Small and Medium Enterprises and ICT/Concepts and Definitions

Small and Medium Enterprises and ICT

List of Acronyms — Forword — Overview — Concepts and Definitions — SME Adoption of ICT — General Policy Framework for ICT Adoption by SMEs — Specific Policy Recommendations for Governments — Suggestions for Further Reading — Works Cited — Notes — About the Author

What are SMEs?

SMEs are usually enterprises that employ no more than 250 employees. The technical definition varies from country to country in the Asia-Pacific region but is usually based on employment, assets, or a combination of the two. Some countries have different definitions for SMEs in the manufacturing and services sector and may exempt firms from specialized industries or firms that have shareholdings by parent companies. Figure 1 illustrates the range of SME definitions in the Asia-Pacific region.

Figure 1: Sample of SME Definitions in the Asia-Pacific Region

Source:White Paper on Small and Medium Enterprises in Taiwan, 2006. http://www.moeasmea.gov.tw/eng/2006whitepaper/2006white.asp

Why are SMEs important?

The only way to reduce poverty in a sustainable way is to promote economic growth, through wealth and employment creation. In developing countries, SMEs are the major source of income, a breeding ground for entrepreneurs and a provider of employment. UNIDO, WSIS Report, February 2003

SMEs are important because on average, they comprise over 95 percent of the economy. Figure 2 illustrates the importance of SMEs to the national economy in a sample of countries from the Asia - Pacific region. The contributions of SMEs to employment and the countries' gross domestic product (GDP) are by no means trivial. As of July 2006, close to 140 million SMEs in 130 countries employed 65 percent of the total labour force.[2]

Figure 2: Comparison of the Composition of SMEs in the Asia-Pacific Region3

Source:White Paper on Small and Medium Enterprises in Taiwan, 2006. http://www.moeasmea.gov.tw/eng/2006whitepaper/2006white.asp

Moreover, SMEs are the driver of economic growth and innovation. Figure 3 describes both reinforcing dynamics. The total number of SMEs in the economy depends on the rate of SME creation and rate of SME destruction. Profitable market opportunities increase the rate of SME creation. This increases the total number of SMEs in the country, which increases job creation and income per capita.As people become wealthier,they will increase their consumption,which in turn will open up new market opportunities that will entice the creation of more SMEs. Contrary to multinational corporations, the growth of SMEs directly benefits the country because most SMEs are domestic firms.This reinforcing dynamic generates economic growth.

The reinforcing loop of innovation also drives economic growth. As the number of SMEs increases, their knowledge of their product and industry increases. Their knowledge allows them to innovate on the product or process, which helps them form a competitive advantage to generate more profits.Again,market opportunity as captured by the profitability of SMEs will encourage more people to establish their own SMEs to capture the opportunity.

In addition, the development of SMEs can also help to achieve other development goals. SMEs can either provide goods and services in areas critical to development, such as health and education, or provide a source of income to disadvantaged people. For example, efforts to develop women entrepreneurs help increase gender equality by providing women with a source of income.

Figure 3: SMEs are a Driver of Economic Growth and Innovation

How Has the Knowledge-Based Economy Impacted SMEs?

For countries in the vanguard of the world economy, the balance between knowledge and resources has shifted so far towards the former that knowledge has become perhaps the most important factor determining the standard of living – more than land, than tools, than labour. Today’s most technologically advanced economies are truly knowledge-based.

World Development Report, 1999

Countries in the world are moving from an industrial economy to a knowledge economy in which economic growth is dependent on a country’s ability to create, accumulate and disseminate knowledge. Computers and the Internet catalyzed the growth of the knowledge economy by enabling people to codify knowledge into a digital form easily transmitted to anywhere around the world. People who have access to this new wave of ICT – broadly defined as technology that can be used for transmitting and/or processing information – are part of an information society connected to a virtual network that constantly creates and disseminates new information. ICT has sped up the pace of globalization and increased the complexity of business practices because firms not only need to be familiar with their local context but also with global developments. Thus, to compete in the knowledge economy, countries need a strong ICT-literate skills base that can innovate and adapt quickly to change. More value is placed on the knowledge worker than ever before. Knowledge, change and globalization are the driving forces of the new economy.

The knowledge economy has impacted SMEs both positively and negatively. On the positive side, because the knowledge economy relies heavily on ICT, it has led to the rapid growth of ICT sectors.Many countries such as India, the Republic of Korea and Taiwan have created enabling environments to ensure that SMEs are well positioned to capture these emerging business opportunities. India, for example, offered relief from import duties for IT hardware, tax deductions for income earned from software exports, and tax holidays, and developed infrastructure in Software Technology Parks.4 India’s thriving ICT sector has in turn propelled the country’s economic growth.SMEs outside the ICT sector have also benefited by adopting ICT in their own operations, enabling them to communicate quickly, increase productivity, develop new business opportunities, and connect to global networks. Conversely, the reliance on ICT in the knowledge economy means that those SMEs who have not yet adopted ICT will have trouble surviving.For example, 60 percent of Intel’s material orders are now done electronically.5 With e-procurement becoming mainstream in developed countries, SMEs that do not have that capability will not be chosen as business partners. Additionally, SMEs that have not adapted to the faster pace and increasing complexity of the way businesses are conducted will lose out to the increasing competition brought about by globalization.

