Module 1: Introduction to Internet Use for Business Development

III. Overview: ICT for SMEs

How important are SMEs collectively to your country? What and how much do they collectively contribute – in terms of employment, revenue, and overall development?

The information revolution has transformed the way modern business is conducted, as ICTs have enabled people to exchange large amounts of information quickly, reliably and cheaply. Success is now determined by those who can best receive, process, and innovate.

As previously stated, ICTs can spur growth, create jobs for the poor, improve market access, contribute to income generation and enhance rural productivity. The economic contribution of ICTs is two-fold - income generation and poverty reduction. ICTs enable people and enterprises to capture economic opportunities with a view to increasing process efficiency, promoting participation in expanded economic networks and creating opportunities for employment.

ICTs can enable solution-sharing among local people and communities, providing access to practical information on matters such as small-sized business accounting, weather trends or best farming practices. In addition, they can facilitate global connectivity, resulting in new ways of creating and delivering products and services on a global scale; and provide developing countries with access to new markets and new sources of competitive advantage to boost income growth.

ICT can also enhance the key role that SMEs play in national economic development strategies by facilitating flows of information, capital, ideas, people and products. A strong SME sector that is integrated into the global digital economy can lead to job creation, increased public revenue and a general rise in the standard of living. In addition, the uses of ICT to enable SMEs to participate in the knowledge economy offers enormous opportunities to narrow social and economic inequalities and thus help achieve broader development goals.

A. Benefits of ICT to SMEs

For SMEs in particular, the use of ICTs can provide several significant benefits, among them:

• Increasing productivity in the production process;

• Enhancing and increasing the efficiency of internal business operations; and

• Connecting SMEs more easily and cheaply to external contacts, whether locally or globally.

Concrete examples of how ICTs can benefit SMEs, include the following:

• Improve inventory management systems;

• Decrease wastage in production processes;

• Improve communication between different departments within the firm;

• Improve accounting and budgeting practices;

• Reduce communication costs and geographic barriers with global suppliers and clients;

• Expand client base through e-marketing (e.g., web sites, portals and mailing lists);

  • Link to local and global supply chains and outsourcing opportunities;

• Share and learn new business practices;

• Facilitate capacity-building of owners and employees through e-learning platforms;

• Simplify government services such as business registration and filing taxes;

• Introduce new methods of payment through e-commerce.

Simply put, Internet and e-commerce enable SMEs to gain access to new customers and to expand their markets geographically, even if they physically have to remain in local and regional markets because of lack of information and marketing capability. Through their web sites, SMEs can attract potential investors and customers by providing information on their technologies, products, services and financial positions. Moreover, the Internet can help knowledge-based small businesses convey their ideas to the whole world, allowing even micro-enterprises with ideas and technologies to remain small and profitable, or even to generate substantial global sales by exploiting their intellectual property over the Internet.

B. Barriers to SME Access and Use of ICTs

Despite the benefits, numerous barriers exist that make it difficult and challenging for SMEs to embrace these new technologies.

1. Unsuitability for Business. SMEs may not see the relevance or suitability of ICT to their businesses. This was the leading reason given by businesses for not engaging in e-commerce as found by a survey conducted by OECD in 2002 of SMEs with fewer than 250 employees in 19 European countries. Many may believe that their goods or services do not lend themselves to Internet transactions.

   SMEs will not take advantage of e-business unless the benefits outweigh the costs and justify establishing and maintaining the e-commerce system.

   In many instances, they may find it more difficult, relative to larger firms, to find an e-business case applicable to them because of lack of time, information and knowledge. They may also wish to retain their current business model and avoid the risks associated with new investments and new business models.

   They may also be worried that existing customers will be turned off by the changes that they may institute.

2. Lack of ICT and Managerial Knowledge Internally. SMEs often lack the human technological resources needed for ICT and e-commerce, especially because they have to focus on day-to-day operations, and lack the time and extra resources necessary to understand the benefits of new technologies.

   Even if they are aware of the potential benefits of adopting ICT, they would still require know-how or qualified personnel.

