Annotated Bibliography

The Impact of E-Commerce on Export Development in Developing Countries: A Case of Small and Medium-Sized Enterprises in Iran and Malaysia

Abstract—Information technology and the Internet have transformed business, but the transformation is not limited to conducting business online; it’s also about integrating Internet and IT into every aspect of value creation, such as procurement, customer relations management and export. For the individual enterprise, e-commerce offers competitive advantages, including helping the enterprise perform value- chain activities efficiently by engaging in end-to-end electronic integration of entire sales. In spite of this, it appears that small and medium-sized enterprises (SMEs) are struggling to embrace and utilize the power of e-commerce in order to improve their performance, with most SMEs limiting their use to e-mail and Web site. This study has concentrated on two different countries, namely Iran and Malaysia. Selection of these two different regions for the purpose of conducting the study survey is that each has its own specific characteristics that could potentially provide significant and valuable results. The findings of this study, demonstrate the impact of e-commerce for the purpose of export in SMEs in developing countries. Country differences were found to have a significant impact on the relationship between implement of e-commerce by exporting SMEs. The finding of this study indicates that the degree of e- commerce implementation by export SMEs can influence their decisions about exporting channels. The results empirically demonstrate that the more exporting SMEs implement e- commerce for their business activities, the more they prefer direct exporting over indirect exporting. Also e-commerce readiness was found to be positively related to e-commerce implementation by SMEs. Finally, It is anticipated that the findings of this study will help to explain critical aspects of export SMEs' behavior in the current Internet age.

Keywords- Small and Medium-Sized Enterprises (SMEs); Developing Countries; E-Commerce; ICT; Direct Export

I. INTRODUCTION The advancement of information and communication

technologies transformed the old fashioned economic into a digital economic. As a result, the internet and e-commerce are an outcome from this transformation [1]. The Internet has helped increase opportunities for firms in different business positions (smaller vs. larger firms or firms from developing vs. developed countries) to compete with each other. Therefore, at one extreme, the Internet has allowed small firms from developing countries to internationalize their products and services more actively and effectively than ever. For example, with the advantages of the Internet,

small Iranian firms can currently acquire information about potential and existing foreign markets more easily and communicate with potential and current foreign partners and customers more directly with very low costs. These types of firm behavior have been increasingly seen in Iran and Malaysia, and will become normal among small Iranian and Malaysian firms in the near future.

This paper investigates one specific interdisciplinary area concerning the relationship between the e-commerce and export development in small and medium-sized enterprises (SMEs) in Iran and Malaysia. SMEs play an important role in most of the economies of the world. In the last decade, researchers have increasingly been interested in how SMEs contribute to economic growth and development. While the term SME is widespread, there is no generally agreed definition that isolates this type of organization. A variety of definitions for SME can be seen among different countries, industries and government agencies. The most significant constraints of SMEs are limitations of internal resources such as financial, people, information, and management [2].

II. CONCEPTUAL MODEL This study takes into consideration e-commerce, a

powerful business phenomenon with significant impact on current business practices. The work applies this phenomenon to two dominant theories in the international business field: 1) internationalization theory and 2) transaction cost theory. These two theories have been used to explain firm behavior in international business for decades. However, in recent years, sophisticated ICT has prompted many new and emerging business practices challenging most dominant theories in the field.

A. INTERNATIONALIZATION THEORY Internationalization theory, suggests that psychic

distance plays a major role in explaining how firms make internationalization decisions and commitments. From this point of view, SMEs would expand their businesses to low risk and psychically close markets to their home countries in the initial stage [3]. Firm management teams are typically disinterested in internationalization during the first stage, but become initially interested in exporting during the second stage when they begin to consider expanding their market or reduce extra inventory. Most internationalization theories suggest that the extent of a firm's market

Ali Noroozi, Ph.D Student Dept. of Management, Payam-e-

Noor University, Tehran, Iran [email protected]

Amirhossein Norouzi Mobarekeh MBA Student, Expert of Pensions, Branch 2 of Isfahan Social Security

Organization, Iran [email protected]

Hossein Farsi Zadeh Dept. of Economics, Faculty of Management, Shahid Chamran

University, Ahvaz, Iran

_____________________________________ 978-1-4244-5265-1/10/$26.00 ©2010 IEEE

knowledge can influence the pattern of internationalization process [4, 5].

