ISSN The Level of International Business and its Association with Different E-commerce Activities. Cahier du GReSI no Février 2006

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1 ISSN The Level of International Business and its Association with Different E-commerce Activities Par : Michael Wybo Pierre-Majorique Léger Luc Cassivi Pierre Hadaya Cahier du GReSI no Février 2006 Tous droits réservés pour tous pays. Toute traduction et toute reproduction sous quelque forme que ce soit sont interdites. HEC Montréal, 3000, chemin de la Côte-Sainte-Catherine, Montréal, Québec, Canada H3T 2A7. Les textes publiés dans la série des Cahiers du GReSI n'engagent que la responsabilité de leurs auteurs.

2 The Level of International Business and its Association with Different E-commerce Activities Michael Wybo HEC Montréal 3000, chemin de la Côte-Sainte-Catherine Montréal, Québec, Canada H3T 2A7 Phone: Fax: Pierre-Majorique Leger HEC Montréal 3000, chemin de la Côte-Sainte-Catherine Montréal, Québec, Canada H3T 2A7 Phone: Fax: Luc Cassivi Department of Management and Technology Université du Québec à Montréal P.O. Box 6192, Downtown Station Montreal (Quebec) Canada, H3C 3P8 Phone: ext Fax: Pierre Hadaya Department of MIS and Quantitative Methods Université de Sherbrooke Sherbrooke (Quebec) Canada, J1K 2R1 Phone: ext Fax: Prière de faire parvenir toute correspondance à Michael Wybo.

3 Résumé Une enquête menée auprès de 1200 firmes canadiennes suggère que toutes les activités de commerce électronique ne sont pas significativement associées au niveau de commerce international. L aptitude à automatiser les transactions et l utilisation proactive de l Internet sont des indicateurs significatifs de l intensité du commerce international. Toutefois, les activités de commerce électronique de nature plus passive, telles que la mise sur pied d un site web, la présence sur une place d affaires électroniques ou l utilisation de mécanismes de paiement électronique ne sont pas significativement associés au commerce international. Ces résultats impliquent qu une firme désireuse d accroître sa présence sur les marchés extérieurs devra choisir attentivement les mécanismes de commerce électronique dans lesquelles elle investit. Abstract A survey of 1,200 Canadian firms shows that not all e-commerce activities are significantly associated with the level of international commerce. The ability to automate the transaction and the pro-active use of Web-based information are significant indicators of international commerce activity. Passive e-commerce activities, such as a company Web site or listings in electronic marketplaces, and the use of Internet based payment mechanisms are not significantly associated with the level of international commerce. These findings imply that companies wishing to use e- commerce to increase their level of international business should carefully target the techniques in which they invest. Mots-clés E-commerce, International Trade, Export 3

4 1. Introduction The Internet has opened an array of opportunities for firms wanting to conduct business on international markets (Barbet, 2003). Internet commerce has the potential to remove the constraints of time and geography and permits companies to conduct business with both buyers and sellers located anywhere in the world (De la Torre, 2001; Lal, 2002; Moodley, 2002; Roccapriore, 2000). International commerce has traditionally been the domain of larger firms and has favoured physical products over services (Verwaal and Donkers, 2002; Wagner, 1995). Easy and inexpensive access to the Internet and e-commerce applications, continually falling costs of computing and telecommunications equipment, and the ready availability of purchased e-commerce services have the potential to open international markets to smaller firms, both for selling their own products and for their own procurement needs. However, it is not clear whether all e-commerce practices are equally effective at supporting international commerce. For example, is having a presence on the Web through a corporate Web site as strongly associated with conducting international business as being listed in various international marketplaces, or as using the Web to find new customers, or in enabling the corporate site to accept and process international payments? Our objective in this study is to better understand both the impacts of electronic commerce as an enabler for smaller firms to operate internationally and to determine which e-commerce practices are most strongly associated with international commerce activities. We surveyed 1,200 Canadian corporations engaged in e-commerce and related both the company s size and type of offering and their e-commerce practices to the extent to which they sold into and purchased from international markets. Our findings indicate that not only does the use of electronic commerce explain much more of the variance in the level of international commerce than the size of the organisation; but that certain e-commerce practices have no significant explanatory value and that larger firms do not appear to be able to better exploit e-commerce techniques than smaller firms. 2. Background and research hypotheses Doing business internationally is complex. It involves a large number of participants in a process with its roots in a centuries old tradition oriented toward the processing of a large number of specialised documents (Feenstra, 2003). In addition to the buyer and the seller, an international transaction often involves forwarding agents to schedule and coordinate various forms of transportation, customs brokers to ensure compliance with both export and import regulations, and a variety of government officials on both sides of the transaction. Each of these participants requires information for their own purpose, which is obtained through an information exchange with other parties. 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. International credit risk is also a major obstacle to conducting international commerce. To hedge the risk of non-payment, exporters need to involve additional participants, such as insurance companies, financial institutions and even more governmental agencies. These additional relationships add to the amount and variety of information being handled and the number of business processes in which the firm must participate to buy or sell internationally. 4

