ISSN Electronic Commerce and the Level of Internationalization

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1 ISSN Electronic Commerce and the Level of Internationalization Par : Pierre-Majorique Léger Pierre Hadaya Luc Cassivi Cahier du GReSI no Septembre 2004 Copyright HEC Montréal. Tous droits réservés pour tous pays. Toute traduction et toute reproduction sous quelque forme que ce soit est interdite. HEC Montréal, 3000, chemin de la Côte-Sainte-Catherine, Montréal, Québec, H3T 2A7 Canada. Les textes publiés dans la série des Cahiers du GReSI n'engagent que la responsabilité de leurs auteurs.

2 Electronic Commerce and the Level of Internationalization Pierre-Majorique Léger Technologies de l information HEC Montréal 3000, chemin de la Côte-Ste-Catherine Montréal, Québec, Canada H3T 2A7 tél : (514) fax : (514) pierre-majorique.leger@hec.ca Pierre Hadaya Département de systèmes d'information et méthodes quantitatives de gestion Faculté d administration Université de Sherbrooke 2500, boul. de l Université Sherbrooke, Québec, Canada J1K 2R1 phadaya@adm.usherbrooke.ca Luc Cassivi Management et technologie Université du Québec à Montréal C.P. 8888, succursale Centre-ville Montréal, Québec, Canada H3C 3P8 cassivi.luc@uqam.ca Prière de faire parvenir toute correspondance à : pierre-majorique.leger@hec.ca Copyright HEC Montréal. 2

3 Résumé Cet article analyse l utilisation du commerce électronique dans un contexte international. Des résultats, issus d une enquête menée auprès d entreprises canadiennes réalisant des activités de commerce électronique, suggèrent que les firmes fortement impliquées sur les marchés étrangers ont tendance à utiliser le commerce électronique dans une plus grande mesure que les firmes se concentrant sur les marchés locaux. Par contre, le niveau de commerce électronique que les firmes les plus internationalisées anticipent utiliser dans un proche avenir semble indiquer que ces firmes se concentrent principalement sur des activités d affaires pour lesquelles les obstacles au commerce électronique international sont moins importants. Par ailleurs, les résultats suggèrent que la taille n est pas un facteur discriminant entre le niveau d internationalisation, et que peu de firmes de service réussissent à surmonter les obstacles au commerce électronique international. Abstract This paper inquires into whether companies use of electronic commerce varies according to their level of internationalization. Results from a survey conducted among Canadian companies carrying out electronic commerce activities suggest that companies conducting a significant part of their business on international markets are more inclined to use electronic commerce than firms focusing only on their local markets. However, the extent to which highly internationalized firms are planning to use electronic commerce in the near future suggests that they will concentrate on tasks for which international commerce obstacles are less constraining. Our findings also clearly suggest that size is not a decisive factor and that few firms are succeeding in selling services through international electronic commerce. Mots-clés International Business (BA05) Inter-Organizational Systems (HA07) Copyright HEC Montréal. 3

4 1. Introduction The advent of the Internet has opened up an array of opportunities for firms wanting to conduct business on international markets [1]. Through electronic commerce activities, companies can now get involved in international trade by establishing new relationships with both buyers and sellers located anywhere in the world [3, 11, 14, 16]. Yet, companies hoping to conduct international electronic commerce (IEC) are confronted with different types of obstacles, which are often non-existent when conducting business only on a national scale. These hurdles can be of different natures: some are logistical or fiscal, while others are financial or even cultural [18]. Since these obstacles may contribute to significantly hampering the growth of electronic commerce among firms that conduct foreign trade, it is relevant to inquire if the use of electronic commerce varies according to the level of international commerce. The theoretical background and research hypotheses are presented in the following section. The research methodology undertaken is then presented in section 3. Finally, research results are presented and discussed. 2. Theoretical background and research hypotheses Companies need to surmount numerous obstacles in order to properly conduct international electronic commerce activities. The first part of this section reviews some of these hurdles. Our goal here is not to present a complete list of all possible obstacles but, rather, to suggest that it is much more difficult for companies to use electronic commerce to support their business activities on international markets than it is when their buyers and sellers are located in their own country or region. In a business-to-business context, doing international business is very complex, since carrying out business transactions requires the involvement of many stakeholders. In addition to the buyer and the seller, for example, an international transaction involves a forwarding agent to schedule multimodal transport, a customs broker to meet customs requirements and government officials to issue foreign trade documents such as certificates of origin. A great number of trade documents must also be exchanged among the various stakeholders during the course of a transaction. For instance, the importer s bank issues a letter of credit to the exporter s financial institution, the logistics intermediaries exchange the bill of lading among themselves, the country of origin requires a declaration of exports and the customs agent in the country of destination requires a certificate of origin. Building on a centuries-old tradition, international commerce relies heavily on massive paper trails. The digitalization of these documents requires common standards and compatible processes that can be difficult to adopt and implement, given the number of parties involved. This is likely to significantly slow down the spread of international electronic commerce. However, it should be noted that some government and industry-led electronic commerce initiatives have been undertaken in recent years to accelerate this transition. For example, the Canadian Customs and Revenue Agency now provides importers with an innovative electronic system to accelerate the customs clearing process. Copyright HEC Montréal. 4

