adoption of new economy practices by smes in eastern europe

European Management Journal Vol. 21, No. 2, pp. 133–145, 2003 2003 Published by Elsevier Science Ltd.Pergamon

Printed in Great Britain0263-2373/03 $30.00 + 0.00doi:10.1016/S0263-2373(03)00009-4

Adoption of NewEconomy Practices bySMEs in Eastern EuropePANAGIOTIS DAMASKOPOULOS, INSEAD, FranceTHEODOROS EVGENIOU, INSEAD, France

We study the key drivers of adoption of e-businesspractices by small and medium-sized enterprises(SMEs) in Eastern Europe. We discuss the results ofa survey of over 900 SME managers in four EasternEuropean countries and Cyprus. The survey wasbuilt on the basis of a framework for studying theadoption of new economy practices that capturesthe dynamic interrelationships between technologi-cal transformations, firms’ organisational andknowledge-creating capabilities, emerging marketand industry structures, and public institutions andregulatory frameworks. Based on the frameworkand the survey results, we offer some reflections onnew economy practices adoption. 2003 Published by Elsevier Science Ltd.

Keywords: e-Business adoption, New economy,SMEs, Eastern Europe, Technology policy, EUenlargement, Regulatory reforms

Introduction

Information and communication technologies (ICT)centred on the Internet are today generally recog-nised as one of the central forces in the transitiontoward a new economic system. During the height ofthe techno-enthusiasm that underpinned the dot.comphenomenon this transition tended to be identifiedwith e-business which mostly meant the ‘transfer’ ofexisting business processes onto an online environ-ment. In the meantime there is a growing realisationthat such a process-oriented e-business transform-ation is only one aspect, albeit a central one, of abroader economic transformation that has importantimplications for the competitiveness of firms. Theviewpoint of this paper is that for new ICT to diffusethroughout the whole economy, not just businessprocesses, but business firms in many aspects, market

European Management Journal Vol. 21, No. 2, pp. 133–145, April 2003 133

conditions, and the culture and institutions of society,all need to undergo substantial change. It is thedynamic interdependence of these three conditionsthat is the source of innovation and value creation inthe new knowledge-driven economy. This is why theagenda of research on the dynamics of adoption ofnew economy practices, innovation, and economicgrowth needs to be expanded beyond the level of thefirm (Castells, 2000).

In this paper we seek to understand the key sets ofdrivers of adoption of new economy practices bysmall and medium-sized enterprises (SMEs) in East-ern Europe. SMEs in Eastern European occupy a stra-tegic position since they constitute key drivers ofinnovation, economic stabilisation, and employment.We explore the adoption patterns of e-business prac-tices in SMEs in four Eastern European countries,Bulgaria, Poland, Romania and Slovenia, andCyprus. ICT broadens the geographical scope ofeconomic activity, which means that business sys-tems interact on a global scale. However, such inter-action is conditioned by the organisational, insti-tutional, and cultural factors in different countries.Different social formations and regions tend to gener-ate their own organisational arrangements that sup-port innovation and e-business practices (Berger andDore, 1996; Castells, 2000). This is a central principlethat structures our inquiry into the e-business adop-tion patterns in Eastern European Candidate Enlarge-ment countries. We discuss the result of a survey ofover 900 SME decision-makers. The survey producedresponses to approximately 100 questions that covertechnological, organisational, market, industrial, andregulatory factors which influence e-business adop-tion. The results presented here yield a range ofinsights in the area of e-business adoption at anational level, that are also valuable to anyone withan interest in marketing to, working with, or under-

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standing Eastern European SMEs that are adoptinge-business practices.

A limitation of this paper is that for a number ofissues we discuss we lack empirical data from thesurvey, since the framework we use has evolved dur-ing the survey process. In these cases the analysis wemake can only be used as a roadmap for futureresearch and analysis of e-business adoption patternsin Eastern Europe. In addition, due to some inconsist-ency in the delivery of the survey, our research mis-ses data only on marginal elements of the e-businessenvironment in Bulgaria.

A Framework for Studying e-BusinessAdoption

In the wake of the collapse of the high-tech stock bub-ble academic and business opinion are marked notonly by uncertainty but also by scepticism as towhether the technological transformation associatedwith ICT and the Internet were the harbinger of anew phase in the development of the global economyor simply a temporary phenomenon that wasbrought about by speculation. What is in questiontoday is whether the technological, economic andorganisational changes associated with ICT amountto the formation of a new economic system, a neweconomy. In this context, it is imperative thatresearch in the domain of e-business in particular andthe knowledge-driven economy in general, be under-pinned by explicitly articulated operating assump-tions and conceptual categories.

The new economy is not just about e-business andeconomic activity conducted through electronic net-

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works. e-Business is a central component of an econ-omic system whose core characteristics are that it isglobal, it is knowledge-based, and it is networked. It isglobal because the key processes of production, circu-lation, and consumption are organised on a globalscale through functional linkages among mainly fin-ancial but also organisational and institutional struc-tures. It is knowledge-based because the productivityand competitiveness of economic organisationsdepend upon their ability to generate, process, andapply knowledge and information efficiently. And itis a networked economic system — and therefore notuniformly distributed globally — because pro-ductivity is generated through and competition isorganised around a global network of interactionsbetween individuals and organisations (Castells,2000).

There are therefore several structural features whosecoexistence are an indispensable condition for thesustainable adoption of e-business practices. Theintroduction of ICT is only one of these. For example,firms’ knowledge-creating capabilities and organis-ational capital, market and industrial structures,inter-organisational relationships within and acrossnetworks and industries, social attitudes toward e-business, and regulatory and public institutionalbodies are equally important.

