Applied Economics, 2006, 38, 1905–1916

Determining factors for the

adoption of e-business: the case of
SMEs in Korea
Bang Nam Jeona,*, Kyeong Seok Hanb and Myung Jin Leec
a
Department of Economics and International Business, Bennett S. LeBow
College of Business, Drexel University, 32nd and Market Street,
Philadelphia, PA 19104, USA
b
Soongsil University, Sangdo-5 dong, Dongjak-gu, Seoul, Korea and
The Wharton Entrepreneurial Program, University of Pennsylvania,
Philadelphia, USA
c
Soongsil University, Sangdo-5 dong, Dongjak-gu, Seoul, Korea and The
Korea Chamber of Commerce, Seosomoon-dong, Jung-gu, Seoul, Korea

This study investigates the determining factors of the successful adoption

of e-business by small and medium enterprises (SMEs) in Korea using
survey data. After the major determining factors were identified from
the innovation adoption literature and were extracted by applying
the principal component analysis to the survey data and by adding the
country-specific characteristics of Korea, we conducted empirical analyses
to determine the critical success factors for the adoption of e-business
by Korean firms. The empirical results which are based on t-tests of the
differences between adopters and non-adopters, the linear probability
model, and the logit model, all suggest that the important determinants
of the successful adoption of e-business by SMEs in Korea are: the CEO’s
knowledge of information technology (IT)/e-business, relative advantages
and benefits from implementing e-business, governmental support,
globalization strategy and the North Korean factor. Business size, the
cost of e-business adoption and competitive pressure of the industry do not
seem to play an important role in the adoption of e-business by Korean
SMEs. The policy implications of this study on promoting e-business
adoption by SMEs in emerging economies, such as Korea, are also
discussed.

I. Introduction by small and medium sized enterprises (SMEs) in

Korea. Although the Internet boom has been drasti-
The purpose of this study is to identify the major cally affecting ways of doing business in Korea,
determinants of the successful adoption of e-business especially for traditional brick-and-mortar SMEs

*Corresponding author. E-mail: jeonbana@drexel.edu

Applied Economics ISSN 0003–6846 print/ISSN 1466–4283 online ß 2006 Taylor & Francis 1905
http://www.tandf.co.uk/journals
DOI: 10.1080/00036840500427262

Electronic copy available at: http://ssrn.com/abstract=1305653

1906 B. N. Jeon et al.
and dotcom start-ups alike, the available empirical barriers for SMEs in emerging economies, including
evidence on the major determinants of e-business Korea, to adopt e-business, such as a lack of
adoption by Korea’s SMEs is scant in the awareness of the positive impact and benefits of
literature.1 We aim to fill this gap by investigating e-business, lack of skills and experts, limited financial
the association of the major determining factors resources, fixed costs associated with e-business
with the successful adoption of e-business by implementation, and concerns about Internet security
Korean SMEs, using recent survey data for Korea. (OECD, 1999).4
This study also derives various policy implications The Korean-style transaction formula, subcon-
regarding the enhancement of the successful adop- tracting structures, and the CEO’s lackluster
tion of e-business by SMEs in emerging economies, innovativeness have also been mentioned often as
such as Korea. obstacles to the full-fledged introduction of
The recent Internet boom in Korea has been e-business, especially for activating B2B (business-
receiving enormous attention from the international to-business) e-business in manufacturing industry.
business community and the news media. Korea was The Korean government, with support from business
praised as a regional leader of the new economy and circles, has encouraged IT business, slashed red tape
dotcoms in Asia, with an advanced infrastructure and for Internet start-ups, and adopted specific action
a high rate of internet users.2 Although chaebols, large plans for accelerating the adoption of e-business
conglomerates, have played a large role in the recent by SMEs in Korea. For example, the e-Commerce
Internet boom and e-business development in Korea, Resource Center (ECRC) was recently established to
SMEs in Korea have also actively participated in train e-business experts, provide technical assistance
applying and expanding e-business to their business and conduct consulting services for SMEs.
practices to survive or prosper in the knowledge-based A crucial prerequisite to launching effective strate-
economy. The Korean SMEs that adopted the gies for developing and expanding e-business for
Internet e-business paradigm have benefited with a SMEs is to identify the key determinants of successful
more level playing field, thanks to the Internet and e-business adoption decisions by SMEs. The paper is
other innovations, as well as a growing market share, organized as follows. Section II identifies a variety of
all providing a new opportunity for a competitive determining factors from the existing literature and
advantage over large companies.3 adds several country-specific characteristics of Korea.
However, the reality is that many SMEs in Korea Section III describes our survey data and method-
have not been successful in exploiting these potential ology to extract determining factors. In Section IV,
opportunities, despite intensified efforts by the we present the results of empirical analyses based on
government and the business community in Korea. t-tests, the linear probability model and the logit
Small firms are often weak in terms of financing, model. Section V concludes the paper and discusses
control, training, planning and information, due to policy implications.
a chronic lack of human and financial resources (Blili
and Raymond, 1993). According to a recent survey
conducted by the Small and Medium Business
Administration (SMBA) in Korea, only about half II. Factors Affecting the Adoption of
of the SMEs in Korea (small firms 44.8%, medium E-Business
sized firms 54.2%) among 200 SMEs surveyed have
adopted e-business as of 1999. Various reasons have There are many definitions of e-business. For the
been identified in similar studies. A recent report purposes of conducting our questionnaire survey,
by the OECD, for example, listed some of the major we adopted the definition of e-business as the range
1
As an exception, Han and Noh (2000) investigated ‘critical failure factors’ that discouraged the growth of e-commerce, at the
business-to-customer level, from the consumer’s perspective using Korean survey data.
2
As of April 2004, more than 16 million households, 78% of the total, have high-speed, broadband Internet access in Korea
(www.chiefexecutive.net/depts/technology/197a.htm). According to a recent report by FCC, Korea is far ahead of other
OECD countries and the rest of the world by the measure of ‘subscribers of broadband Internet per capita’ at 21.4 per 100 as
of December 2002. Canada is the second at 11.7 and the US is the sixth at 6.9 (Ismail and Wu, 2003).
3
According to the Small and Medium Business Administration (SMBA) of Korea, the share of SMEs in the Korean economy
is 99.8%, or 2 948 000, in the number of establishments; 86.7%, or 10.4 million, in the number of employees; 51.7%, or $97.3
billion, in the total value added in the manufacturing industry); 85.1%, or $517.4 billion, in the gross domestic product
(GDP); and 42.2%, or $81.7 billion, in the total exports, as of March 2003.
4
The critical issues facing the Internet adoption from the demand side include taxation, privacy, censorship and security
concerns (Koyuncu, 2003). For empirical identifications of other barriers facing IT sector SMEs including imperfections
in the loan market and the difficulty in financing in the bank loan market, see Grilli (2005).