   SMEs may also lack managerial understanding and skills for e-business. Successful integration of e-business often requires restructuring of business processes, or changes in organizational structures. Professional IT or e-business consultants could help, but SMEs may not have ready access to them because of their relatively high costs.

3. Costs of Developing and Maintaining e-Business Systems. SMEs are generally concerned about the costs of establishing and maintaining e-commerce systems since they often suffer from budget constraints and are less sure of the expected returns on such investments.

   Some SMEs cannot afford to adopt sophisticated ICT solutions (e.g., web sites with a secure environment allowing credit card transactions).

   Outsourcing webpage design and updating are optional, but the costs of such may be difficult for SMEs to contain.

   Logistics services, such as package collection and delivery, also matter. This is a real concern for small businesses, especially in remote districts where private package collection/delivery services may not be available at reasonable costs.

   Some items, such as software, music and books, could be delivered digitally, but it may not be feasible for an individual, business or customer with slow Internet connections, or small download capacities.

4. Network Infrastructure – Access. The availability of a wide range of Internet connections and other communications services, preferably at competitive prices, is very important to the extent that it allows small businesses to choose different and appropriate services according to their specific needs and expectations from on-line activities.

   The availability of broadband connections may affect SMEs’ decisions to adopt e-commerce. Broadband’s faster speeds improve overall online experiences for both individuals and businesses, encouraging them to explore more applications and spend more time online. In contrast, slow internet connections and data transfers discourage SME adoption of the Internet.

5. Building Security and Trust. Lesser-known SMEs are at a clear disadvantage in terms of buyer confidence when compared with large multinationals with highly recognizable brand names. Online clients view recognition of a brand or company name as an indicator of a firm’s credibility, just as they do offline. The inability to verify online sellers’ credentials ranks high among reasons for reluctance to buy online.

   A professional web site can help improve a firm’s image for large-scale B2B transactions.

   Moreover, consumers who use credit cards for online transactions are highly concerned about security, protection of credit-related information and secure systems. As more online clients demand secure transaction environments, SMEs are likely to face increasing costs for system protection and security measures.

   Other related barriers include payment uncertainties and contract, delivery and guarantee uncertainties.

   Privacy and legal protection for Internet purchases are also significant concerns, both for businesses and customers alike.

6. Legal Uncertainties. Legal uncertainties and conflicting regulatory environments for cross-border transactions may affect SMEs strongly. SMEs may be at risk of being sued in multiple jurisdictions under a number of inconsistent laws. But more generally, the lack of a satisfactory redress mechanism in the event of a dispute may strongly discourage both B2B and B2C online transactions.

C. General Status of Internet Use for Business Development

Although there are limited data and studies focused on the adoption of the Internet and e-commerce by firms in developing countries, and particularly SMEs, there is ample anecdotal and case study evidence that show that SMEs generally (especially those in urban centres) can easily use and be connected to the Internet – if they want to.

According to a 2004 Report on e-Commerce and Development by the United Nations Council on Trade and Development (UNCTAD), the main uses of the Internet for business purposes are exchanging email, accessing the World Wide Web for information or transactional purposes, or setting up a company web site, which would represent their main gateway to the Internet for both B2C and B2B transactions.

The challenge is to move SMEs to go beyond these first few basic steps, and to eventually move towards integrating ICTs in more sophisticated business applications as outlined above.

This is a major step for SMEs, especially in developing countries, because these would require management and technical skills and investments (as well as organizational changes) that they may not be able to afford or for which they may not have ready access.

D. The Role of Governments in Encouraging ICT Use by SMEs

The role of government is to create the enabling environment that will enable these benefits to flourish and be easily recognized.

“Creating an Enabling Environment” means addressing, in a holistic manner, the various policy, legal, market and social considerations that interact both at domestic and global levels to create fertile conditions for ICT-led growth.

Public policy is the tool by which the government can help to create an environment and remove barriers for businesses to adopt ICT. The government should take the following steps to provide a supportive legal and regulatory environment for e-business (World Bank, 2005):

• Create appropriate environments for ICT access and use, such as liberalizing markets to expand and improve network infrastructure. Increase liberalization and competition in ICT markets to stimulate investment telecommunications, such as broadband access.