In the present section we develop a framework ofanalysis for studying e-business adoption based onthe conceptualisation of the new economy outlinedin the previous section. The framework is comprisedof three interrelated levels of analysis: the level of thefirm, the level of the market and industrial structures,and the regulatory environment. This is summarisedin the ‘Model’:

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Level 1: e-Business at the SME Firm Level

Successful e-business initiatives and strategiesdepend on the mentalities of managers, their under-standing of ICT, and the organisational implicationsof the introduction of the Internet. Managerial per-ceptions and commitment are critical factors for thesuccessful implementation of e-business strategies. Ifpositive perceptions and commitment to the pursuitof competitiveness and growth in the e-businessenvironment are lacking at the upper echelons of anorganisation it is unlikely that commitment andactivism elsewhere within it will lead to the develop-ment of e-business strategies. However, awarenessand commitment, though necessary are not the onlyconditions that ensure ICT uptake and success of e-business initiatives. The successful implementation ofe-business strategies depends on the capacity of anorganisation to generate synergies between tech-nology, organisational goals and strategies, andpeople’s abilities and skills. On the ‘e-business at theSME firm level’ we therefore examine:

1. The general state of SME managerial perceptions2. The state of technological readiness of SME firms3. The state and goals of e-business strategies in

SMEs4. The availability of skills for e-business adoption

in SMEs.

Level 2: e-Business at the Level of the Marketsand Industry Structure

Successful implementation of e-business initiatives isnot exclusively a function of conditions prevailingwithin the firm. Conditions prevailing ‘outside’ thefirm are of equal importance. Such factors include theexistence of networks and technological infrastruc-ture at the level of the market, such as telecommuni-cations infrastructures, which directly influence thesize of the online market through, for example, limit-ing consumer Internet penetration. At the same time,for a market to work, payment systems need to be inplace and broader social attitudes to be mature. Wetherefore consider the state of e-payments and clear-ing systems, the levels of security and trust in onlineeconomic activity, and the broader social attitudes toonline commerce. The dimension of financial capa-bilities at this level is exclusively concerned with themarket components that enable the initiation andconclusion of online transactions, not the financialstructure of the economies under examination. Thatis a separate issue which we also study. Indeed, thefinancial structure of any given economic system hasclearly also a decisive impact on its industrial struc-ture, the organisation of the investment process, thestructure of governance of enterprises operating in itand its course of economic and social development(Gintis, 1989; Berger and Dore, 1996). As such, thefinancial environment of a given economy, in thissense, does not refer to the banking functions associa-


ted with business transactions. Instead, it refers to thefinancial structure on the basis of which investmentis organised. Hence, we deem it necessary to analyti-cally distinguish the financial elements associatedwith transactions from the structures that organisethe investment process among Eastern European SMEs.On the ‘e-business at the market and industry level’we therefore examine:

1. The technological infrastructure and Internet pen-etration

2. The state of electronic payment systems, trust,and security

3. The financial environment for investments4. Social attitudes toward online commerce.

Level 3: e-Business at the Level of theInstitutional and Regulatory Environment

Popular accounts of the formation of the Internethave it that it has evolved so successfully preciselybecause it has escaped government intervention andthrived on self-regulation. It is true that an entrepren-eurial culture is of crucial importance for the devel-opment of e-business. However, active governmentsupport has been a crucial factor both in the forma-tion of the Internet as well as the regulatory structureon which e-business has evolved (Castells, 2000). Inother words, government policy and regulation is ofcritical importance in the formation of e-businesssupportive environments. Key prerequisites are theexistence of a competitive telecommunications mar-ket, regulation regarding intellectual property rightsand e-signatures for trust and security, and supportfor entrepreneurship. On level 4 ‘e-business at thelevel of the institutional and regulatory environment’we therefore examine:

1. Legal support for e-business transactions andintellectual property

2. Regulatory reform and liberalisation of telecoms3. Support of entrepreneurship and of ‘clusters of

innovation’.

For the part regarding telecoms, we do not provideany statistics since the survey did not include ques-tions regarding regulation of telecoms — which is anissue in a sense beyond the control and action planof SME managers.

The State of SME e-Business Adoptionin Eastern Europe

Description of the ENLARGE Survey Study

The ENLARGE survey generated a broad samplingof SMEs, which was a primary sampling goal. MostSMEs surveyed are in the tertiary sector, although

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many are in the secondary, and a few are in the pri-mary sector. Some respondents indicated that theyworked in the government sector, in at least one casea recently privatised service that works closely withlocal governments; these cases were placed in the ter-tiary category. Most organisations interviewed weresmall — fewer than 50 employees. Bulgaria was anexception in that almost 40 per cent of those inter-viewed worked at organisations employing 250 per-sons or more. The respondent profile was predomi-nantly senior managers with almost 50 per cent top-level executives and 80 per cent in the upper echelonsof management. These managers were, on averagefairly young, as almost 70 per cent of respondentswere under 45 years of age, but most were above theage of 35. In Romania and Poland, however, the 45–55 year age bracket was significantly large — almost40 per cent. Figure 1 shows the statistics for eachcountry.