B. TRANSACTION COST THEORY In the business exchange context, transaction cost theory

suggests three assumptions of human behavior: bounded rationality, opportunism, and risk neutrality; and three dimensions of transactions: asset specificity, uncertainty, and transaction frequency [6]. Nevertheless, only the assumption of opportunism and the dimension of uncertainty will be emphasized and examined in this study due to the nature of the study, which relates to choices of business relationships within and between cross-culture markets.

C. PROPOSED MODELS For the purpose of this study, which is the impact of e-

commerce on export in SMEs, two conceptual models have been proposed. The first model (Fig. 1) was developed to test the critical relationship between e-commerce readiness and the firm choice of direct exporting. It is presumed that this relationship will be compromised unless e-commerce implementation has been presented as a mediator. In that case, this investigation continues to determine how e- commerce can be used so that SMEs select direct exporting as opposed to indirect exporting as their distribution channel. The expanded model in Fig. 2 briefly illustrates proposed constructs and their relationships that connect e-commerce implementation with the direct-export choice of SMEs.

Figure 1. Basic Model

As depicted in Fig. 1, positive relationships between e- commerce readiness and e-commerce implementation and

between e-commerce implementation and direct exporting are expected. However, the relationship between e- commerce implementation and direct exporting has been proposed to develop through two different paths, as shown in Fig. 2.

Figure 2. Expanded Model

III. RESEARCH HYPOTHESES In this section, all proposed constructs are defined and

described based on suggestions of internationalization theory and transaction cost theory and empirical finding.

A. BASIC MODEL

E-COMMERCE READINESS AND E-COMMERCE IMPLEMENTATION The e-commerce readiness that will be examined in this

study refers to the ability to mobilize and deploy Internet- based resources in combination or co-presentation with other resources and capabilities. E-commerce implementation here refers to use of the e-commerce by businesses at the level of enterprises or firms for the purpose of conducting business activities, including general, purchasing and selling activities, over the Internet. Effective use of the e-commerce enables increased efficiency, lower business transaction costs, improved communication speed, more flexibility and better responsiveness to customer needs, and minimized time and distance barriers of global markets [7, 8]. In a business-to-business relationship, e-commerce can be employed as a channel for nearly all activities that occur between a focal firm and its suppliers or distributors. Accordingly, it can be hypothesized that: H1: The more e-commerce readiness, the more e-commerce implementation by SMEs.

B. DIRECT EXPORTING Selecting an appropriate mode of entry into foreign

markets is critical to small firms with limited resources that cannot invest in long-term risk [9]. Indirect exporting by SMEs through exporting representatives reduces time and costs tremendously as these expenses are shared with their distribution representatives in entering and potentially expanding into new foreign markets [10]. Implementing e- commerce, firms can acquire information related to potential and current foreign customers, business partners, and markets, as well as competitive intelligence much more easily than in previous years and at minimal expense. Therefore, within the current business environment, it is hypothesized that: H2: The more e-commerce implementation, the higher the degree of direct exporting is used by SMEs in their foreign markets.

C. EXPANDED MODEL

MARKET KNOWLEDGE In international business, correct and accurate

understanding of target markets in foreign countries is critical to business success. Firms experience challenges of understanding different business practices, evaluating different product standards, and acquiring unreliable market information [11]. The Internet can be considered one of the most powerful universal communication tools for acquiring information and gaining knowledge quickly and affordably

E-Commerce Readiness

E-Commerce Implementation

Direct Exporting

H1 H2

+ +

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E-Commerce Implementation

Market Knowledge

Direct Exporting

Environmental Uncertainty

Behavioral Uncertainty

Transaction Costs

[12]. Further, the Internet facilitates immediate access to vast amounts of global information and valuable competitive intelligence [13]. By implementing e-commerce, SMEs are expected to have reduced foreign barriers and increased foreign market knowledge. This leads to: H3: The more e-commerce implementation, the more market knowledge from foreign markets is acquired by SMEs.