• Develop e-security policies and programmes and provide supportive legal and regulatory environments. The government should set up a regulatory framework for trust, security, enforcing authentication mechanisms and combating cyber crimes, which will encourage business use of ICT. Specific policies include low-cost online dispute resolution, e-security policies such as Public Key Infrastructure (PKI) and Computer Emergency Response Teams (CERTs).

• Enhance technological diffusion, and overcome market failures by launching e-government services and e-procurement programmes to contribute to promoting trust and security in online transactions.

• Provide and support ICT training for skill development. The government has a major role in providing basic ICT skills training, such as integration of ICT in school curriculum and conjunction with the private sector on the ICT demands of the sector.

Key policy directions in this respect should include the following:

1. Business Environment. As a basic requirement, a healthy business environment is fundamental for firms to thrive and benefit from ICTs. This includes:

   • A transparent, open and competitive business framework;

   • Clear, independent rule of law for all firms;

   • Easy set-up and dissolution of businesses;

   • Transparent, simple and accessible corporate regulations; and;

   • Equal and stable legal treatment for national and cross-border transactions.

   In other words, the government must develop and implement policies and regulations that will make it easy for people to set up businesses and remove barriers to help these businesses become more profitable and competitive.

2. Network Infrastructure and Broadband Deployment. Broadband connectivity is a key component in ICT development, adoption and use. It accelerates the contribution of ICTs to economic growth, facilitates innovation, and promotes efficiency, network effects and positive externalities. The development of broadband markets, efficient and innovative supply arrangements, and effective deployment and use of broadband services require policies that:

   • Promote effective competition and continue to stress liberalization in infrastructure, network services and applications across different technological platforms;

   • Encourage investment in new technological infrastructure, content and applications; and

   • Take a technology-neutral stance among competing and developing technologies to encourage interoperability, innovation and expand choices.

   Public financial assistance and other initiatives to expand coverage for under-served groups and remote areas could complement private investment where appropriate, provided it does not pre-empt private-sector initiative or inhibit competition.

   Regulatory Trust. SMEs have to be certain that the regulatory system will ensure and properly balance their security, privacy and consumer protection interests. Issues that need to be addressed could include:

   • Cyber crimes and cyber-security;

   • Spam;

   • Cross-border cooperation;

   • Presence of low-cost online dispute resolution mechanisms between firms, and between firms and consumers.

3. Content Development. The government and the private sector have key roles in facilitating content availability across all platforms and encouraging local development of new content, including content from public sources. This brings with it issues concerning intellectual property rights, which need to be balanced against public interests to promote creativity and innovation.

4. Human Capital Development and Skills Enhancement. Lack of ICT skills and business skills are widespread impediments to effective uptake once adoption decisions are made. Governments have major roles in providing basic ICT skills in compulsory schooling and an important role in conjunction with education institutions, business and individuals in providing the framework to encourage ICT skill formation at higher levels, in vocational training and in ongoing lifelong learning.

5. Information. Small firms may not have enough information regarding the benefits and costs of adoption of ICT. The private sector (e.g., business associations) and government must facilitate awareness and access to services that are available, as well as provide information on the benefits of adoption and use of ICT, for example, through case studies and real-world best practices.

6. e-Governance. Online provision of government information and services can increase the efficiency and coverage of public service delivery to small firms and act as a model user and standard-setter for ICT adoption by small firms. As a model user of broadband, the government can demonstrate the potential of broadband-based services and content, and provide demonstrations and “pull-through” mechanism for small firms. Government demand aggregation to provide services can help spread new services more widely. Education, general government information and services and the provision of government services to businesses and citizens can all potentially benefit from the use of new high-speed infrastructure and services, and should be given priority in government strategies.

   Particularly in relation to SMEs, the integration of e-government into business processes could assist SMEs in their efforts to embrace and integrate e-business. It could provide SMEs with an incentive to go online.