5 Even if there are a smaller number of stakeholders and fewer trade documents involved, international business-to-consumer electronic commerce also faces important challenges. For example, based on a survey in the wireless telecommunications industry, Léger and Cassivi [13] suggest that firms selling to consumers are less likely to conduct international electronic commerce. The highly prohibitive costs and delays in delivering small parcels across countries are among the barriers to international B2C electronic commerce [6]. Moreover, many of the firms involved in B2C international electronic commerce are not competitive in terms of delivery logistics since their infrastructures are not adequately organized to support the overseas delivery of small parcels and are even less able to efficiently return products that do not meet customers needs [10]. International credit risk is also a major obstacle to the growth of international electronic commerce. In a business-to-business context, to hedge the risk of non-payment, exporters need to involve many stakeholders, such as insurance companies, financial institutions and governmental agencies. These numerous relationships make the international sales process a complex matter, thus impeding its automation through electronic commerce [7]. Credit risk is also an obstacle in international B2C transactions. The credit card is by far the most widely-used method of payment on the Internet today [4]. Yet, the use of credit cards is very limited in many countries, especially in developing economies where credit card companies are very reluctant to issue cards to consumers who do not meet rigorous solvency requirements. In some countries, such as China, there are legal restrictions to the use of credit cards, since holders are legally responsible in the event of fraud. Moreover, retailers selling through the Internet are still very leery of credit card fraud, especially fraud perpetrated by foreign buyers. In 2002, the cost of worldwide credit card fraud was evaluated at $3.8 billion (U.S.) [9] and many retailers are therefore hesitant to sell abroad many even refuse orders that come from specific countries. Socio-cultural challenges also constitute major obstacles to international electronic commerce [2, 8]. In addition to language and cultural barriers, many firms do not make the effort required to make their Web sites appealing and intelligible to a non-english-speaking audience [5, 18]. For example, telephone numbers, currencies, measurement standards or date formats may significantly vary from one country to another. The obstacles presented above are only some of the barriers to conducting international electronic commerce. Problems related to international payments and taxation [1], international insurance and legal issues related to Incoterms are also a hindrance. Based on the arguments presented above, we suggest the following hypothesis: H1: Among the firms using electronic commerce, those with a high level of internationalization use electronic commerce to a lesser extent than those with a low level of internationalization. As previously stated, there are many types of obstacles to the use of international electronic commerce and these hurdles may vary significantly from one industrial context to another. In some economic sectors, therefore, there may be more obstacles to international electronic commerce and they may be harder to overcome. Companies offering services rather than products may be less inclined to use international electronic commerce, due to the human interactions often inherent in the delivery of such services. Also, professional corporations often Copyright HEC Montréal. 5

6 prohibit the supply of services by foreign companies not belonging to their local or national associations. Thus, our second hypothesis: H2: Among firms using electronic commerce, those in the service sector carry out international commerce to a lesser extent than other firms. Recent studies on the adoption of electronic commerce have shown that a company s size will be positively related to its use of electronic commerce [17]. Since larger firm have the capability for assigning more resources to deal with the various obstacles associated with the adoption of international electronic commerce, we therefore propose the following hypothesis: H3: Among firms using electronic commerce, larger firms use international electronic commerce to a greater extent than smaller firms. 3. Methodology 3.1 Data collection and target population This paper is based on an electronic survey that inquires into the use of electronic commerce by Canadian firms. An was sent to senior managers of Canadian firms, providing them with an explanation of the research project and a link to the electronic questionnaire. In order to reach the highest number of respondents possible and encourage them to respond thoroughly to the electronic questionnaire, a personalized benchmark report (by sector) was made available to those who took the time to participate in the survey. The personalized benchmark report allowed each firm to compare its electronic commerce strategy to that of other participating firms operating in the same sector. A total of 1,612 questionnaires were received, for a response rate of %. This rate is considered satisfactory since a single was sent to each firm. Out of the questionnaires received, 412 were incomplete and were therefore disregarded. 3.2 Research variables and descriptive statistics Internationalization and electronic commerce strategies can be significantly different within upstream or downstream relationships in the supply chain. Hence, two separate sets of variables are needed to adequately test the research hypothesis. Upstream/downstream internationalization is measured by the ratio of purchases/sales made on international markets. Upstream/downstream use of electronic commerce is operationalized through the percentage of purchases/sales conducted in the form of electronic commerce. The following table presents these variables and their operationalization. Copyright HEC Montréal. 6