D. ENVIRONMENTAL UNCERTAINTY Environmental uncertainty is defined as "unanticipated

changes in circumstances surrounding an exchange" within an unpredictable or complex environment [14]. These changes are not limited to only industry change and innovation, but also the uncertainty or unpredictability of actions taken by competitors and customers. Levels of perceived risk and uncertainty about international business increase for export SMEs, which are limited by internal resources, international experience, as well as firm-specific knowledge about foreign buyers and competitors [15]. It is hypothesized that: H4: The more the market knowledge obtained through the Internet, the lower the degree of environmental uncertainty of foreign markets perceived by SMEs.

E. BEHAVIORAL UNCERTAINTY This focuses on the behavioral risks that might emerge

from the relationships among business partners from different countries. Behavioral uncertainty of foreign distributors of SMEs, in this case, should be expectedly high when partner firms are geographically located in culturally different areas. Nevertheless, effective methods of evaluating and monitoring the performance of SMEs' foreign partners will minimize the degree of behavioral uncertainty of these partners. This leads to: H5: The more e-commerce implementation, the lower the degree of behavioral uncertainty of foreign partners perceived by SMEs.

F. TRANSACTION COSTS Conducting business across borders requires not only

competitive business activities, but often involves challenging international issues such as cultural differences, regulations of foreign governments, and economic concerns. These factors inevitably result in higher transaction costs in foreign markets for both large and small firms. Transaction efficiency could be obtained using the Internet [5]. The effective management of the distribution relationship via the Internet may improve the relationships among business partners of SMEs, and decrease behavioral uncertainty, as well as related transaction costs. Accordingly, it is hypothesized that: H6: The lower the degree of behavioral uncertainty of foreign partners perceived, the less the transaction costs related to foreign partners encountered by SMEs.

G. DIRECT EXPORTING The Internet has affected the internationalization process

of SMEs in particular, due to reduced costs of reaching global markets via the Internet [16]. Utilizing the Internet, an export firm can perceive prospective foreign environments and partners with minimized uncertainty and dependence on the ability of independent representatives outside the firm. The firm is then enabled to conduct export activities using its own sales representatives to gain more control and to reduce the degree of opportunism within the distribution process [17]. According to internationalization theory, firms gradually increase international involvement through market knowledge and experience, which are assumed to aid firms in reducing market uncertainty. Thus, it can be hypothesized that: H7: The lower the degree of environmental uncertainty of foreign markets perceived, the higher the degree of direct export used by SMEs in their foreign markets.

Similarly, based on transaction cost theory, in many cases firms will favor in-house management if the costs of managing business exchanges internally are lower than the costs of conducting the exchanges through the mechanism of the market. Even though costs of acquiring information required for evaluating partner performance in the foreign environment are higher than costs of obtaining the same type of information domestically, communicating, negotiating, and coordinating activities can be accomplished inexpensively, and evaluating and monitoring partner performance can be achieved more effectively through sophisticated technology including the Internet [7, 8]. This leads to: H8: The less the transaction costs related to foreign partners, the higher the degree of direct export used by SMEs in their foreign markets.

IV. RESEARCH METHODOLOGY The research method applied in this study follows the

quantitative path using self-administered questionnaires to collect desired data, and applying regression analysis to interpret obtained data for valuable information and implications. To ensure the reliability and validity of the survey questionnaire for the main study, the initial questionnaire was pretested using a convenient sample of 30 exporting SMEs (15 SMEs from the Iran and 15 SMEs from Malaysia). Since this study will be conducted in two countries of differing languages (Farsi and English), the process of pretesting was managed carefully and thoroughly. Target respondents asked to complete the surveys were either owners or managers of exporting and manufacturing SMEs, or firms with 500 or less employees. For reliability assessment, Cronbach's coefficient alpha was applied to ensure the measurement tool was accurate. Details of the reliability assessment are provided below:

TABLE I. COMPOSITE RELIABILITY (CRONBACH'S ALPHA)

Construct Name Iran SMEs Malaysia SMEs

Total

E-Commerce Readiness 0.91 0.86 0.89 E-Commerce Implementation 0.87 0.84 0.85 Market Knowledge 0.92 0.86 0.89 Environmental Uncertainty 0.91 0.87 0.88 Behavioral Uncertainty 0.94 0.86 0.89 Transaction Costs 0.85 0.88 0.86

The ordinary least squares (OLS) method was used to test the hypothesized relationships between constructs, and when more suitable to do so, the weighted least squares (WLS) regression method was applied. To test all eight proposed hypotheses, eight corresponding bivariate regression models were initially developed and run in order to confirm the direction and significance of each hypothesized relationship as follows: Model 1: ecii = β0 + β1 * ecri + εi Model 2: diri = β0 + β1 * ecii + εi Model 3: mki = β0 + β1 * ecii + εi Model 4: eui = β0 + β1 * mki + εi Model 5: bui = β0 + β1 * ecii + εi Model 6: tci = β0 + β1 * bui + εi Model 7: diri = β0 + β1 * eui + εi Model 8: diri = β0 + β1 * tci + εi� [e-commerce implementation(eci), commerce readiness (ecr), direct exporting (dir), market knowledge (mk), environmental uncertainty (eu), behavioral uncertainty (bu), transaction costs (tc)]

Throughout this hypothesis testing process, the possibility of any moderating effect was rigorously monitored.

V. DATA ANALYSIS AND RESULTS Since the results suggest a similarity between the Iran and Malaysia sample groups, data from the two countries were combined and used as total data for significant data analyses including construct validity and reliability, and hypothesis testing. However, the same survey data were also analyzed separately (Iran group vs. Malaysia group) to examine whether country differences significantly affected each of the hypothesized relationships. As a result, a dummy variable called "country", which represents country differences, was added to the hypothesis testing process. Two sets of questionnaires were collected. The first set was 123 questionnaires from Iranian firms, and the second set was 96 questionnaires from Malaysian firms. In Hypothesis 1, testing the interaction effect between country difference and e-commerce readiness generated an insignificant result with the P-value of 0.86 for b3. Therefore, the interaction effect was no longer considered a major factor for the relationship. Country difference has critical influences on the relationship between e-commerce readiness and e-commerce implementation (P-value of b2 = 0.04). In addition, the core relationship between e- commerce readiness and e-commerce implementation is significantly positive with b1 = 0.89 (P-value = 0.00). By applying the WLS regression method to test the relationship, the R2 (67.4%) improved tremendously when compared to the R2 (46.5%) generated by the OLS regression method.

In Hypothesis 2, the results indicate no significant interaction effect (P-value = 0.79) between the country variable and e-commerce implementation. Since the WLS regression method does not provide a higher R2 value to the entire model than the OLS regression method, the OLS regression method (R2 = 39.84%) is sufficient for data analysis. The analysis result indicates a relationship exists between e-commerce implementation and direct exporting that is significantly positive (b1 = 1.53 with a P-value of 0.00). However, country difference has no significant effect (P-value of b2 = 0.21) on the relationship between e- commerce implementation and direct exporting. In Hypothesis 3, using the OLS regression method to test the interaction effect has shown it is not strong enough within the relationship (the P-value of b3 = 0.75). Minus the interaction effect, the relationship was tested again by both the OLS and WLS regression methods. The result has shown that the WLS method can help increase the value by 7.3% (from 29.6% using the OLS method to 36.9% using the WLS method). The result derived from using the WLS regression for further data interpretation has suggested a positive relationship exists between e-commerce implementation and market knowledge (b1 = 0.32 at a P- value of 0.00). In Hypothesis 4, the initial regression analysis was conducted using the OLS method. Results of the analysis indicate that the interaction effect of the country variable is not considerably strong (b3 = 0.19 with a P-value of 0.17). The WLS method can increase the R2 from 41.7 percent to 45.8 percent. The data analysis results strongly confirmed the negative relationship of Hypothesis 4 by the b1 value of - 0.93 at the 0.00 P-level. The influence of country differences is not significantly strong in this relationship (b2 = -0.73 with a P-value of 0.32). In Hypothesis 5, the country variable is significant (b3 = - 0.26 at the P-value of 0.01). Because the WLS regression method could not better explain the variation, the initial OLS regression analysis was used to explain the concerned relationship. While the analysis results show that not only the interaction effect (b3 = -0.26 with a P-value of 0.01), but also the basic influence of country differences (b2 = 5.83 with the P-value of 0.00) are considerably strong, the core relationship between e-commerce implementation and behavioral uncertainty is not significant (b1 = -0.13 at the P- value of 0.28). In Hypothesis 6, the fitted linear model for the relationship can support about 24.1 percent of the total variation in related transaction-cost sample data. The test for the interaction effect revealed a weak influence (b3 = 0.39 at the P-value of 0.15). With the OLS regression method, the analysis results show that while the main positive relationship between behavioral uncertainty and transaction costs is supported by the sample data (b1 = 0.47 with a P- value of 0.05), the influence of country differences on the relationship is insignificant at the P-value of 0.45 (b2 = - 0.37).

