially invoicing), delivery, and stock control.
It is clear from this study that ICT utilization is already having an impact on
economic performance among firms in transition countries. This is reflected in the
findings on the impact of ICT on economic performance, where it is evident that ICT is
a substantial contributor to productivity, profitability, and growth. Moreover, the fact
that 30 percent of the firms say that ICT usage itself generates increases in ICT
investment indicates that engagement in ICT usage is to a certain extent a selfsustaining process that requires cumulative investment. However, while the use of ICT
is resulting in improved economic performance of firms, it is important to note that ICT
utilization does not automatically translate into economic impacts but requires a range
of complementary factors. Hence, one of the most notable findings relates to the factors
shaping ICT utilization and impact on economic performance. The Figure below
depicts the factors that contribute to the positive impact of ICT in SMEs.

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Chapter I ICT adoption, economic performance and internationalisation of SMEs

Factors Reinforcing the Positive Effect of ICT in SMEs

Accordingly, a new marketing strategy is particularly relevant for translating the

introduction and use of ICT into the improvement of profitability. This is mainly
because the use of ICT together with new marketing initiatives enables firms to
strengthen their position in existing markets or enter new markets, thereby improve
profitability. ICT and investment in equipment is particularly important for lowering
operational costs and increasing revenue. This is perhaps not surprising, as ICT is said
to allow for new and more efficient production processes, which in turn require
investment in new equipment. The impact of ICT on production processes thus does not
primarily arise from ICT in itself. Rather, ICT is a means by which new and more
efficient production processes can be achieved when combined with new equipment.
Organizational change is particularly important for achieving greater labour
productivity, lower operational costs, and higher revenues. The close correlation
between these dimensions of improved economic performance from ICT and
organizational change identified in this study corresponds well with findings from other
studies on the impact of ICT on firm performance. It has thus often been argued that the
effective utilization of ICT requires more horizontal organizational structures with
greater levels of responsibility for the overall coordination of work placed on the
individual employee. It also requires the implementation of clearer functional
descriptions of tasks. All this often requires a complete re-shaping of the organizational
structure of the firm where all aspects of the organizational development are
consequently given attention. This view is further supported by the case studies
conducted as part of this project, which highlighted the importance of changes in
organizational structures and ensuring that every employee has a sense of responsibility
for their work.
These findings also have to be seen in the light of the wider transition process that
shapes the context in which the firms operate. Hence, it is important to note that the
firms are going through a period of rapid modernization, emphasizing improved
production processes and flexible organizations that can address the needs of the
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Chapter I ICT adoption, economic performance and internationalisation of SMEs

market, as part of transformations of the socio-economic fabric to a market-driven

economy. This may in part explain why ICT is combined with other factors, such as
new marketing strategies and organizational change, for improved economic
performance.
In addition, it is worth noting that the size of the firm appears to matter when ICT
and performance profitability the attribution of positive effect to ICT (mainly or along
with other factors) ranges between 67 percent and 61 percent for large firms and
between 55 percent and 53 percent for micro and small enterprises. Micro and small
enterprises score relatively better for revenue increases than for cost reductions. For
revenue increases, the difference between micro and small and large enterprises is 19
percent while for cost reduction it is16 percent.
The introduction, use, and impact of ICT is not only determined by the
characteristics of the individual firm, but also by the nature of the goods or services
being produced and sold. More specifically, there appears to be a strong correlation
between the information intensity of the product and the capacity of firms to use ICT
to increase performance. This involves both product characteristics as well as
transaction characteristics. In other words, it is not the nature of the tangible or
intangible product that determines the extent to which ICT can be used to improve
performance, but the extent to which procurement, production, and sales processes are
information rich or information poor.
However, these findings should be interpreted with great caution. Our regional
samples have been constituted to be representative of the geographical area under
scrutiny. Sectors were chosen that are important for the economies of those regions. As
a consequence, the industrial composition of our sample varies considerably per
country, leaving little scope for rigorous comparative analysis. It may seem paradoxical
that samples which are more or less representative of regional economies cannot be
compared but, as is demonstrated in this study, the rate of adoption and potential effects
of ICT usage on firm performance vary significantly per sector, and differences in the
sectorial composition of the economy in the different regions may therefore determine
regional outcomes. Proof of this was obtained by comparing the different regional
samples. Many differences were found, but most of them could not be explained
without taking into account the incidental influence on a given regional sample of noncomparable sectors. The proper way to infer regional or country differences is thus to
operate by triangulation, i.e. to find out about residual differences by comparing
identical sectors or industries in different countries. Unfortunately, when applied with
rigour this approach yields only a relatively small sample of three sectors (food, ICT
and retail). It may well be, for example, that the rate of adoption of ICT in a given
country is higher in absolute terms but the pace of adoption has recently been higher in
another country.

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Chapter I ICT adoption, economic performance and internationalisation of SMEs

Sector related key findings on ICT and economic performance

In addition to identifying the immediate impact of ICT on the economic

performance of SMEs, it is possible to identify how firms use ICT to improve their
future performance, namely through innovation. ICT in itself is only a minor facilitator
of innovation; it only becomes powerful in combination with a number of other
complementary factors.
Factors contributing to innovation

In most of the sectors surveyed, ICT contributes more to process innovation than
to product and relational innovation. The use of ICT is thus mainly for changes in
production processes within the organization, rather than the development of new
products or the furthering of relationships especially with suppliers. It was found that
relatively fewer firms report decreasing costs as a result of ICT. Rather, the contribution
of ICT to product innovation was higher in the European sample. Even more significant
was the contribution of ICT to relational innovation, in particular the contribution of
ICT to increasing customer loyalty and consolidating preferential relations with
suppliers. The comparison confirms that SMEs can rapidly modernizing their
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Chapter I ICT adoption, economic performance and internationalisation of SMEs

organizational structures. The effect of ICT use on internal organization is likely to be

more marginal in firms that already have a highly streamlined internal organization and
are already well adapted to the market economy. It is also easier for firms that are
structurally modernizing to integrate ICT in the workings of their organizations.
However, it also leads to the conclusion that ICT usage is not comparatively
mature. Reaping the full benefits of ICT usage requires streamlining external and
internal transaction processes. Our findings indicate that European SMEs find it more
difficult to enter that stage. Several forms of ICT-driven product innovations,
particularly for intangible products, are conditional upon, or will only significantly payoff when external and internal processes are mutually integrated. Our findings indicate
that many if not most European companies have not yet reached that stage. However, in
time they may benefit from being second here as well.