7 Table 1: Research variables and their operationalization Variable Upstream variables Upstream internationalization Use of electronic commerce Downstream variables Downstream internationalization Use of electronic commerce Operationalization % of purchases made on international markets % of purchases made through electronic commerce % of sales made on international markets % of sales made through electronic commerce All firms are categorized according to their level of downstream and upstream internationalization. Based on the percentage of purchases/sales made on international markets, downstream and upstream internationalization are split respectively into 3 groups: national commerce only (0% international commerce), low international commerce (below the median) and high international commerce (equal to or above the median). Since our research focuses only on firms that have adopted electronic commerce, we limited our analysis to firms having only a positive percentage of purchases/sales made through electronic commerce. Table 2 presents the number of firms comprised within each category for both upstream and downstream international commerce, excluding firms that are not conducting electronic commerce. Table 2: Number of firms per category for upstream and downstream relationships Upstream Gr 1 Gr 2 Gr 3 National commerce only Low International Commerce High International Commerce All firms Only e-com firms All firms Downstream Only e-com firms To test the second and third hypotheses, two other variables were required: the nature of the offer and the size of the company. The nature of the offer is a binary variable: companies offering services (1) versus those that do not offer services (0). The size of the firm is measured by the number of full-time employees. A pre-test was carried out with 15 companies to test the research variables. The comments provided by the responding firms resulted in minor changes to the questionnaire. Copyright HEC Montréal. 7

8 4. Results In this section, the three groups classified according to their level of international commerce (for both upstream and downstream relationships) are analyzed and compared in order to test the three hypotheses presented in section 2. Members of the three groups are conducting business through electronic commerce to various degrees. The results in the first row of Table 3 show that the level of electronic commerce use is significantly different among the three groups (ANOVA, p =.0000), for both upstream and downstream relationships, and notably different between low international commerce firms (group 2) and high international commerce firms (group 3). However, the first hypothesis (H1) is not supported. Despite the numerous obstacles in doing international business through electronic commerce, group 3 scores higher in electronic commerce use for both upstream and downstream relationships (averages of 2.89). Furthermore, firms focusing on local markets use electronic commerce more frequently than firms with a low level of internationalization. This result is not as surprising as the previous finding since doing electronic commerce locally is simpler and easier as logistical barriers are non-existent.table 3: Group comparisons for all three research variables (1) Gr 1 Gr 2 Gr 3 National commerce only (1) Low International Commerce (1) High International Commerce (1) ANOVA Gr 1 vs Gr 2 T-Test Use of electronic Upstream **** * **** ** commerce Downstream **** * **** *** Nature of the Upstream 80 % 66 % 42 % **** *** **** **** offer (2) Downstream 74 % 47 % 41 % **** **** **** Size of the Upstream firms (3) Downstream (1) Only for firms conducting electronic commerce (2) % of service-oriented firms (3) Expressed as the natural logarithm in order to standardize the variables The second row of table 3 presents the percentage of service-oriented firms in each of the three groups. For both upstream (procurement) and downstream (sales) relationships, the three groups are significantly different (ANOVA, p =. 0000). As expected, a high percentage of locally-based firms are service-oriented (80% upstream and 74 % downstream), whereas we observe that for Gr 2 vs Gr 3 Gr 1 vs Gr 3 Copyright HEC Montréal. 8

