POLICY BRIEF ON ICT APPLICATIONS IN THE KNOWLEDGE ECONOMY

United Nations ESCAP
ISSUE NO.1 NOVEMBER 2006

Enhancing Asia-Pacific small and medium-sized enterprises productivity through e-business
The United Nations Conference on Trade and Development (UNCTAD) has recently published the Information Economy Report 2006, which, among other issues, confirms the positive impact of information and communication technologies (ICT) on productivity growth and highlights the importance of promoting broadband adoption in developing countries to enhance competitiveness and productivity at the level of private firms. Since small and medium-sized enterprises (SMEs) account for the majority of the enterprises and employment in developing countries, their level of ICT adoption deserves special consideration. How do SMEs in Asia and the Pacific use ICT in their business? What are the challenges that they face in adopting ICT? This policy brief examines the factors that contribute to the adoption of e-business, defined as the use of ICT in business, by SMEs in the developing and the least developed countries of Asia and the Pacific. ESCAP recommends five areas for policy intervention to enhance e-business adoption among SMEs.

E-business benefits
The engines of growth for the economies of Asia and the Pacific are the SMEs, which account for more than 95 per cent of the enterprises in some countries of the region. The important contributions of SMEs to GDP and employment are well recognized. However, the competitiveness and productivity of SMEs are often constrained by limited access to information and technological know-how to support the development and marketing of value-added products. The use of ICT, particularly e-business applications, can address some of these limiting factors in the development of SMEs. E-business refers broadly to the use of ICT to conduct, support or improve business activities and processes, including research and development, procurement,

Figure 1 Proportion of enterprises using the Internet for providing customer services and banking or financial services

Source: UNCTAD – Information Economy Report 2006

United Nations Economic and Social Commission for Asia and the Pacific

design and development, operation, manufacturing, marketing and sales, logistics, human resources management, finance, and value chain integration. A subset of e-business is e-commerce, which describes the buying and selling of products, services, and information via computer networks, including the Internet.

Figure 2. Expected ICT impact on SMEs

E-business is indisputably transforming the way business is conducted across the world. More and more enterSource: ESCAP survey among SMEs in GMS (2005) prises in developed and developing countries are integrating ICT in their business processes, including Broadband access is neither easily available nor through providing customer services and using financial affordable in developing countries. services via the Internet (see figure 1). Among other benefits, ICT increases efficiency, promotes innovation, In the developing and least developed countries of reduces transaction costs, facilitates networking among Asia and the Pacific, the use of ICT in business is still stakeholders and allows SMEs to participate in broader low, particularly among SMEs. E-business adoption by markets and compete with larger firms in what can be SMEs is limited to word processing, email and searches called a “leveled playing field”. for information on the Internet. An ESCAP survey conducted in 2005 among 109 enterprise support agencies (ESAs) (e.g. government agencies, business associations, chambers of commerce) in Cambodia, the Lao People’s Democratic Republic, Myanmar, Thailand, Viet Nam and Yunnan Province of China, showed that ICT was considered to have a positive impact on SMEs in terms of creating or enabling competitive advantage, improving customer satisfaction and enabling growth (see figure 2). Regarding ICT applications, an ESCAP survey conducted in 2004 among SMEs in Cambodia, the Philippines and Viet Nam showed that SMEs considered the ease of interacting with customers to be the most important aspect of ICT applications, and therefore email was their most commonly used Internet application. Business-related research through the Internet was the second most prevalent use of ICT. The development of websites for business purposes was far less prevalent than email use and websites were typically used to display products rather than to facilitate online transactions. Consistent with the customer orientation of e-business, the survey found that businesses targeting overseas customers indicated higher levels of email use and website presence than those oriented towards domestic markets. This includes exporters and the tourism and hotel industry, which are reliant on foreign clientele. Except for the use of accounting software, specialized business management software, such as management information systems, were not commonly used by the SMEs surveyed. This pattern seems to be true in developed countries as well and it is mainly related to the lack of software adapted to SMEs’ needs. 2

How do SMEs use ICT?
Since the Asia-Pacific region consists of a mix of least-, medium- and most-connected economies in terms of ICT connectivity, there is a wide division, between countries regarding the level of use of ICT in business. Additionally, there is a divide within these same countries. Internet access is available mainly in the major cities; rural areas lag behind and have little access to the Internet. In terms of connectivity, whenever SMEs access the Internet they usually do it through dial-up connections.

To find SMEs on the Internet just visit an e-business portal
E-business portals and e-marketplaces are the preferable online locations for SMEs to conduct ecommerce, defined as selling and buying goods and services through the Internet. The use of such portals has many advantages for SMEs compared with developing and hosting their own website, particularly the affordability of the solution and the visibility of wellknown e-business portals. Results from the ESCAP project on the development of e-business services for SMEs in the Greater Mekong Subregion1 countries show that SMEs and enterprise support agencies consider e-business portals as adequate e-business development services for SMEs. Portals and e-marketplaces considered as simple and affordable ways to start e-business and an initial step prior to more advanced ICT use, such as the development of dedicated websites. E-commerce conducted by SMEs, including business utilizing e-business portals, is usually limited to promoting products through the website followed by an exchange of e-mails to set the terms of the purchase (e.g. price, quantity, return policy etc.). Since online payment systems are absent in most countries of the region, the payment is usually conducted off-line through traditional means (e.g. bank transfer, courier etc.).