In Hypothesis 7, the regression analysis using the OLS method revealed no significant interaction effect of country differences (b3 = 0.39 at the P-value of 0.64). Since the WLS method cannot increase the R2 value, the OLS method with the R2 of 28.5 percent was finally used to test the main relationship between environmental uncertainty and direct exporting. The regression analysis found that the data significantly support the negative relationship proposed by Hypothesis 7 with the coefficient estimate b1 of -4.62 at the 0.00 P-value. In Hypothesis 8, the OLS regression analysis was used to test the main relationship and the influence of country differences, the WLS method was not very helpful. The interaction effect and influence of the country variable on this relationship proved to be insignificant (b3 = -0.93 at the P-value of 0.06 and b2 = -4.03 at the P-value of 0.18)

VI. CONCLUSION The results of this study are shown to support seven of

eight proposed hypotheses. The unsupported hypothesis concerns the relationship between e-commerce implementation and foreign partners' behavioral uncertainty perceived by export SMEs. The two main relationships in the basic model are significantly supported by survey data collected for the study. E-commerce implementation by an SME is closely related to its e-commerce readiness. Also, the degree of e-commerce implementation will impact how exporting SMEs select their exporting intermediaries. The results support the positively hypothesized relationship between e-commerce implementation and direct exporting of SMEs. To investigate how and what factors might possibly affect a positive relationship between e-commerce implementation and direct exporting of SMEs, internationalization theory and transaction cost theory were applied to the study. Analyzing the survey data collected from Iran and Malaysia confirms a positive relationship between e-commerce implementation and foreign market knowledge of SMEs. The survey results also support a negatively hypothesized relationship between possessing foreign market knowledge and the perceived environmental uncertainty of foreign markets. Thus, the internationalization theory suggests that increasing foreign market knowledge of a firm can reduce the degree of the uncertainty perceived by that firm about the foreign environments. Also, the research findings show that through e-commerce implementation, reduction in the perceived environmental uncertainty has encouraged exporting SMEs to conduct direct exporting rather than indirect exporting. All three hypothesized relationships based on internationalization theory are significantly supported by the survey data from both Iran and Malaysia.

On the other hand, using transaction cost theory to explain the relationship between e-commerce implementation of exporting SMEs and their decisions to conduct direct exporting has shown a partial supportive

result. One of three hypothesized relationships on Path II in the expanded model is not supported by the research data. That is the relationship between e-commerce implementation by exporting SMEs and their perceptions of the behavioral uncertainty of their foreign business partners. Finding suggests that when human behavior or performance is assessed across countries, factors related to country differences such as culture and norms must be taken into consideration. The other two relationships that were hypothesized along transaction cost theory are each supported by the data. SMEs will choose to export their products and services directly to their foreign customers and associates, if transaction costs of monitoring and evaluating their foreign partners' performance are reduced.

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