9 highly internationalized firms, the numbers decrease to 42% for upstream relationships and 41% for downstream relationships. Therefore, our second hypothesis is supported. As expected, services are generally more difficult to export, and this fact is intensified by the electronic means of doing business. One of the variables that might explain the differences among groups in terms of international commerce supported by electronic commerce is the size of the firm. Large firms may have more resources (technology, workforce, capital, etc.) to seize the opportunities to conduct international business through electronic means. Surprisingly, this is not the case in this study as the company size (natural logarithm) in each group are not significantly different (as presented in the third row of table 3). Therefore, our third hypothesis is not supported. Our results show that the proportion of large and small companies carrying out international commerce through electronic commerce is very similar to the proportion of firms buying and selling locally. 5. Discussion Our results reveal an interesting pattern. Firms conducting international business report a significantly higher proportion of on-line sales and purchases than other users of electronic commerce. Moreover, it appears that company size does not explain some of the variation in electronic commerce usage. The explanation for this phenomenon may lie in the innovativeness of these firms. Previous studies suggest that internationalization is often associated with a propensity for product and process innovation. For example, Lefebvre et al. [12] suggest that the capacity to improve existing products is a key factor in distinguishing between exporters and non-exporters, especially when it comes to small and medium-sized organizations. More recently, Nassimbeni [15] showed that the propensity to export is strongly related to the capacity to innovate. This tendency to innovate, which contributes to firms' international competitiveness, may spread to other aspects of how organization conduct business, such as their willingness to overcome the obstacles associated with international electronic commerce. Therefore, it is possible that the innovative attitude of firms helps them work around international e-business hurdles by pioneering new ways of doing business with foreign partners. In addition, the nature of electronic activities may vary among the three groups. Companies highly involved in international commerce appear to do more business over the Internet than companies focusing on local markets, but the business activities supported through electronic commerce may be different. Unfortunately, the survey covered the current use of electronic commerce but did not attempt to identify the different interorganizational business processes. Respondents were asked, however, about the extent to which they planned to use electronic commerce over the next 12 months to support 8 tasks related to their procurement activities and 9 tasks related to their sales and marketing activities. Table 4 presents the details of their future use of electronic commerce to support these tasks. The future level of use of electronic commerce is prospective in nature, thus a psychometric 7-point Likert scale (from not at all to to a large extent ) was used to measure each of these constructs. Copyright HEC Montréal. 9

10 Table 4: Future use of electronic commerce T-Test Gr 1 National commerce only Gr 2 Low Internat. Commerce Gr 3 High Internat. Commerce ANOVA 1 vs 2 2 vs 3 1 vs 3 Find and compare information ** * ** Negotiate price and sales conditions Upstream relationships Buy non-strategic products and services Buy strategic products and services Place and manage purchase orders * ** Exchange inventory information * ** * Exchange technical documents and drawings Transfer payment information and funds * * Overall upstream electronic commerce (alpha =.911) * ** * Promote your organization and products/services *** *** *** Find new customers ** *** ** Downstream relationships Negotiate price and sales conditions Sell strategic products/services * Place and manage purchase orders * Exchange inventory information Exchange technical documents and drawings Provide post-sales service * Transfer payment information and funds Overall downstream electronic commerce (alpha.888) ** *** The future use of electronic commerce is somewhat similar to the current use presented in Table 3 since: i) the three groups are significantly different and ii) the future use of electronic commerce by highly internationalized firms is higher than for the other two groups for both upstream and downstream relationships (see the last rows of upstream and downstream relationships). Copyright HEC Montréal. 10