Electronic copy available at: http://ssrn.com/abstract=1305653

Factors for the adoption of e-business
of online business activities for products and services,
both business-to-business (B2B) and business-
to-consumer (B2C), through the Internet.5 E-business
is, first of all, an important form of technology
innovation which is both process-oriented, and a new
way for SMEs to do business. According to the
literature on technological innovation, several vari-
ables have been identified as possible determinants
of the adoption of an innovation. Kimberly and
Evanisko (1981) identified three predictors of innova-
tion adoption: CEO characteristics, organizational
characteristics and environmental characteristics.
Tornatzky and Fleischer (1990) listed three factors
influencing the technological innovation decision:
the organizational factor, technological factor and
environmental factor. Thong (1999) identified four
variables for information systems (IS) adoption from
the technological innovation literature: CEO
characteristics, IS characteristics, organizational
characteristics and environmental characteristics.
As major innovation characteristics affecting the
decision on the implementation of electronic data
interchange (EDI) by small firms, Premkumar et al.
(1994) used five factors: complexity, compatibility,
costs, relative advantages and communicability.
E-business is also an interorganizational system
innovation. Customer-based interorganizational sys-
tems (CIOS) literature has identified several factors
facilitating the adoption decision of a CIOS. Grover
(1993), for example, used five factors in predicting the
adoption of CIOS: the organizational factor, policy
factor, environmental factor, information systems
(IS) factor and support factor.
Based on the technology innovation literature and
interorganizational system innovation literature, this
study adopts four groups of characteristics affecting
e-business adoption decision: CEO characteristics,
e-business characteristics, organizational characteris-
tics and environmental characteristics. Each of these
four characteristics consists of several sub-factors.
CEO characteristics consist of two sub-factors:
the CEO’s knowledge of IT and e-business and the
CEO’s attitudes toward innovation (Harrison et al.,
1997). E-business characteristics reflect three aspects
for implementing e-business operations: the compat-
ibility/complexity issue, the relative advantages and
benefits issue, and the adoption costs issue (Thong,
1999). Organizational characteristics cover two sub-
factors: employees’ knowledge of IT and e-business
technology and business size. Among many variables,
5
This is the definition used by Hoque (2000) and OECD (1998, 1999). Accordingly, e-business refers to the use of Internet
technologies for internal business processes (intranet); for business relationships (extranet); and for the transactions of goods,
services and information (Internet). For more detailed discussion, see the OECD reports.
6
Article 2, the Small Business Fundamental Act, Korea.
1907
we consider industry competition, governmental
support and the firm’s globalization orientation
to be the most important sub-factors in the
environmental characteristics for SMEs in emerging
economies, such as Korea (Child et al., 2003).
In addition, we include country-specific character-
istics of Korea which are believed to have affected
e-business adoption decisions by SMEs in Korea.
The most significant and contemporary economic
and political issues influencing e-business adoption
decisions by SMEs in Korea have been business
restructuring efforts after the 1997 financial crisis and
the North Korea factor. The economic uncertainty
created by the 1997 Asian crisis and the political
uncertainty caused by confrontation with
North Korea have lent new challenges as well as
opportunities to SMEs in Korea. More detailed
definitions and measurements of each characteristic
and sub-factor are shown in Table 1.
III. Survey Design and Pre-tests on Data
After conducting a pilot study in which 30 CEOs of
SMEs in Korea participated, an eight-page ques-
tionnaire containing a total of 68 questions on firm-
specific information and factors affecting e-business
adoption decisions, based on the face-to-face inter-
views and literature review, was prepared. The
questionnaires were mailed to the CEO of each of
the 1200 Korean SMEs in the survey sample, which
were selected from the SME database available from
the Small and Medium Business Administration
(SMBA) in Seoul, Korea. We employed the definition
of an SME from the definitions adopted by
the SMBA. For example, in the case of the
manufacturing industry, the number of employees
should not exceed 300, the fixed assets of the business
should be smaller than 70 billion Korean won
(approximately $58.3 million at the exchange rate
of 1200 won per dollar), and the annual sales of the
business should be smaller than 8 billion won
($6.7 million).6
A total of 204 effective responses were collected,
representing a 17% response rate, through a postal
survey, an electronic survey using e-mail and
the Internet, and an interview survey in 2001
and 2002. By industry, manufacturing had the largest
share of 36%; service, 32%; distribution and
1908 B. N. Jeon et al.
Table 1. Descriptive statistics, factor analysis, reliability testing and measurement of determining factors for adopting
e-business by SMEs in Korea
Factor analysis and
Statistics reliability testing