Below we present some of the results of the survey.It is important to note that for simplicity for mostgraphs we show only some of the measures from thesurvey questions. The whole survey and all the stat-istics derived are available upon request from theauthors.

e-Business at the Level of SME Firms

General State of SME Managerial PerceptionsIt was not so long ago that Western executives ofcompanies operating in Eastern European countriesfound that managers in Eastern Europe did not yethave e-business fully in their field of vision. How-ever, perceptions of the economic potential of theInternet and e-business strategies are changing. Forinstance, a poll commissioned by Intel and conductedby the Pentor Opinion and Market Research Instituteas early as 1999 in Poland (including Hungary, the

Figure 1 (a) Distribution of SMEs Surveyed According to the Industrial Sector. (b) Percentage of SME Size(Employees). (c) Respondent Profile — Management Levels. (d) Age Group of Respondents


Czech Republic, and Russia) revealed a growingawareness of the potential of e-business. Our surveyalso indicates that Eastern European SME managersare in general agreement that the Internet and e-busi-ness represent an opportunity for their firms. Thevariation in response to the question of whether e-business represents a threat or an opportunity is rela-tively minor and generally follows the average pat-tern shown in Figure 1 for the particular case ofrelations with business partners — the results weresimilar for the questions about the implications of e-business for the ‘existing business relations of organ-isations and their business environment’, and the‘basic existing relationships of a company to its cus-tomer, supply, and distribution networks’(Figure 2).

Yet the apparent enthusiasm for the potential of theInternet is not always reflected in sustained commit-ment to the adoption and implementation of e-busi-ness strategies among SME managers. One of the fun-damental conditions for the successfulimplementation of e-business strategies is serioustop-level management commitment and organis-ational buy-in. If upper management is not commit-

Figure 2 SME Management Response Pattern to theQuestion ‘Is e-Business More of a Threat or More of anOpportunity for your Company’s Relations with Busi-ness Partners?’

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Figure 3 Percentage of SMEs for which More Than 5%of the Operating Budget is Applied to e-Business (Datafor Other, Lower Percentages of Budget are Not Shownfor Simplicity)

ted to a company’s e-business strategy it is unlikelythat other company stakeholders will be. However,it is often the case that such commitment is oftenlacking among SME managers. One way to capturethe managerial commitment is through measuringthe size of the budget allocated to e-business initiat-ives: the premise is that commitment implies largerbudget allocations. Figure 3 shows the expenditurelevels dedicated to the development of e-business.Polish SMEs report the highest expenditure levelsconsistent with their frequent deployment of e-busi-ness technologies (see sub-section below). This resultis interesting in another way because the Polish SMEswere the most likely to be in the primary (agriculture,mining, etc.) or secondary economic (industrial pro-duction, construction, etc.) and the least likely to bein tertiary services. SMEs in Slovenia and Cyprusreport the lowest expenditure rates for e-businessinitiatives, which is interesting since these are two ofthe most advanced countries in terms of e-businessadoption. This is yet one more indication that one hasto look beyond the firm level to see what facilitates ornot the adoption of e-business and new economypractices.

The State of Technological Readiness of SME FirmsIn terms of the technological readiness of SMEs theemerging picture is one of variation across differentcountries, as shown in Figures 4 and 5. Notice thatSlovenia, commonly considered the most advancedof the countries surveyed here in terms of adoptionof e-business practices, does not have the highestscore in these figures. Adoption of e-business prac-

Figure 4 Percentage of SMEs that have an Intranet


Figure 5 Percentage of SMEs where More Than 50%of the Employees Regularly Use the Internet

tices is by no means equivalent to technological e-readiness, as we discussed in the previous section.

The State and Goals of e-Business Strategies in SMEsThe existence of computers and other aspects of ICTdo not necessarily mean that Eastern European SMEshave fully developed e-business strategies. Forinstance, in Poland research conducted by the Euro-pean Business Inquiry in 2001 shows that only 17 percent of SMEs have an e-business strategy. These fin-dings are consistent with our survey results whichdemonstrate that despite the introduction of Internettechnologies, including websites and Intranets, fewerthan half the SMEs had actual e-business plans, asshown in Figure 6. There are fairly wide variationsacross the countries, and this difference did not corre-late with company size. In fact, company size, at theSME level, did not have any impact on the likelihoodof having an e-business plan. Notice that despite thefact that Slovenia scored low in Figures 3–5, it scoresthe highest in Figure 6: a larger number of SMEsadopted e-business strategies in Slovenia, even if thetechnology and the budgets allocated to e-business isrelatively lower there.

Existing research suggests that the reason EasternEuropean companies most frequently give for mov-ing into e-business is to reach more customers. Othersignificant motives are information gathering, com-munication, the desire for greater competitiveness,quality of services for customers, implementation ofnew marketing channels, cost reduction, improvedefficiency, match the moves of the competition,

Figure 6 Percentage of SMEs that have an e-Busi-ness Plan

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Table 1 Reasons for Establishing a CompanyWebsite

Slovenia Poland Romania Cyprus Bulgaria(%) (%) (%) (%) (%)

Competition 28 24 63 43 33Parent 7 19 21 6 8companyPartners/

14 10 11 8 11suppliersNew markets 19 0 4 27 33Cost reduction 26 43 2 16 11Other 6 5 0 0 3

reduce the length of the order cycle, or simply thebelief that the company’s future is on the net.

Our research shows that intensified competition isinstead the major motive for adoption of e-businesspractices. Table 1 shows the results by country. Over-all, competition appears to be the main factor. Costreduction was only a top factor in Poland. Address-ing new markets (reaching new customers) is of highinterest only in Cyprus, Bulgaria, and Slovenia, butnot in Poland or Romania.

Table 1 also shows that the influence of partners andsuppliers regarding the motives for e-business adop-tion is larger in Slovenia. In a networked economy,the adoption of e-business practices by members ofthe economic ecosystem of a firm plays an importantrole in the development of e-business practiceswithin a firm. We investigate this further in Figure7, which shows how many SMEs have business part-ners that use e-commerce. In Slovenia, many compa-nies report that a majority of their business partnersare engaged in e-commerce, while in most othercountries only a few business partners do so. This isan interesting finding that may partly explain whythere is a relatively accelerated rate of e-businessadoption in Slovenia: network dynamics provide anextra motivation for adoption of e-business.