11 However, we observe that the future use of electronic commerce by highly internationalized firms is significantly higher for supporting certain specific tasks only. Compared to local firms, highly internationalized firms plan to use electronic commerce to a greater extent to gather information on new customers and suppliers and to promote their products and services. Moreover, highly internationalized firms plan to exchange inventory information with their customers electronically to a greater extent than the other two groups. Interestingly, the activities for which highly internationalized firm plan to use electronic commerce to a greater extent are those in which the obstacles to international electronic commerce are less constraining. For instance, local electronic commerce firms and highly internationalized electronic commerce firms do not appear to differ in terms of their future plans to transfer funds electronically. Therefore, the fact that these international firms are using electronic commerce to a greater extent than other firms may not be completely explained by the fact that they are generally exceedingly innovative, they may only be more proactive than others and they have found an inexpensive communications tool with which to explore and open new markets. With this in mind, the decision to reject the first hypothesis may not be as clear-cut as it initially appeared. Future research is needed to better assess the use of electronic commerce in international trade. 6. Conclusion The aim of this paper is primarily to determine if, among firms using electronic commerce, those with a high level of internationalization use electronic commerce less extensively than those with a low level of internationalization. Our results indicate that firms conducting a significant part of their business on international markets are more likely to use electronic commerce than firms limiting their business activities to local markets. The fact that firms working on international markets are often more innovative than other firms and, as such, are earlier adopters of electronic commerce, can partially explain this result. Yet, when looking at the short-term future use of electronic commerce, it appears that highly internationalized firms plan to use electronic commerce to a large extent to support tasks in which the obstacles to international e-business are less constraining. This latter result mitigates our initial findings and it may therefore be premature to accept or reject our first hypothesis. Our findings also clearly suggest that size is not a decisive factor and that few firms are succeeding in selling services through international electronic commerce. This research has several limitations. Our sample includes only Canadian firms but, since many industries are represented in the study and Canada is well ranked in terms of Internet penetration, we can assume that the respondents are fairly representative of any industrialized country. Moreover, the use of electronic commerce is measured as a proportion of sales and purchases, which does not allow us to clearly assess the specific electronic commerce tasks carried out by the firms. A psychometric evaluation of short-term future electronic commerce utilization was used to get a more precise evaluation of this phenomenon. Future research avenues are numerous. For instance, testing our hypotheses on another target population, with a sample of firms comprised of both firms that have already adopted electronic commerce and others which have not, could provide external validation of our findings. Identifying some of the determinants that lead firms to adopt and use international electronic Copyright HEC Montréal. 11

12 commerce (e.g. sectoral activity, technical skills, level of R&D, as well as the characteristics of their business relationships) could also lead to a better understanding of the phenomenon. Copyright HEC Montréal. 12

13 REFERENCES [1] Barbet, P. Electronic commerce and the international trade regulatory framework, Annales des Télécommunications-Annals of Telecommunications (58:1-2), Jan-Feb 2003, pp [2] Boyd, S.L., Hobbs, J.E., and Kerr, W.A. The impact of customs procedures on business to consumer e-commerce in food products, Supply Chain Management-an International Journal (8:3-4) 2003, pp [3] De La Torre, J. Introduction to the Symposium E-commerce and Global Business: The Impact of the Information and Communication Technology Revolution on the Conduct of International Business, Journal of International Business Studies, (32:4), 2001, [4] Demery, P. How can I pay? Let me count the ways, Internet Retailer, May 2004, (available online : [5] Dou, W., Nielson, U. and Ming Tan, C. Using Corporate Websites for Export Marketing, Journal of Advertizing Research (September-October), 2002, pp [6] Drucker, P. Will the Internet Manage to Deliver? The World in 2000, EIU, 1999, p [7] Fontanella, J. International Trade Logistics, AMR Research, 1999, Cambridge, MA. [8] Harrison-Walker, L.J. If you build it, will they come? Barriers to international e- marketing, Journal of Marketing Theory and Practice (10:2), Spring 2002, p 12. [9] Giesen, L. There s a cost to keeping the criminals out and it s not always obvious, Internet Retailer, Jan (available online: [10] Krumwiede, D.W., and Sheu, C. A model for reverse logistics entry by third-party providers, Omega (30:5), Oct. 2002, p 325. [11] Lal, K. E-Business and Manufacturing Sector: A Study of Small and Medium-Sized Enterprises in India, Research Policy (31:7), 2002, pp [12] Lefebvre, E., Lefebvre, L.A. and Bourgault, M. R&D-Related Capabilities as Determinants of Export Performance, Small Business Economics, 10, 1998, pp [13] Léger, PM, Cassivi, L Electronic Commerce and Internationalization: Empirical Evidence from the Wireless Communication Sector, Web nd Workshop on e- Business, December 2003, Seattle, pp [14] Moodley, S. Global Market Access in the Internet Era: South Africa s Wood Furniture Industry, Internet Research (12:1), 2002, pp [15] Nassimbeni, G. Technology, innovation capacity, and the export attitude of small manufacturing firms: A logit/tobit model, Research Policy (30:2), Feb 2001, p 245. [16] Roccapriore, D. Building IT for Export Exploration, Business and Economic Review, (46:2), 2000, Copyright HEC Montréal. 13

14 [17] Statistics Canada, Embracing E-business: does Size Matter? - Connectedness Series, Ottawa, [18] Sheldon, L.A. and Strader, T.J. Managerial Issues for Expanding Into International Web-Based Electronic Commerce, SAM Advanced Management Journal (Summer), 2002, pp Copyright HEC Montréal. 14