Mean (S.D.) Factor Cronbach

Determining factors (n ¼ 204) loading alpha Definitions and measurementa
CEO characteristics
CEO’s IT/e-business (eB) 0.860
knowledge
CEO’s knowledge 1 3.42 (1.08) 0.858 the level of general knowledge of IT/eB by the CEO
CEO’s knowledge 2 3.32 (1.16) 0.843 CEO’s capability to use computer software
CEO’s knowledge 3 3.36 (1.18) 0.744 hours of PC usage by the CEO per day
CEO’s attitude towards 0.835
innovation
CEO’s innovativeness 1 3.17 (1.07) 0.857 CEO’s eagerness to acquire relevant information and skill
CEO’s innovativeness 2 3.18 (1.02) 0.683 the extent to which the CEO feels urgency for a PC training
programme
E-business characteristics
Compatibility and 0.521
complexityb
Compatibility 1 2.64 (0.86) 0.811 the degree to which eB is perceived as difficult to adopt
Complexity 1 3.00 (0.88) 0.620 the extent to which transactions by eB are perceived as complex
Relative advantage and benefits 0.664
Advantage/benefits 1 3.20 (0.89) 0.797 the degree to which eB is expected to bring better payoffs
Advantage/benefits 2 3.23 (0.97) 0.790 the extent to which the firm’s business is covered by eB
Cost of e-business adoptionc 0.832
Adoption cost 1 2.14 (1.17) 0.898 the degree of the cost burden to adopt eB by the firm
Adoption cost 2 2.44 (1.13) 0.785 the share of costs for maintaining eB in the total sales
Organizational characteristics
Employees’ IT/e-business 0.807
knowledge
Employees’ knowledge 1 2.81 (1.46) 0.749 the number of internal eB experts in the firm
Employees’ knowledge 2 3.53 (1.17) 0.529 the level of internal expertise in handling PC software
Business size 0.722
Business size 1 2.80 (1.14) 0.880 total sales of the firm
Business size 2 2.78 (1.09) 0.521 the number of employees of the firm
Environmental characteristics
Competitive pressure 0.698
of the industry
Competition 1 3.79 (1.01) 0.858 the intensity of competition in the same industry
Competition 2 3.72 (1.10) 0.808 the number of rivalries of the firm
Governmental support 0.743
for e-business
Governmental support 1 1.30 (0.75) 0.860 the frequency of receiving financial support for eB
Governmental support 2 1.43 (0.92) 0.844 the amount of financial support for eB from government
Need of globalization of the firm 0.829
Globalization 1 3.54 (1.03) 0.907 the extent to which eB is perceived to enhance global
competitiveness of the firm
Globalization 2 3.23 (1.04) 0.877 the extent to which eB is expected for the firm to penetrate the
world marketplace
Country-specific –
characteristics of Korea
1997 financial crisis 3.06 (0.86) – the extent to which eB contributes to restructuring effort by
and IMF bail-out Korean firms during the post-1997-crisis era
North Korean factor 3.65 (0.78) – the perceived urgency of adopting eB for business with
North Korea