The introduction of e-business can impact all aspects

Figure 7 Percentage of SMEs for which the Majority ofBusiness Partners use e-Commerce


Figure 8 Areas of SME Company Structure Changeafter the Introduction of e-Business

of an organisation’s structure. Fig. 8 shows whichareas of SMEs had to change after the introduction ofe-business practices. Marketing/sales was the mostfrequently impacted area, and manufacturing wasthe least impacted. In other words, e-business affectsfirst the boundaries of the firm with the market inwhich it operates: the relationships of the firm firstwith its customers, and then suppliers and partners.

The Availability of Skills for e-Business Adoption inSMEsInsufficient knowledge about Internet applications isan important barrier to the adoption of e-businesspractices among SMEs. Research indicates that manySME managers consider the Internet is useful butmostly for the operations of big companies. As aresult, they do not see compelling reasons for e-busi-ness adoption in SMEs. At the same time, high num-bers of managers consider that they do not have thenecessary skills and knowledge to take advantage ofthe potential of the Internet and in leading an e-busi-ness strategy in the transparent environment of theInternet, as shown in Figure 9. The underlying per-ception is that e-business applications are quite com-plex and require dedicated personnel and skills.Indeed, extant research and surveys point to a strongconcern among many SME managers that theimplementation of e-business will present problemsbecause they lack a critical mass of employees withthe relevant e-business and e-commerce skills. Skillsare key in knowledge-intensive processes, such asthose involved in e-business initiatives, so the lack ofthem as well as the lack of training or access to them

Figure 9 Percentage of SMEs that Rate the SkillsComposition of their Organisation and its Prepared-ness for the Successful Implementation of an e-Busi-ness Strategy as Good or Very Good

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Figure 10 Percentage of SMEs that have AddressedOrganisational Development Through Training

can be seen as important factors for the lack of orunsuccessful e-business adoption.

Skills, especially in the context of generally high lev-els of education that characterise most Eastern Euro-pean countries, can of course be developed throughtraining. However, many SME managers say thattheir organisations have neither the time nor the bud-gets to send their employees to education or trainingon information technologies and for the acquisitionof skills necessary for e-business. For instance, as Fig-ure 10 indicates, with the exception of Slovenia, rela-tively low numbers report that they have in placetraining schemes. On the other hand, the cost ofemploying skilled e-business personnel varies con-siderably across countries with substantial numbersof SME managers reporting that such cost is ‘high’or ‘very high’(Table 2).

e-Business at the Level of Eastern EuropeanMarkets and Industries

Technological Infrastructure and Internet PenetrationThe state of the telecommunications infrastructure inmany countries is fast evolving. For example, mobilephones are almost as common on the streets of manymajor Eastern European cities as they are in theirWestern counterparts. And the proportions of house-holds with Internet connections in Slovakia and Slov-enia are comparable to those of Spain or Switzerland(Financial Times, 2000). However, it is a far from uni-versal success story. The most important factor set-ting the pace of development of the region’s telecom-

Table 2 Ratings of the Cost of EmployingSpecialised e-Business Personnel


1— Very 0 0 2 0 3low2 2 17 9 8 143 24 24 26 28 414 38 21 34 44 275 — Very 12 33 18 14 2highDon’t know 24 5 10 7 12


Figure 11 Percentage of SME Managers that Considertheir Country’s Technical Infrastructure Mature

munications infrastructure has been the pace ofliberalisation, and particularly the introduction ofcompetition.

Our research shows that significant numbers of SMEmanagers are relatively dissatisfied with the cost ofnetworking facilities in their countries. Yet, theemerging picture covers a spectrum where a signifi-cant 48 per cent of Polish SME managers rated suchcost as ‘very high’ whereas a negligible 7 per centdid so in Cyprus and 8 per cent in Slovenia.

Table 3 Ratings of the Cost of Network Facilitiesby Country

Slovenia Poland Romania Cyprus(%) (%) (%) (%)

1—- Very low 0 0 1 32 13 5 8 153 45 17 24 404 27 14 38 345 — Very high 8 48 19 7Don’t know 6 17 10 0

Moreover, our research demonstrates that the devel-opment of the technological infrastructure acrosscountries remains uneven. As shown in Figure 11SME managers in Slovenia and Bulgaria representopposite ends of the perception spectrum, with theformer rating the country’s technological infrastruc-ture as relatively ‘mature’ while the latter as fairlyundeveloped. The rest of the SME managers sur-veyed in the other countries occupy the middle of theperception spectrum.

The maturity of the technical infrastructure has adirect effect on Internet penetration, which is veryimportant for the growth of e-business particularlyin terms of B2C commerce. Our survey did not cap-ture this, since there are numerous statistics on Inter-net penetration per country (i.e. the Economist Intelli-gence Unit). From such surveys we point out thatmuch of Eastern Europe remains in single figures,excepting Slovenia and the Czech Republic that havepenetration rates comparable to those of some EUmember states. In large measure, this is statisticallycorrelated with relatively low per capita incomes and

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an underdeveloped telecommunications infrastruc-ture, which makes it expensive for average citizensin the region to become active Internet users. Inaddition, a profound language gap further adds toeconomic and infrastructure obstacles.

Electronic Payment Systems, Trust, and SecurityThe key payment barriers to the development of e-business on the level of the interface of SMEs withtheir market environment can be grouped into twocategories. The first is related to the existing techno-logical and payments infrastructure and it concernsthe relative availability of credit cards and e-pay-ments systems. The second is related to issues of trustand security and broader societal attitudes regardinge-commerce.