5 Socio-cultural challenges also constitute major obstacles to international commerce (Boyd et al, 2003; Harrison-Walker, 2002). In addition to language barriers, data issues such as telephone numbers, currency, measurement systems, and date formats may significantly vary from one country to another (Dou et al, 2002; Sheldon and Strader, 2002). International organisations, governments, and industry groups have done much to standardise data and processes across the actors involved. A significant component of the international trade information exchange has been digitised and automated. This, together with increasingly liberalised international trade legislation, has opened the door for firms to adopt various electronic commerce practices to increase their level of participation in international markets. In light of this investment in making international trade information exchanges more efficient, it is important to understand whether some of the traditional characteristics associated with the extent to which a firm engages in international trade still hold. For example, companies offering physical goods are traditionally much more likely to operate internationally than those offering services (Rose and Shoham, 2002). Firm size has also long been associated with the degree to which a company sells into or procures from international markets (Verwaal and Donkers, 2002; Wagner, 1995). In spite of the greater resources at the disposal of larger firms, some authors have noted the presence of smaller, less visible firms who in fact are export champions (Wagner, 2003). The ease of access to the Internet in most countries, the falling costs of information processing equipment, government investments in digital infrastructure and document exchange, and the possibility to purchase e-commerce services rather than build an internal capability, all act to reduce the in-house resources needed to adopt e-commerce and should all act to level the playing field for firms of all sizes to operate internationally. We might therefore expect that firm size, in the age of electronic commerce, is less a predictor of international commerce than in the past and, in particular, less a predictor than the use of electronic commerce techniques. H1: The use of electronic commerce is a stronger predictor of the level of international commerce in which a firm is engaged than the size of the firm. If indeed e-commerce activities are better at explaining the level of international commerce than firm size, and the reasons for this are those noted above, namely the accessibility and affordability of e-commerce technologies, then one would not expect larger firms that use e- commerce to have any particular advantage in operating internationally than smaller firms. H2: The interaction of firm size and the use of electronic commerce is not a significant predictor of the level of international commerce in which a firm is engaged. It is not readily apparent, however, whether all e-commerce practices are equally effective at supporting international commerce. For example, certain e-commerce activities are extremely passive, such as simply having a Web site, even a multilingual site (Sullivan, 1999). Others are much more active, such as using the diverse information available on the Web to perform competitive or industry analyses. To better understand which e-commerce practices are most strongly associated with international commerce, we identified e-commerce practices associated with the various steps in a simple business model as shown in Figure 1. In this model, the firm must first find partners with which 5

6 to do business. Having a Web site and registering as a member of an international marketplace are relatively passive means of finding customers or suppliers (activities 1 and 2). Using the Web to actively search for international partners and opportunities is a much more active use (activity 3). Next, the parameters of the transaction must be established and the appropriate documents completed and transferred (activity 4). Finally, payment must be made and received to complete the transaction (activity 5). Figure 1: Electronic Commerce Practices Find Clients or Suppliers Process the Transaction Process Payment (1) Company website (2) Electronic marketplace listings (3) Competitive or Marketplace intelligence (4) Electronic document processing (5) Transfer payment information and funds electronically Based on this simple model and the competitive nature of business, it can be argued that the active use of Internet based information for marketplace and competitive analysis is potentially more strongly associated with the level of international commerce than a simple presence on the Internet though a Web site or a listing on an electronic marketplace. Using the Internet to conduct market intelligence, find new customers, and promote the firm and its products are proactive information behaviours. Previous research has shown that export performance is enhanced by the synergistic effects of different information activities (Leonidou and Theodosiou, 2004). H3: The existence of a company Web site and being listed on an international electronic marketplace are less significant predictors of the level of international commerce in which a firm is engaged than the firm s use of the Web to perform competitive analysis and seek out new customers. Transaction processing activity is where document and process standardisation and digitisation and the availability of outsourced services has reduced the cost, complexity, and need for inhouse specialised knowledge to process international transactions. As such, it represents one of the major factors that should make participation in international commerce easier for firms of all sizes, but especially possible for smaller firms. H4: The use of e-commerce to process international trade transactions is significantly associated with the level of international commerce in which a firm is engaged. Finally, a variety of international payment mechanisms exist and have been generally available to small companies and the general public for some time. Examples include wiring or cabling money, bank transfers, personal and corporate credit cards, and, more recently, Internet based payment services. Given the history and ready availability of these services, their 6