Notes: a All variables were measured on 1 to 5 scale. High scores mean very important, abundant, large and strong, while low
scores mean very unimportant, scarce, small and weak. Some measurements, such as business size and governmental support
for e-business, are based on scales with specific ranges.
b
A low score means low compatibility and high complexity.
c
A low score means the high burden of adoption costs.
Factors for the adoption of e-business
transportation, 14%; and finance and banking, 5%.
Of the responding samples, 110 SMEs, or 53.9%, had
adopted e-business as of the time when the survey was
conducted.7 More than 75% of the sample SMEs
from the service industry and the finance and banking
industry adopted e-business, while only 35% of
the surveyed SMEs from the manufacturing industry
adopted e-business. Almost three-quarters of
the respondents, or 74%, came from Seoul, and the
remainder were from other provinces in Korea.
All variables were measured on a five-point Likert
type scale (1 ¼ least important, scarce and weak,
5 ¼ most important, abundant and strong), except for
some open-ended questions which asked for reasons
or specific examples. The specific measurement of the
explanatory variables is illustrated in Table 1. The
CEO’s knowledge of IT and e-business is measured
using three indicators: the number of hours of PC
usage by the CEO per day, the CEO’s capability
to use computer software, and the CEO’s self-
assessment of his/her level of general knowledge of
IT and e-business by the CEO. The CEO’s attitude
towards innovation is measured using two indicators:
the CEO’s eagerness to acquire relevant information
and skills on e-business and the extent to which the
CEO feels an urgency for PC training programmes
for employees. We measure employees’ IT/e-business
knowledge by colleting two indicators: the number of
internal experts on e-business in the firm and the level
of internal expertise in handling PC software relevant
to e-business transactions by the firm. Compatibility
is measured by the degree to which e-business is
perceived to be difficult to adopt by the firm, and
complexity is measured by the extent to which
e-business-based transactions by the firm are
perceived to be complex to perform.
We measure the relative advantages and benefits of
adopting e-business using two indicators: the degree
to which e-business is expected to bring better
business performance and the extent to which the
firm’s business is to be covered by e-business-based
transactions when e-business is adopted. We also
surveyed the CEOs to get information on the number
of rival companies of the firm and get each CEO’s
assessment on the intensity of competition in the
same industry to measure the competitive pressure of
1909
the industry on the firm. We measured government
support for e-business by collecting two indicators:
the amount of financial support for e-business from
the government and the frequency of receiving
financial support from the government for e-business
adoption and implementation. The costs of e-business
adoption are measured using two indicators: the
degree of the cost burden of the firm adopting
e-business and the relative share of costs for main-
taining e-business in the total sales. We also measured
the size of business by collecting information on total
sales of the firm and the number of employees
in the firm. See Table 1 for other measurements of the
explanatory variables.
We used principal components analysis to extract
factors by performing rotation using the Varimax
method. A total of 10 factors were extracted from
21 effective question statements and measurements,
accounting for 78.5% of the explained variance.
The extracted 10 factors included: (1) two CEO
characteristics – the CEO’s IT/e-business knowledge
and the CEO’s attitude towards innovation;
(2) three e-business characteristics – compatibility
and complexity, relative advantage and benefits, and
cost of e-business adoption; (3) two organizational
characteristics – employees’ IT/e-business knowledge
and business size; (4) three environmental character-
istics – the competitive pressure of the industry,
governmental support for e-business, and the need
for globalization and expanding to markets abroad
by the firm.
The criterion for the inclusion of effective state-
ments was that the factor loadings of the statement
should be at least 0.5 (Fornell and Larcker, 1981).
The principal components analysis also demonstrated
a clear factor structure. Reliability analysis was next
conducted to examine the internal consistency of the
factor’s item composition. The resulting Cronbach-

coefficients were greater than 0.6 except the compat-
ibility/complexity factor, indicating that the state-
ments within each of the 10 factors were measuring
substantially the same construct (Nunnally, 1978).
Table 1 shows specific measurements and
descriptive statistics for each of the sub-factors
affecting e-business adoption decisions, along with
the results of the factor analysis for extracting the