The imperfection of the banking system, the relativeunderdevelopment of electronic clearing systems,and the lack of credit cards impedes the speedydevelopment of e-commerce. In many Eastern Euro-pean countries, with the possible exception of Slov-enia, the amount of people with credit cards remainslow. Furthermore, commercial credit is still relativelyundeveloped and as a result economies continue tobe very much cash-based. Generally, the emergingpicture in terms of the existence of payment schemesfor online activities is far from universal. As Figure12 shows the perceived maturity of the financial sec-tor in each country varies considerably with Sloven-ian and Cypriot SMEs indicating confidence in theircountry’s banking systems’ capacity to support e-payments while managers in Poland, Romania, andBulgaria expressing considerable concerns.

Security and trust in online transactions is the otherindispensable condition for the development of e-commerce. These issues are likely to be addressedespecially in light of the entry of these countries intothe EU. Nonetheless, as Table 4 indicates, there areconsiderable concerns among SME managers when itcomes to the issues of trust and security of onlinetransactions. This is more the case in Poland andRomania and less in Slovenia and Cyprus. Onlinefraud, for instance, is quite high in Romania. Suchconcerns are likely to constrain the development ofe-business until the proper technological, legal and

Figure 12 Percentage of SME Managers that Perceivetheir Country’s Banking Sector to Support ElectronicFinancial Transactions as Mature


Table 4 Perceived State of Trust and Security inElectronic Transactions by Country


1 — Very3 0 2 4

high2 18 0 6 183 44 14 29 364 13 36 21 185 — Very low 2 50 25 15Don’t know 19 0 17 8

regulatory structure emerges. However, on a positivenote, the volume of fraud is at least growing moreslowly than that of payments (The Economist Intelli-gence Unit, 2001).

The Financial Environment for InvestmentsA central feature of the transition to the new econ-omy is the interplay between information technologyand finance. It is this interplay that allows for thecreation of the economic dynamism that underpinssuccessful e-business development in the new econ-omy. In the context of SMEs in Eastern Europe, thisis not a question of technological uptake alone butalso one of financial reform and the formation of anopen and transparent capital market suitable to theneeds of SMEs and entrepreneurship. The EasternEuropean economies are marked by a predominantlybank-based financial environment that is not con-ducive to high-risk entrepreneurial activity. Thoughmany Western and Eastern European banks havetaken steps to address the financing needs of newstart-up enterprises and SMEs many suggest thatbank-based credit is not entirely appropriate for thecurrent needs of SMEs.

Traditional deep and wide capital markets and ven-ture capital financing of Internet start-ups are far lessdeveloped and affordable than in more advancedWestern economies. Over the past few years invest-ment funds, venture capital firms and merchantbanks have been trying to establish a base in EasternEuropean regional Internet markets. Our researchshows that financing e-business initiatives amongSMEs has a variety of sources whose relative impor-tance varies across countries, as shown in Table 5,but SME managers report that between two-thirdsand three-quarters of the e-business initiatives werestill self-financed. The European Union was a sig-nificant funding source in Poland, and parent compa-nies provided capital most often in Romania, Cyprus,and Bulgaria. It is noteworthy that venture capital isa particularly marginal source of funds for e-busi-ness. Bank credit is also a relatively unimportantsource except in Poland and Slovenia. In contrast,parent companies, government funds, and the EU arethe main sources for most countries.

The relative underdevelopment of capital markets

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Table 5 Frequency of Financing other than Self-Financing for e-Business


VentureCapital 1 0 1 4 13ParentCompany 5 3 13 16 13EuropeanUnion 2 15 0 6 2Government 6 8 3 13 1Bank 7 10 5 0 3

and/or a more efficient and risk-taking banking sys-tem means that many SMEs experience considerabledifficulties in raising funds to finance e-businessinitiatives. Figure 13 summarises these results. Itshows that these difficulties are particularly promi-nent in Poland, Romania and Bulgaria and slightlyless so in Slovenia and Cyprus.

Social Attitudes Toward e-BusinessFinally, at a market level, social attitudes toward e-business are embedded in the fabric of a society andthey affect social interest in technology innovation,embracing of B2C, etc. For many segments of thesociety, ICT, e-business, and the digital economy con-tinue to be seen as distant future realities. For somesocial segments this has to do with unfamiliarity withIT and a general digital illiteracy.

The perceived maturity of each country’s social pre-dispositions toward e-business is depicted in Figure14. SME managers in Cyprus and Slovenia report thatthe prevailing social attitudes toward e-business intheir countries are mature or well developed,whereas significant numbers of their counterparts inBulgaria, Poland and Romania perceive such atti-tudes in their countries as relatively immature andin some cases even undeveloped. We note that thesewere simple unguided ratings, i.e. no guidelines formaturity were provided; the responses are simplyeach respondent’s personal assessment.