They adopt e-business to enhance communication with both customers (B2C: business-to-customer) and partners in the supply chain (B2B: businessto-business). Usually, the adoption of e-business throughout the supply chain imposes e-business adoption on all businesses that want to keep operating in that industry. In developed countries, the adoption of e-business per se may not necessarily bring any competitive advantage for the enterprises operating in the specific sectors of economy mentioned above. It is only part of the cost of their business. On the other hand, in developing countries, enterprises in these sectors are in a position to benefit from e-business and gain a competitive advantage. Other sectors of the economy are not yet obligated to adopt e-business systems but may see them as an opportunity to reach a broader market (e.g. handicrafts/ artisans, agribusiness). SMEs that adopt e-business in these sectors usually are export-oriented and use B2B web portals to sell their products.

What you don’t know you don’t miss
While poor ICT infrastructure and a lack of ICT technical and managerial capacity are limiting factors for ebusiness adoption among SMEs, the lack of awareness and understanding of e-business is considered as one of the key obstacles preventing SMEs from employing ICT to enhance their business. Stakeholder consultations conducted by ESCAP in 2005 among SMEs and enterprise support agencies in six GMS countries identified five top barriers to the development of e-business services for SMEs: 1. Lack of awareness and understanding of ebusiness 2. Poor infrastructure 3. Lack of human resources 4. The lack of a comprehensive legal framework 5. Language barriers A lack of awareness regarding the benefits of ebusiness is usually the case of SMEs in non-exportoriented economic sectors. Since their clients and partners in the supply chain are also deprived of affordable and adequate ICT access, they do not see any benefit in adopting ICT in their business. They lack the managerial and technical capacity to use ICT to improve internal processes and to visualize hidden opportunities. 3

Different needs means different strategies
Companies that see profitability in conducting ebusiness are clearly willing to invest in the hardware and obtain connectivity that allows them adequate access to the Internet. This suggests that businesses that are in a position to benefit from e-business will plan for ICT investment as they would for any other business expansion plan. Some sectors of the economy are practically required to adopt e-business to remain competitive, and ultimately, in business. The software, manufacturing, tourism and hospitality industries are such examples.
1

Information regarding the ESCAP project entitled “The Development of e-Business Development Services for SMEs in Selected ASEAN Countries and Southern China” is available at: www.unescap.org/ icstd/applications/projects/e-business-GMS/index.asp

Poor infrastructure includes that related to ICT infrastructure (e.g. poor Internet connection, software, hardware etc.) and also the infrastructure in the supply chain, including transportation, warehousing, documentation, freight forwarding and cross-border shipment of the products. Usually, the purchasing and ordering system is not linked to any logistics service. Most companies rely either upon the post service or local transportation and shipping companies. The lack of a legal framework to support e-business (e.g. regulations for online transactions, digital signatures, arbitration, intellectual property rights, exports and imports etc.) creates a barrier to ecommerce practice. Some SMEs are not confident handling exports through electronic means and prefer to operate through agents or take their goods to the border and hand them over to a buyer. One reason for this is the perceived need to pay bribes, in some countries, to clear a smooth path through customs. Another related issue is the exposure of product prices on the Internet. SMEs prefer to keep their prices confidential in order to avoid competition on a price basis. SMEs also are reluctant to expose original designs and different versions of products since there is usually no guarantee of the intellectual property rights. Another related issue is that some overseas buyers want to see and handle the goods, and most developing and least developed countries do not have any standards and certification bodies that can act as guarantors of quality. Language is a huge barrier for the development of export-oriented e-commerce among SMEs in Asia and the Pacific. An ESCAP evaluation in 2006 of e-business portals pilot projects shows that SMEs reported difficulties in preparing product descriptions and having them translated into English for an international audience. Knowledge of foreign languages is also necessary during the follow up exchange of e-mails that is characteristic of e-commerce by SMEs.

policies into concrete national programmes on ebusiness development. ESCAP recommends five areas for policy intervention: 1. Further develop/implement ICT policies and regulations related to online transactions. This regulatory framework can potentially provide a supportive secure legal and regulatory environment to establish trust security, enforce authentication mechanisms and combat cybercrimes as well. This will encourage the use of ICT in business, including SMEs. 2. Introduce specific programmes to develop the capacity of enterprise support agency and promote e-business development services such as content creation, SME databases, product catalogues, online payment and translation. In general, SMEs have neither the in-house capability nor the financial resources to experiment with innovative approaches such as e-business, especially when they do not perceive immediate returns. It is often more costefficient for SMEs to use business development services offered by enterprise support agencies. However, e-business development services (planning, implementing, technical and consultancy services of e-business) are currently non-existent or very limited in terms of the range of services offered by enterprise support agency. 3. Integrate initiatives on ICT for trade and transport facilitation with e-business development programmes. Since e-business is considered a tool for expanding marketing opportunities, the promotion of e-business for SMEs would provide better results if developed together with initiatives that facilitate trade and transport, including those using ICT. 4. Adopt e-procurement techniques as part of egovernment strategies. In most countries, the Government is one of the largest buyers of goods and services. Since many Governments buy a share of their goods and services from domestic SMEs, the adoption of e-procurement may provide an important incentive for SMEs to begin using e-commerce as well. 5. Develop enabling policies and regulations to promote the development of domestic ICT markets and ICT services and products, including broadband connectivity, relevant content in the local language and development of ICT skills.

Five areas for action
Countries in the Asian and Pacific region are at various stages of implementing ICT policies and regulations. These efforts are seen to be supportive of e-business among SMEs. The challenge is how to translate these

This Policy Brief on ICT Applications in the Knowledge Economy has been prepared by the Information, Communication and Space Technology Division of ESCAP to provide a brief introduction on selected ICT applications, identify issues for implementation, and provide policy direction for the promotion of the applications. For further information on this Policy Brief, please contact: Mr. Siva Thampi, Chief, Information, Communication and Space Technology Division (e-mail: thampi@un.org).

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