7
These 110 e-business adopters were shown to have adopted varying forms of e-business. Among them, 40 companies or
36.5% adopted webpage and e-mail advertisement; 19 or 17.3% adopted B2C (business-to-consumer); 26 or 23.6% adopted
B2B (business-to-business) and online-based supply-chain management (SCM); and 25 or 22.7% adopted B2C as well as
B2B/SCM, which is the most extensive form of e-business adoption. Identifying the factors that contribute to the adoption of
the different forms of e-business in Korea also seems to be a promising project when a sufficient number of observations
become available. The authors thank an anonymous referee on this point.
1910
number of factors and of reliability testing for the
internal consistency in the measurement of composite
factors.
IV. Empirical Results
Our key research question is how each of the
determining factors of e-business adoption decisions
is different between the SMEs which have adopted
e-business (adopters) and the SMEs which have not
adopted e-business (non-adopters) in Korea. A series
of t-tests was conducted on the means of the two
groups’ measurements of various indicators for sub-
factors which were believed to affect e-business
adoption decisions by Korean SMEs. We measured
a total of 23 indicators for 12 sub-factors, which were
organized into five groups of characteristics.
For example, the respondent’s level of (self-perceived)
knowledge of IT and e-business technology was
measured on a scale of one to five as one of the
three indicators of the CEO’s IT/e-business knowl-
edge, which was also grouped into CEO character-
istics, along with the CEO’s attitudes toward
innovation.
Adopters vs. non-adopters: t-tests
Table 2 presents the results for the survey of the
respondents from both the adopters’ group (n ¼ 110)
and the non-adopters’ group (n ¼ 94). Mean score
ratings, with standard deviations, of the 23 indicators
are shown with the results of t-tests comparing the
two different groups. As shown in the table,
significant differences were found for 18 of the 23
indicators.
There were significant differences in 10 of the 12
factors, with the exceptions of business size and
competitive pressure of the industry. In CEO char-
acteristics, the CEO’s knowledge of IT and e-business
technology was significantly higher for adopters than
non-adopters (t ¼ 5.96
7.37; p < 0.01), and the
CEO’s innovativeness was also higher for e-business
adopting firms, compared to non-adopters (t ¼ 5.35
and 5.64; p < 0.01). Overall, the CEO factors seem to
play an essential role in e-business adoption decisions
by Korean SMEs. The more knowledgeable and
innovative a CEO is, the more likely the Korean
small business will adopt e-business.
E-business characteristics, such as compatibility
and complexity of e-business implementation in the
firm, relative advantage and implementation costs
were all shown to be significantly different between
B. N. Jeon et al.
the two groups (t ¼ 2.02
4.81; p < 0.10
0.01).
Higher compatibility and lesser complexity of
e-business, more advantages and benefits available
from e-business, and lesser burdens of e-business
adoption costs to the firm all seem to increase the
probability of adopting e-business by Korean SMEs.
The tests for organizational and environmental
characteristics produced mixed results. The level
of employees’ knowledge of IT and e-business
technology for adopting firms was shown to be
significantly higher than that of non-adopting firms
(t ¼ 6.54
7.85; p < 0.01), while no significant differ-
ence in business size was found between adopters and
non-adopters. In terms of environmental character-
istics, government support for e-business was shown
to be significantly higher for adopters, compared
to non-adopters (t ¼ 3.56
5.05; p < 0.01), whereas
the industry competition factor turned out to be
unessential for the basis of e-business adoption
decisions by Korean SMEs. A firm which considers
e-business to be an important global strategy for
expanding into the world marketplace is more likely
to adopt than a firm which does not so (t ¼ 2.29;
p < 0.01).
We also investigated the impact of economic
uncertainty caused by the 1997 financial crisis and
the political uncertainty caused by South Korea’s
confrontation with North Korea on e-business
adoption decisions by Korean SMEs. E-business
seems to have been perceived as a viable strategic
option for effective restructuring efforts during the
post-1997 financial crisis period, more favourably by
the e-business adopter group than the non-adopter
group (mean values, 3.20 for adopters vs. 2.93 for
non-adopters, with t ¼ 2.16; p < 0.05). A strategic
consideration of adopting e-business in preparation of
burgeoning transactions with North Korea in the near
future seems to have played a role in adopting
e-business by SMEs in Korea (t ¼ 1.96; p < 0.05).
Overall, two of the CEO characteristics (e-business
knowledge and innovativeness), three of the e-business
characteristics (compatibility/complexity, relative
advantage and adoption costs), one of the organi-
zational characteristics (employees’ e-business
knowledge), two of the environmental characteri-
stics (governmental support and a strategic consi-
deration of penetrating the global market), and
country-specific factors including the ongoing
process of restructuring Korean businesses after the
1997 Asian financial crisis and the North Korean
factor, turned out to be the important factors to
differentiate adopters and non-adopters of e-business
among small and medium sized firms in Korea.
Factors for the adoption of e-business 1911
Table 2. Determining factors for adopting e-business by SMEs in Korea: comparing means between adopters and non-adopters

Meana

Non-adopters Adopters
Determining factors (n ¼ 94) (n ¼ 110) t-value
CEO characteristics
CEO’s IT/e-business knowledge
CEO’s knowledge 1 2.91 (1.02) 3.84 (0.95) 6.65***
CEO’s knowledge 2 2.82 (1.02) 3.73 (1.11) 5.96***
CEO’s knowledge 3 2.76 (1.06) 3.85 (1.03) 7.37***
CEO’s attitude towards innovation
CEO’s innovativeness 1 2.76 (0.93) 3.51 (1.05) 5.35***
CEO’s innovativeness 2 2.77 (0.96) 3.52 (0.93) 5.64***
E-business characteristics
Compatibility and complexity
Compatibility 1 2.35 (0.79) 2.87 (0.84) 4.58***
Complexity 1 2.75 (0.83) 3.21 (0.88) 3.79***
Relative advantage and benefits
Advantage/benefits 1 2.89 (0.82) 3.46 (0.86) 4.81***
Advantage/benefits 2 3.10 (0.88) 3.34 (1.02) 1.83*
Cost of e-business adoption
Adoption cost 1 1.96 (1.28) 2.29 (1.06) 2.02**
Adoption cost 2 2.11 (0.92) 2.70 (1.22) 3.89***
Organizational characteristics
Employees’ IT/e-business knowledge
Employees’ knowledge 1 2.15 (1.33) 3.37 (1.33) 6.54***
Employees’ knowledge 2 2.91 (1.03) 4.05 (1.02) 7.85***
Business size
Business size 1 2.81 (1.14) 2.80 (1.16) 0.04
Business size 2 2.68 (1.13) 2.86 (1.04) 1.23
Environmental characteristics
Competitive pressure of the industry
Competition 1 3.68 (1.00) 3.89 (1.01) 1.51
Competition 2 3.67 (1.15) 3.76 (1.06) 0.58
Governmental support for e-business
Governmental support 1 1.04 (0.25) 1.51 (0.94) 5.05***
Governmental support 2 1.18 (0.59) 1.63 (1.09) 3.56***
Need of globalization of the firm
Globalization 1 3.47 (0.98) 3.60 (1.07) 0.93
Globalization 2 3.04 (0.97) 3.38 (1.07) 2.29**
Country-specific characteristics of Korea
1997 financial crisis and IMF bail-out 2.93 (0.86) 3.20 (0.88) 2.16**
North Korean factor 3.50 (0.81) 3.73 (0.75) 1.96**
Notes: Numbers in parentheses are standard deviations. t-tests were conducted on the means of the responses by the two
groups, adopters and non-adopters of e-business, under the assumption of unequal variances between the two groups when
the hypotheses of equal variances were not accepted.
a
All variables were measured on 1 to 5 scale. High scores mean very important, abundant, large and strong, while low scores
mean very unimportant, scarce, small and weak.
*p < 0.10; **p < 0.05; ***p < 0.01.