Figure 13 Percentage of SME Managers whichResponded which it was Difficult to Obtain Financingfor their e-Business Initiative


Figure 14 Percentage of SME Managers that Perceivetheir Country’s Societal Attitudes Toward Internet ande-Business as Mature

e-Business at the Level of the Institutional andRegulatory Environment

Legal Support for e-Business Transactions andIntellectual PropertyA commonly accepted fundamental obstacle to thedevelopment of e-business in Eastern Europe is theinsufficient and slow change of the regulatoryenvironment — the regulatory environment has notchanged fast enough to accommodate the quick paceof Internet developments. One area where regulatorymeasures need to proceed is legislation regarding theprotection of e-commerce both at the level of trans-actions as well as at the level of protecting intellectualproperty, a central aspect in the knowledge economyespecially because of the greater transparencybrought with the adoption of e-business. In someEastern European countries governments havemoved relatively quickly to establish a legal frame-work supportive of e-business and e-commerce. Forinstance, in Slovenia a specific law on e-commercewas passed in the first half of 2000. The Act of theelectronic commerce and electronic signature regu-lates the operation of the economic subjects, citizens,and State organs (Government of the Republic of Slo-venia, 2000). However, as our study summarised inTables 6 and 7 indicates, Slovenia and to a much lessextent Cyprus, are the exception. In other countriesregulation is still far from being satisfactory: forexample in Poland and Romania almost half therespondents consider the regulatory environment tobe completely unsatisfactory.

Table 6 ‘Do you Think that the Legal Framework inyour Country is Adequate for Supporting e-Commercial Transactions?’


1 — Highly 2 0 3 0satisfactory2 27 19 4 103 37 14 12 284 6 16 23 265 — Non- 8 47 45 24satisfactoryDon’t know 23 5 16 11

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Table 7 ‘How Would You Rate the Current State ofProperty, Commercial and Contract Law in YourCountry – Especially when it comes to theProtection of Intellectual Property Rights?’


1 — Excellent 0 0 0 22 21 7 9 83 44 37 18 254 13 46 54 355 — Non- 1 7 11 22existentDon’t know 21 2 8 10

Regulatory Reform and Liberalisation of TelecomsBeyond the introduction of e-signature laws a morefundamental question concerning the regulatoryenvironment of e-business in Eastern Europe has todo with the decentralisation and liberalisation of thenational telecommunications industry. Our study hasnot covered this important aspect. We include thisaspect here because we believe it is central to thestudy of e-business adoption, and we refer the readerto other studies regarding the liberalisation of telec-oms in Eastern Europe and Cyprus (Financial Times,2000). This is in many ways the backbone of dynamice-business environments since it tends to lead tohigher competition and hence greater efficiencies andlower costs in e-commerce and e-business practices.As we discussed at the market and industry level,high network costs are a concern for SME managers,shown in Table 3. However, the pace of reform inthis crucial area is slow and uneven across EasternEuropean countries. Liberalisation of telecoms is athorny political issue which has significant disruptivesocial consequences.

The social and political nature of the process of liber-alisation in the utilities markets has been pointed outin recent research by the European Commissionwhich notes that ‘The future growth in utility ser-vices will depend on the progress toward liberalis-ation and privatisation in these areas. Telecommuni-cations and transport in particular — being keyservice areas with cross-cutting functions across theeconomy as a whole — will improve significantly inperformance if the privatisation policy is maintained.The crucial problem is that currently there are stillmany people employed in (public) utility services,but their productivity is comparatively low (as is thewage level). Upgrading will therefore confront theissue of reallocation of the workforce and/or unem-ployment’ (European Commission, 1999).

Support for Entrepreneurship and of ‘Clusters ofInnovation’A key question for companies, especially SMEs andpublic, regional, and national authorities, is how tocreate a business and institutional environment sup-portive of innovation and entrepreneurship. Such an


Table 8 SME Management Perceptions of Supportby National Government for EntrepreneurialActivities in General and e-Business Initiatives inParticular


1 = Highlysupportive 1 0 0 1 02 16 0 3 6 43 32 17 11 17 174 20 39 39 32 325 = Non-existent 5 37 35 33 42Don’t know 27 7 11 12 4Mean ofresponses 3.21 4.21 4.19 4.05 4.17

environment would need to be the product of coordi-nated programs on the part of public authorities andgovernment agencies at both national and regional-local levels. However, as Tables 8 and 9 show, withthe possible exception of Slovenia, SME managers invirtually all other countries consider the support theyreceive from national governments and regional–local public poor. Polish, Romanian, and BulgarianSMEs give the most negative evaluations of the levelof support received from their national governmentsfor entrepreneurial activities in general, and e-busi-ness in particular. Regional and local governmentswere rated as providing even less support, with theordering across the countries being roughly consist-ent with the national evaluation. The situation is sig-nificantly better in Slovenia. For instance, eventhough it is a small country, Slovenia has bigambitions in information technology, especially insoftware engineering. Its successes in this domainalready include one of Central and Eastern Europe’sbiggest software houses, Hermes Softlab, whichrecently raised 10 million Euro in an internationalequity placement, which, including the new capital,valued the group at 54 million Euro. The government

Table 9 SME Management Perceptions of Supportby Regional/Local Government for EntrepreneurialActivities in General and e-Business Initiatives inParticular


1 = Highlysupportive 2 0 0 1 02 14 0 2 4 23 23 12 8 13 124 26 38 37 35 245 = Non-existent 10 36 47 35 52Don’t know 27 14 6 14 9Mean ofresponses 3.46 4.28 4.38 4.18 4.39

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wants to further build on these successes: a post ofMinister for Information Society was created in 2001,whose main objective is to bring together traditionaltelecommunications policy with novel ideas for pro-moting the development of IT in the country. It isworth noting here that Slovenian officials and execu-tives claim they have some additional advantages incomparison with other Eastern European countries:geographical proximity to important Western mar-kets such as Germany and the discipline and abilityto work together in teams (Financial Times, 2001).