7 use is not likely to significantly explain the level of international commerce conducted by a firm. In addition, the majority of financial processes involving international transactions still require manual intervention and have proven difficult to automate (Aberdeen, 2005; Fontanella, 1999). H5: The use of electronic payment mechanisms is not significantly associated with the level of international commerce in which a firm is engaged. 3. Methodology 3.1 Data collection and target population Our data was collected by means of an electronic survey into the use of electronic commerce by Canadian firms. The survey was conducted in February and March 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 personalised benchmark report (by sector) was made available to those who took the time to participate in the survey. The personalised 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. This left us with 1,200 useable questionnaires 3.2 Research variables Table 1 summarises the research variables and their associated questionnaire items. We measured upstream internationalisation as the percentage of total purchases made on international markets. Downstream internationalisation was operationalised as the percentage of total sales realised internationally. The nature of the firm s offering was operationalised as a binary variable: companies whose primary line of business is services were scored as 1 and those whose primary line of business was product were scored as 0. The size of the firm was measured using the number of full-time employees. E-commerce practices were measured for both sales and procurement activities. For both selling and buying activities, we measured the company s passive e-commerce presence. The existence of a company Web site was coded as a binary variable: 1 if the company had a site and 0 if no site existed. We also measured the extent to which the company was listed in own sector and cross sector electronic marketplace directories. On the sales side, the degree to which the company actively used the Internet to sell was measured using four items related to finding clients and performing competitive analyses. These items have an internal validity score of alpha = The extent to which the company used the Internet to conduct the sales transaction itself was indicated by the percent of total sales using electronic commerce. One item measured the extent to which the firm received payment from its customers over the Internet. 7

8 Table 1: Research variables and questionnaire items Contracts Degree of international commerce Organisational characteristics Variables Nbr of items Internet presence Marketplace 2 Competitive marketplace Intelligence Electronic document processing Internet based payments information and funds transfer Items Cronbach's alpha (α) International sales 1 % of sales made outside of your country n/a International % of procurement made outside of your 1 procurement country n/a Company Size 1 Number of employees in 2001 n/a Service offering 1 Service vs product n/a Web site 1 Do you have a Web site (y/n) 0.94 Is your company listed on a sectorial (vertical) electronic marketplace Is your company listed on a multisectorial 0.94 (horizontal) marketplace Sales intelligence Procurement intelligence Sales transact Procurement transact Sales payment Procurement payment In dealing with your customers, to what extent does your organisation use the Internet to : Promote your organisation and/or products /services Find new customers Find information on your sector Find information on products/services of competitors In dealing with your suppliers, to what extent does your organisation use the Internet to : Find and compare information Find information on your sector Find information on products/services of competitors % of sales realised using electronic commerce % of purchases made through electronic n/a 1 1 In dealing with your customers, to what extent does your organisation use the Internet to transfer payment information and funds In dealing with your suppliers, to what extent does your organisation use the Internet to transfer payment information and funds n/a n/a n/a 8

9 On the procurement side, three questions measured the degree of Internet use to actively find supplier information with an alpha of The use of the Web to conduct the procurement transaction itself was indicated by the percent of total purchases using electronic commerce and one item measured the extent to which the firm paid its suppliers over the Internet. 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. The final questionnaire was completed by 1,200 companies. 3.3 Statistical analysis Tobit models were used to assess the influence of the various research variables on the level of international sales and international procurement. The Tobit model is often used to formulate export behaviours (e.g. Lefebvre et al., 1998; Nassimbeni, 2001) since they take into account the truncated distribution of the dependent variable (Cramer, 1986; Greene, 1997) and thus avoids the potential bias caused by the fact that many firms are non-exporters. Indeed, a significant number the firms in our study sample indicated that they do not conduct international sales (663 firms to be exact) and/or international procurement (640 firms to be exact). 4. Results The results of our statistical analysis are presented in Table 2. We analysed three models for sales and procurement. In Model One, we examined the relationship between the traditional organisational characteristics associated with the extent of international commerce independent of any electronic commerce activities. Not surprisingly, we found that the size of the organisation was positively associated with the level of international commerce. We also found, as might be expected, that having a predominantly services offering was negatively associated with the percentage of the firm s sales and purchases in international markets. Together these two variables explained 9.7% of the variance in the extent to which these firms sold internationally and 13% of the variance in the extent to which they purchased outside of Canada. In Model Two, we added the e-commerce variables identified above. Again, the objective here was to understand which of these e-commerce activities was most strongly related with the conduct of international commerce. Adding the e-commerce variables to the analysis increased the amount of explained variance in international sales from 9.7% to 53.25%. In the case of international procurement, these variables increased the explained variance from 13% to 58%. These increases in R2 are large and statistically significant. These results provide strong support for Hypothesis 1, that the use of electronic commerce is a stronger indicator of the level of international commerce in which a firm is engaged than its size. Model Two also demonstrates that not all e-commerce variables are significantly associated with the level of international sales or procurement. On the sales side, being a member of an online marketplace and the ability to receive payment over the Internet were not significantly correlated with the extent of international sales, providing support for Hypotheses 3 and 5. Having a Web site was only marginally significant, again supporting Hypothesis 3. The two significant variables in this analysis were the use of the Internet to actively pursue sales opportunities and the percentage of total sales conducted electronically. This is consistent with hypotheses 3 and 4. 9