Regression analysis: the OLS model and
the logit model
To further investigate the major determinants of the
adoption of e-business by Korean SMEs in
the multivariate context and to obtain the best
predictive model of adoption, we conducted multiple
regression analyses. The specification of the multiple
regression model is:
Zi ¼ F1 ðPi Þ ¼
þ Xi þ "i
where the dependent variable, Zi, is a binary choice
variable of 1 or 0 for a respondent i: the value of 1
1912
for adopters of e-business, and the value of 0 for
non-adopters. A vector of Xi consists of the set of
explanatory variables representing the determining
factors of e-business adoption decisions by a firm
i, which include CEO characteristics, e-business
characteristics, organizational characteristics,
environmental characteristics and country-specific
characteristics of Korea. "i is a disturbance term.
A total of 10 composite variables of determining
factors were constructed by aggregating a respon-
dent’s scores for indicators used to measure each
factor, as described in Table 1.8 The aggregation of a
total of 21 sub-factors into the 10 composite factors
was statistically justified by showing internal consis-
tency of the factor measurement with relatively higher
Cronbach alpha coefficients. After examining the
pattern of the respondents’ reply, especially to open-
ended questions, we decided to include two additional
factors in the estimation – the 1997 financial crisis
and the North Korea factor – as country-specific
characteristics of contemporary Korea.
To account for the industry effect, we also included
a set of industry dummy variables in the estimation:
the service industry, the distribution industry, bank-
ing and finance, and others. The manufacturing
industry is used as the reference industry in the
regression. The category of ‘others’ includes the
companies that are not classified in any of the four
industry groups – service, manufacturing, distribu-
tion, and banking and finance – and unidentified
cases.
Before conducting the multivariate regression
analysis, we computed the bivariate correlation
coefficients among the 12 composite factors and
reported the results in Table 3. As the table
shows, there seem to be no serious threats to multicol-
linearity, with a maximum correlation of 0.54.
The table also reports the correlation coefficients
between each of the 12 composite factors and the
variable for the adoption of e-business (a binary
choice of 1 or 0: 1 ¼ adoption of e-business and
0 ¼ non-adoption of e-business). A high and statisti-
cally significant bivariate correlation implies a strong
association of the e-business adoption with relevant
B. N. Jeon et al.
composite factors, although it allows no conclusions
to be drawn with respect to the relative or joint
explanatory power of the composite factors.
Multivariate regression analysis therefore follows.
To find the probability that a small Korean firm
would adopt e-business, given specific information
on factors and environments facing the firm, we
estimated the linear probability (OLS) model and the
logit model. The logit model, which is estimated by
using the non-linear maximum likelihood estimation
method, measures the probability, Pi, that an SME
will adopt e-business, given information about a
variety of determining factors:
expð
þ Xi Þ
Prob Pi ðZi ¼ 1Þ ¼
1 þ expð
þ Xi Þ
where Zi ¼ 1 if SME i has adopted e-business and
Zi ¼ 0, otherwise; a vector of Xi is the set of
explanatory variables for determining e-business
adoption decisions by SME i. This logit model
remedies the limitation of the linear probability
model whose predictions may lie outside of the
(0, 1) interval for some sets of explanatory variables9
(Pindyck and Rubinfeld, 1998).
The results of the estimation are reported in
Table 4. Our models suggest that the important
determinants of the adoption of e-business by SMEs
in Korea include the CEO’s IT/e-business knowledge,
relative advantages and benefits, governmental sup-
port, globalization strategy and the North Korean
factor. The CEO’s attitudes toward innovation also
showed some evidence of association with e-business
adoption decisions by SMEs in Korea. Out of the five
groups of characteristics, CEO characteristics show
significant coefficients of estimation most consis-
tently. CEO involvement seems to be the key factor
in the adoption of e-business by SMEs in Korea.
For the successful adoption of e-business, small firms
need CEOs who are knowledgeable about IT and
e-business and are enthusiastic about adopting
technology innovation (DeLone, 1988; Harrison
et al., 1997). This finding is especially relevant to
SMEs in Korea, partly because there is usually no

8
The reliability and internal consistency of the composite measures were assessed by calculating the Cronbach alpha
coefficients. All the reliability coefficients were larger than or close to the generally accepted guideline of 0.70 (Hair
et al., 1995).
9
We also estimated the probit model, which showed similar results to the logit model reported here. The only difference
between the two is that the probit model is associated with the cumulative normal probability function in transformation in
order for the estimation of the dependent variable to get predictions inside the (0, 1) interval, while the logit model is based
on the cumulative logistic probability function. The logit and probit formulations are quite similar; the only difference is that
the logit has slightly fatter tails (Pindyck and Rubinfeld, 1998).
Table 3. Means, standard deviations, and correlations between e-business adoption by SMEs in Korea and independent variables (N ^ 204)

Variables Mean s.d. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
CEO characteristics
(1) CEO’s IT/e-business knowledge 3.33 1.02
(2) CEO’s attitude towards innovation 3.15 0.93 0.54**
Factors for the adoption of e-business