How about the general support of SMEs for e-busi-ness adoption? Are Eastern European economies ontheir way to forming sustainable ‘clusters of inno-vation’ that could accelerate the adoption of e-busi-ness practices in SMEs and contribute to their tran-sition toward the new economy? The evidencegathered from SME managers, presented in skeletalform in Table 10 is patchy. The table shows the rela-

Table 10 Effectiveness of Different Organisationsin Facilitating the Adoption of e-Business


Government agenciesHighly effective = 1 25 0 2 32 28 0 5 163 27 28 19 284 16 35 34 25Not effective = 5 5 38 39 28IT industryHighly effective = 1 41 29 16 142 41 37 30 393 15 27 30 374 3 5 18 10Not effective = 5 0 2 7 1International organisationsHighly effective = 1 12 0 10 112 29 0 25 413 39 33 26 394 16 31 24 8Not effective = 5 4 36 16 1Universities/Research InstitutesHighly effective = 1 27 29 7 92 37 26 27 413 25 33 27 374 8 5 25 12Not effective = 5 3 7 14 1Trade or Industry AssociationsHighly effective = 1 13 0 7 42 30 5 13 303 39 32 27 494 14 34 30 14Not effective = 5 4 29 24 3Financial InstitutionsHighly effective = 1 27 0 9 162 33 12 23 323 28 32 31 374 9 27 25 11Not effective = 5 2 29 12 3


tive assessments of how effective different — mostlynon-governmental — organisations are in facilitatingthe adoption of e-business in each country. On aver-age, the IT industry and universities/research insti-tutes were judged the most helpful, scoring an aver-age across countries of 2.3 and 2.6 respectively, whilegovernment agencies and trade/industry associ-ations were viewed as the least helpful, scoring 3.6and 3.2 respectively. Slovenia is an exception: itviews governmental agencies as effective, althoughthe IT industry was perceived as even more effective.Polish and Romanian SMEs felt the IT industry wasthe most effective of the choices. In Cyprus, both theIT industry and international organisations werejudged to be the most effective.

Implications and Change Needs

We first summarise what we believe are someimportant findings that emerge from the surveyresults, and then we briefly discuss the implicationsabout changes that can facilitate e-business adoption.We briefly discuss the training needs as these wereidentified by SME managers.

Summary of Key Findings

The figures and tables presented in section 3 indicatea number of hypotheses and findings. A rigorousstatistical analysis of the survey results is beyond thescope of this paper and the subject of future research.However, it is important to emphasise some obser-vations that we believe are important and can formthe basis for future research in this area. Combiningthese observations with the general acceptance thatSlovenia and Cyprus are more advanced than Rom-ania, Bulgaria, and Poland in terms of e-businessadoption (Slovenia being more advanced thanCyprus) can lead to an immediate hypothesis regard-ing which factors are key for enabling e-businessadoption. Therefore the observations below can alsobe rephrased to form such hypothesis.

Our observations can be summarised as follows:

❖ Adoption of e-business practices is by no meansequivalent to technological e-readiness. Forexample Slovenia, considered the most advancedcountry in terms of e-business adoption as Figure6 also indicates, is far from being a technologyleader as shown in Figures 4–5.

❖ Factors beyond the level of the firm seem to bemore important for e-business adoption than fac-tors at the firm level. For example, a larger numberof SMEs adopted e-business strategies in Slovenia,even if the technology and the budgets allocatedto e-business are relatively low there. On the otherhand, Slovenia is more advanced at the market,industry and regulatory levels, as is consistently

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indicated in the tables and figures in the corre-sponding sections above.

❖ Availability of skills is an important factor for e-business adoption. For example, Slovenia has thehighest perceived skills composition. Moreover,with the exception of Slovenia, relatively lownumbers in the other countries report that theyhave training schemes in place for theiremployees.

❖ There are considerable concerns among SME man-agers when it comes to the issues of trust andsecurity of online transactions. This is more thecase in Poland and Romania than in Sloveniaand Cyprus.

❖ The cost of telecommunication networks variessignificantly across leaders and laggards.Although SME managers are relatively dissatisfiedwith the cost of networking facilities in their coun-tries, the emerging picture covers a spectrumwhere a significant 48 per cent of Polish SME man-agers rated such costs as ‘very high’ whereas anegligible 7 per cent did so in Cyprus and 8 percent in Slovenia. Moreover, generally SME man-agers in Slovenia rate the country’s technologicalinfrastructure relatively ‘mature’, while in Bulga-ria as fairly undeveloped. The rest of the SMEmanagers surveyed in the other countries occupythe middle of the perception spectrum.

❖ Slovenia, and to a much less extent Cyprus, is alsothe ‘leader’ in terms of regulation that is support-ive to e-business.

❖ With the possible exception of Slovenia, SME man-agers in virtually all other countries consider thesupport they receive from national governmentsand regional/local public poor. The perceivedmaturity of the financial sector in each countryvaries considerably with Slovenian and CypriotSMEs again indicating confidence in their coun-try’s banking systems’ capacity to support e-pay-ments while managers in Poland, Romania andBulgaria express considerable concerns.

❖ Difficulties in raising funds to finance e-businessinitiatives are particularly prominent in Poland,Romania and Bulgaria and slightly less so in Slov-enia and Cyprus.

❖ SME managers in Cyprus and Slovenia report thatthe prevailing social attitudes toward e-businessin their countries are mature or well developed,whereas significant numbers of their counterpartsin Bulgaria, Poland and Romania perceive suchattitudes in their countries as relatively immatureand in some cases even undeveloped.

❖ Competition appears to be the main motivation fore-business initiatives. Cost reduction was only thetop factor in Poland. Addressing new markets isof high interest in Cyprus, Bulgaria, and Slovenia,but not in Poland or Romania. Moreover, the exist-ence of partners with e-business initiatives is moreimportant as a factor in Slovenia, which is also theonly country where many SMEs report that amajority of their business partners are engaged in


e-commerce, while in most other countries only afew business partners do so.