10 Similar results were observed for the firm s procurement activities. The large increase in explained variance was significantly associated with active procurement and the percentage of total purchase transactions conducted electronically. Together results indicate that the degree of association with the level of international commerce varies across different e-commerce activities. In Model Three, we introduced a set of interactions between the size of the organisation and the different e-commerce activities tested in Model Two. This analysis was performed to test Hypothesis 2, that larger firms are not better able to exploit e-commerce in the conduct of international business than smaller firms. The results support this hypothesis. Furthermore, the results in Table 2 indicate a significant (negative) effect of the size/marketplace combination on international commerce (-1.46 for sales and for procurement). Hence, smaller firms with an electronic marketplace presence carry out a larger percentage of international commerce than other firms (large firms and/or firms not listed on an electronic marketplace). Table 2: Regression results Sales Procurement Model One Model Two Model Three Model One Model Two Model Three Std. Beta p- value Std. Beta p- value Std. Beta p- value Std. Beta p- value Std. Beta p- value Std. Beta p- value Company size Services offering Web site Marketplace Transact Intelligence Payment Size * Web site Size * Marketplace Size * Transact Size * Active Size * Payment R R2 Change

11 5. Discussion Large increases in explained variance for international sales in this sample can be attributed to automating transactions and in using the Internet to actively pursue sales opportunities. Passive sales approaches such as simply having a Web site or being listed in some international marketplace are not significantly associated with the degree of international sales. The firms in this sample seem to be increasing their cross border sales largely through moving to electronic transactions and actively exploiting the information content of the Web to find and solicit new customers. Similar large increases in international procurement activities are also associated with being able to process the transaction electronically and, somewhat less significantly, to actively using the Web to locate product and supplier information. In neither sales nor procurement was the ability to transfer payment information and funds significantly associated with the level of international commerce. International Internet payment is not a critical condition of international business. The regular banking system provides a number of options to pay and be paid. The impact of additional, Internet based payment mechanisms is insignificant in terms of explaining the degree of international commerce. The complexity and legal controls of the banking system imply that Internet payment mechanisms exist largely to facilitate access to existing international payment mechanisms rather than provide an alternative means of payment. The principal conclusion we draw from these results is that electronic commerce has the potential to level the playing field between large and small firms in their ability to conduct business internationally. However, this only holds if the firm adopts an electronic commerce strategy focused on actively exploiting the information available on the Web and exploiting the efficiencies of processing transaction information electronically. Firms that are more involved in international sales appear to be investing the time in harvesting the market, industry, customer, and competitive information that exists on the Web to find and solicit new customers. This information may be difficult to find and most likely requires a significant degree of consolidation and analysis before being useful in a competitive sales situation. However, the Internet may be the only means of performing this kind of analysis on an international scale and is clearly associated with the degree to which our sample companies sell into international markets. They are also exploiting the public and private investments made in the electronic processing of trade documents to complete their transactions more efficiently. At this point, we cannot determine the extent to which they employ third party service bureaus to assist with their international transaction processing and to what extent they have these capabilities in-house. This is a question for further research. 6. Conclusion We asked whether different e-commerce activities were significantly associated with the level of international sales and procurement activities. Our findings indicate that automating international commerce transactions and exploiting the information content of the Web for competitive selling and procurement are significantly correlated with large increases in explanatory power over and above company size and product offering. This indicates that firms wishing to use the potential of electronic commerce to increase their level of international sales and/or procurement should focus their activities. Not all e-commerce activities have an equally important association with the level of international commerce. An e-commerce strategy that highlights the active 11

12 exploitation of competitive information found on the Web and the electronic processing of international commerce information seems to hold the most promise in terms of supporting increased international business. 12

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