E-business characteristics
(3) Compatibility and complexity 2.76 0.75 0.39** 0.37**
(4) Relative advantages and benefits 3.17 0.81 0.40** 0.36** 0.54**
(5) Cost of e-business adoption 2.31 0.82 0.31** 0.23** 0.35** 0.36**
Organizational characteristics
(6) Employees’ IT/e-business knowledge 2.81 1.45 0.48** 0.43** 0.44** 0.42** 0.31**
(7) Business size 2.79 0.99 0.01 0.29 0.09 0.06 0.10 0.33**
Environmental characteristics
(8) Competitive pressure of the industry 3.35 0.60 0.16* 0.15* 0.95 0.11 0.19** 0.08 0.06
(9) Governmental support for e-business 1.36 0.75 0.30** 0.23** 0.18** 0.23** 0.29** 0.40** 0.32** 0.16*
(10) Need for globalization of the firm 3.20 1.06 0.19** 0.41** 0.18* 0.22** 0.16* 0.31** 0.21** 0.11 0.25**
Country-specific characteristics of Korea
(11) The 1997 financial crisis 3.06 0.89 0.06 0.21** 0.11 0.19** 0.10 0.18* 0.10 0.02 0.10 0.15*
(12) North Korean factor 3.65 0.78 0.01 0.17* 0.07 0.02 0.03 0.05 0.04 0.12* 0.06 0.02 0.07
(13) Adoption of e-business 0.54 0.49 0.51** 0.42** 0.38** 0.41** 0.23* 0.42* 0.05 0.10 0.31** 0.30* 0.14* 0.11*
Notes: The variable for the adoption of e-business is a binary choice of 1 or 0: 1 ¼ adopters of e-business; 0 ¼ non-adopters of e-business.
*p < 0.05; **p < 0.01.
1913
1914 B. N. Jeon et al.
Table 4. The determinants of the adoption of e-business by SMEs in Korea: estimation results of the linear probability (OLS)
model and the logit model
OLS model Logit model

Explanatory variables (1) (2) (3) (4)

Constant 0.73 (3.24)*** 1.24 (4.00)*** 8.19 (4.59)*** 12.29 (4.80)***
CEO characteristics
CEO’s IT/e-business knowledge 0.12 (3.15)*** 0.11 (2.69)*** 0.70 (2.90)*** 0.65 (2.48)**
CEO’s attitude towards innovation 0.05 (1.22) 0.08 (1.87)* 0.26 (0.99) 0.51 (1.80)*
E-business characteristics
Compatibility and complexity 0.06 (1.13) 0.03 (0.60) 0.43 (1.33) 0.37 (1.01)
Relative advantage and benefits 0.09 (1.89)* 0.09 (1.70)* 0.55 (1.87)* 0.53 (1.64)*
Cost of e-business adoption 0.02 (0.43) 0.01 (0.09) 0.14 (0.55) 0.09 (0.29)
Organizational characteristics
Employees’ IT/e-business knowledge 0.03 (1.18) 0.02 (0.52) 0.11 (0.64) 0.01 (0.06)
Business size 0.03 (0.81) 0.01 (0.14) 0.12 (0.55) 0.01 (0.06)
Environmental characteristics
Competitive pressure of the industry 0.03 (0.61) 0.02 (0.35) 0.10 (0.32) 0.07 (0.19)
Governmental support for e-business 0.07 (1.66)* 0.08 (1.69)* 0.72 (1.88)* 0.77 (1.91)*
Need of globalization of the firm 0.07 (2.31)** 0.05 (1.61) 0.49 (2.43)** 0.45 (2.08)**
Country-specific characteristics of Korea
1997 financial crisis and IMF bail-out 0.02 (0.48) 0.13 (0.57)
North Korean factor 0.11 (2.71)*** 0.81 (2.98)***
Industry dummies
Service 0.13 (1.79)* 0.17 (2.11)** 0.95 (2.02)** 1.20 (2.41)**
Distributors 0.12 (1.28) 0.15 (1.50) 0.82 (1.37) 1.16 (1.78)*
Banking and finance 0.07 (0.48) 0.13 (0.83) 0.19 (0.19) 0.46 (0.44)
Others 0.16 (1.75)* 0.12 (1.18) 1.06 (1.83)* 0.91 (1.40)
Number of observations 204 188 204 188
Log likelihood 92.60 83.56
Number of correctly predicted case 160/204 155/188
Prediction ratio 78.4% 82.4%
R2 0.38 0.39
Notes: The dependent variable is a binary choice of 1 or 0: 1 ¼ adopters of e-business; 0 ¼ non-adopters of e-business.
Numbers in parentheses are t-statistics. The prediction ratio is the percentage of cases predicted correctly by the regression
estimation. *p < 0.10; **p < 0.05; ***p < 0.01.

separation between the ownership and management
of a firm.10 CEOs are, therefore, owners of the firm
at the same time in most cases of Korean SMEs.
The statistically significant coefficient of the North
Korean factor seems to be consistent with the recent
observation of increased transactions between small
firms in South Korea and North Korea, especially
in IT and software industries.11 The statistically
insignificant coefficient of the 1997 financial crisis
variable may suggest that SMEs in Korea could not
adopt e-business, if not adopted yet, as their strategy
for market expansion, or mere survival, during the
post-1997 financial crisis period, possibly due to the
lack of financial resources and an adverse business
environment caused by the 1997 crisis. The industry
effect was controlled by including a set of the industry
dummy variables. Among them, the dummy for the
service industry shows a positive and statistically