❖ Marketing/sales were the most frequently impac-ted area, and manufacturing was the least impac-ted. In other words, e-business affects first theboundaries of the firm with the market in whichit operates: the relationships of the firm first withits customers, and then suppliers and partners.

Change and Training Needs for Faster e-BusinessAdoption

As part of the survey we asked SME managers toprioritise the areas of the highest need for managerialtraining that can facilitate e-business adoption. Table11 summarises the results.

The priorities are in general agreement with the keyobservations discussed above. In particular, it isimportant to notice that among the top five needsonly two are at the firm level (‘Developing a businessplan’ and ‘Developing an e-business strategy’), whilethe other three locate the issues at the market andthe regulatory levels. Security and trust is the mostimportant issue. The state of e-business in EasternEurope reveals the need for a large effort to increasesecurity of commercial activity of the Internet, bothby technical means and co-ordinated legal actions, asthe countries of the region produce not only goodprogrammers, but also sophisticated hackers.

Financing e-business initiatives is also among the keytraining concerns of managers. We discussed this

Table 11 Priorities for Training as Perceived bySME Managers Across the Countries Studied. Top 5and Bottom 5 Priorities are Shown in Order ofSignificance (Top to Bottom). The Other Options areIndicated in the Middle Section

Addressing security and privacy concernsDeveloping a business planDeveloping an e-business strategyUnderstanding of electronic payment methodsFinancing e-business initiatives

Personalisation and customer relationship management onthe InternetSourcing e-business solutions and expertiseDeveloping the right partnerships for e-businessTraining in technology managementImplementation of e-business strategyLearning how to collect marketing intelligence onlineCrafting the right business model for the internetDeveloping marketing strategies for the internet

Collecting marketing intelligence onlineOpportunities and pitfalls of online advertisingUnderstanding mobile commerceDevising a sustainable revenue modelUnderstanding business-to-business marketplaces andvirtual value chains

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issue in the previous section. We only emphasise ithere with a quote from the conclusions of the LisbonEuropean Council: ‘Efficient and transparent finan-cial markets foster growth and employment by betterallocating capital and reducing its costs. They there-fore play an essential role in fuelling new ideas, sup-porting an entrepreneurial culture and promotingaccess to and use of new technologies.’ (PresidencyConclusions Lisbon European Council, 2000).

As a general note regarding training that can facili-tate e-business adoption, we close with a quote froma recent European Commission report on the ‘widerpicture’ on European enlargement:

It is important to notice that the science and technologysystems of all these countries have suffered major shocksas a consequence of a decline of both government supportand industrial investment in research. As a result aroundhalf of the industrial researchers have been lost to the sys-tems. Although the situation now appears to be stabilisedit is not clear if recovery will be rapid, nor is it clear ifthe remaining system is well attuned to the needs of theemerging innovative and technologically advanced indus-tries. In particular it can be doubted that the university sys-tem has the capacity to provide high quality teachingneeded to support the transition to a knowledge economy.Institutional reforms have to go further to bridge moreeffectively the gap between industrial requirements,science and technology outputs and an adequate supplyof well-trained scientists. In particular entrepreneurial andmanagement skills are lacking. The key questions are howto achieve these changes, how to achieve them rapidly(European Commission, 1999).

Eastern European countries generally have skilledworkforces with skills needed to build the Infor-mation Economy. Against this background the intro-duction of information technology, which is the back-bone of e-business, presents the potential to leapfrogstages of transition and convergence to the newknowledge-driven economy. Nonetheless, even inthis domain, which is of paramount importance forthe transition to the new knowledge-driven econ-

PANAGIOTIS THEODOROSDAMASKOPOULOS, EVGENIOU, TechnologyTechnology Management Management Department,Department, INSEAD, INSEAD, Boulevard deBoulevard de Constance, Constance, 77305, Fontaine-77305, Fontainebleau, bleau, Cedex, France. E-Cedex, France. E-mail: pan mail: theodoros.evgeniouagiotis.damaskopoulos@inse @insead.eduad.edu

Theodoros Evgeniou isPanagiotis Damaskopoulos Assistant Professor of theis Senior Research Fellow at Information Systems at

INSEAD. His research interests include technological INSEAD. His current research interests lie inand organisational dynamics of business innovation developing and implementing information-based stra-under conditions of global financial markets, and the tegies, data-mining and business intelligence, and newmanagement of intangible corporate assets and intellec- business models and related economic modellingtual capital. applied to value creation in the networked economy.


omy, the challenges confronted by Eastern Europeancountries should not be underestimated, as accu-rately captured by the quote above.

Acknowledgements

This work was conducted in the context of the ENLARGEresearch project. ENLARGE is part of the European Com-mission Information Societies Technology (IST) Research Pro-gramme. The objective of the project is to promote the inte-gration of EU Eastern European Candidate EnlargementCountries through the development and application of amethodology for designing and implementing e-business stra-tegies in SMEs. The ENLARGE research consortium underwhich this research was conducted is composed of the follow-ing institutions: the Athens Laboratory of Business Adminis-tration (ALBA), (Greece), Planet Ernst & Young (Greece),INSEAD (France), the Central Laboratory for Parallel Pro-cessing (CLPP) of the Bulgarian Academy of Science(Bulgaria), the University of Cyprus (Cyprus), the NationalInstitute for Research and Development Informatics (ICI)(Romania), the University of Maribor (Slovenia), and theAcademy of Entrepreneurship and Management (LKAEM)(Poland). We generously acknowledge permission from theconsortium to publish some of the research findings in thepresent paper.

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adoption of new economy practices by smes in eastern europe

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