10
Similar findings on the important role of CEOs/entrepreneurs in growth of the SMEs in other Asian countries have been
reported in the literature. For example, see Honjo (2004) for the empirical evidence of the CEO factor in the growth of new
start-up firms in the manufacturing industry in Japan.
11
For example, a South Korean venture firm, Ntrack Co., recently signed a venture contract with North Korea’s
Kwanmyongsung Trading Group to build an information technology complex in Pyongyang. The complex will be used to
foster North Korean IT manpower, develop software and engage in businesses like assembling electronic parts.
Factors for the adoption of e-business 1915
significant coefficient, reflecting that the e-business an opportunity for cultivating business opportunities
adoption rate is higher in the service industry than with North Korea, is more likely to successfully
in the manufacturing industry.12 adopt e-business in Korea. Business size, the cost of
The estimation results of the linear probability e-business adoption and competitive pressure of the
model and the logit model are very similar. The industry do not seem to play an important role in
regressions fit the data relatively well with an adopting e-business by SMEs in Korea.
R-squared of 0.38–0.39 and 78.4–82.4% of the Several policy implications can be derived from this
prediction ratio. The estimation results imply that a study. First, quality human resources appears to be
firm which has a more IT/e-business knowledgeable a key element for increasing e-business adoption by
CEO, expects significant advantages and benefits SMEs. The role of CEOs, who are well equipped with
from the adoption of e-business, receives large knowledge and positive attitudes toward innovation,
governmental support for e-business, puts more in adopting and expanding e-business by SMEs
emphasis on a globalization strategy using e-business cannot be overemphasized.13 Second, promoting
practices, and anticipates a more active usage of awareness of the relevance to and benefits of
e-business in business transactions with North Korea, e-business for SMEs, through information and
will have a higher probability of successfully adopting training programmes, seems very important to
e-business in its business operation. enhance e-business adoption by SMEs.14 Third,
the role of government is essential in promoting
e-business to SMEs in emerging economies, like
Korea. The government is expected to take the
V. Conclusion and Policy Implications initiative in providing infrastructure and subsidies,
removing barriers to e-business adoption by SMEs,
This study investigated the major determining factors and facilitating access to information and the global
for the successful adoption of e-business by SMEs marketplace for SMEs.15
in Korea using survey data. After a list of determin- Finally, e-business seems to have great potential for
ing factors was identified from the innovation facilitating business transactions between small and
adoption literature and country-specific characteris- medium sized firms in South Korea and North
tics of Korea, we conducted empirical tests to extract Korea, despite political uncertainty. The best candi-
the determinants and confirm their empirical evi- dates for an optimal form of joint venture or strategic
dence. The empirical results suggest that the impor- alliance between SMEs in the two Koreas seem to be
tant determinants of the adoption of e-business by the IT industry or e-business sector.
SMEs in Korea include the CEO’s knowledge of
IT/e-business, the relative advantages and benefits
from adopting e-business, governmental support for
e-business, using e-business as a globalization strat- Acknowledgments
egy for market expansion and the North Korean The authors wish to thank the Editor of this journal
factor. An SME which has a knowledgeable and and an anonymous referee for helpful comments and
innovative CEO, appreciates the relative advantages suggestions, H. J. Kwak for useful discussion, and
and benefits of implementing e-business, receives E. Y. Kwon for her assistance in the data collection.
significant governmental support, uses e-business An earlier version of the paper was presented at
as a strategic option for enhancing the degree of International Conference on e-Business, 2002, in
globalization of the firm, and foresees e-business as Beijing, China. This research was supported by the
12
In spite of the limited number of observations, we run a separate regression for the service industry to check the possibility
of different slope coefficients from the manufacturing or non-service industries. The estimation results show significant
coefficients on globalization, competitive pressures and the North Korean factor, and near-significant coefficients on CEO
knowledge and relative advantages and benefits.
13
A recent report by the Ministry of Commerce, Industry and Energy (MOCIE) of Korea forecast that the IT sector would
experience a manpower shortage of 55 000 and the e-business sector will be short of about 117 000 workers during the period
from 2002 to 2005 (Digital Chosun, 21 January 2002).
14
Lack of awareness of benefits and opportunities of e-business was found to be the most significant barrier to the usage of
e-commerce by SMEs in a number of countries including Korea (OECD, 1998).
15
Using cross-sectional data for 62 countries on Internet usage and e-commerce activity, Oxley and Yeung (2001) found that a
supportive institutional environment, particularly with respect to the rule of law, was essential for the development
of e-commerce, especially in emerging markets. Ein-Dor et al. (1997) found that the dominating factor explaining considerable
success in their IT industries in Israel, New Zealand and Singapore was government policy in promoting IT industries: most
importantly, subsidies to R&D and educational programmes.
1916
Soongsil University Research Fund. The paper was
completed while Kyeong Seok Han was visiting the
Wharton Entrepreneurial Program, University of
Pennsylvania, Philadelphia, PA 19104, USA.
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