Box 1: B2B Marketplace Opens New Buying and Selling Opportunities Alibaba.com6
Alibaba.com is the largest online marketplace for both international and domestic business-to-business (B2B) exchanges in China. In August 2005, Yahoo! paid USD 1 billion for 40 percent of Alibaba’s ownership stake. Alibaba International caters to SMEs interested in international trade. It has one million registered SMEs from over 200 countries and territories with more than 300,000 visitors per day. It was ranked by Alexa, which conducts independent web traffic ratings of websites around the world, as the world’s most popular site in the categories of Import-Export and International Business and Trade. Alibaba also has a B2B portal for domestic businesses (http://www.china.Alibaba.com).With over 6 million registered users that are verified by a third-party credit agency, it is the largest online SME community in China. Members pay an annual subscription fee that entitles them to post offers on the website.SMEs do not need sophisticated ICT tools to join the community; only Internet access, email, and basic use of web browsers are required. SMEs have a strong incentive to have the basic ICT capacity to join the network because it offers them a wealth of buying and selling opportunities. Alibaba overcame the online payment security problem by creating AliPay (http://www.Alipay.com), a proprietary fraud prevention system that allows any individual or business with an email address and credit card to make transactions online. AliPay partners with leading banks in China including China Merchants Bank, China Construction Bank, Agricultural Bank of China, and the Industrial and Commercial Bank of China.

How do SMEs use ICT?

SME usage of ICT ranges from basic technology such as radio and fixed lines to more advanced technology such as email, e-commerce, and information processing systems (see Figure 4). Using advanced ICT to improve business processes falls into the category of e-business.7 However, not all SMEs need to use ICT to the same degree of complexity. The first ICT tool that most SMEs adopt is having basic communications with a fixed line or mobile phone, whichever is more economical or most convenient for their business.This allows the SME to communicate with its suppliers and customers without having to pay a personal visit. After acquiring basic communication capabilities, the next ICT upgrade is usually a PC with basic software. Even without Internet connectivity, SMEs can use PCs for basic word processing, accounting, and other business practices. With the Internet, SMEs are able to use more advanced communications capabilities such as email, file sharing, creating websites, and e-commerce. This may be sufficient for most SMEs, especially those in service industries such as tourism. SMEs in manufacturing may adopt more complex IT tools such as ERP software or inventory management software. SMEs may adopt the tools progressively or jump immediately to advanced ICT capabilities.

Figure 4: Progression of ICT Adoption

Box 2: Mobile Phone Use Transforms Business
The use of mobile phones has helped many entrepreneurs reduce costs and improve business processes. In many developing countries, farmers now use mobile phones to find best prices for their produce. In a recent study by Harvard University, Professor Robert Jenson found that the use of mobile phones reduced waste by 4.7–6 percent and reduced price dispersion by 63–86 percent in the sardines market in Kerala.8 Some South Africans and Kenyans have actually tied mobile phones around the necks of elephants to track them in the jungles. According to Professor Wouter van Hoven of the University of Pretoria’s Center for Wildlife Management, using mobile phones can reduce the cost of tracking wildlife by 60 percent.9

What Types of Advanced ICT Products are SMEs Starting to Use?

Like any firm, an SME decides which type of ICT products to adopt based on the concrete benefits they can bring to its core business, the ICT capacity of its employees, and the financial resources available. Most people are familiar with basic ICT such as fixed phone lines, mobile phones, fax, computers, and basic document processing software – like Microsoft Office. Advanced communication technology, however, is more complex. Advanced communication technology relies primarily on the Internet and the intranet, whichallow people within the firm to share files with each other over the same network. Having Internet connectivity enables firms to do faster research, set up websites, conduct e-commerce, and set up video conferences. One of the most revolutionizing developments in advanced communication technology is Voice over Internet Protocol (VoIP).VoIP includes all types of voice communication transmitted through the Internet, whether it is between computer and computer or in hybrid form between computer and regular phone. It competes directly with traditional fixed line and mobile phone operators.Users only pay for their dial-up, broadband, or wireless Internet connection. iSuppli, a market-research firm, estimates the number of VoIP residential users worldwide will reach 197 million by 2010.10

Box 3: Skype Revolutionizes Communication Technology
Skype (http://www.skype.com) is one of the most popularly used VoIP programmes. It allows users to talk for free over the Internet after downloading a simple free programme onto their computers. Skype also offers additional services for a low price. To connect with parties who use ordinary phones, Skype offers at a lower price ‘Skype In’, which allows people to call a Skype user with a regular phone, and ‘Skype Out’, which allows a Skype user to call a regular phone (starting from USD 0.02 per minute). Skype’s growth has been astounding. In less than three years, it has attracted over 54 million worldwide subscribers, of which about 30 percent – primarily SMEs – use Skype for business purposes.11 eBay acquired Skype for USD 2.6 billion in cash and shares in September 2005.

Most complex of all is advanced IT. It is often very expensive, sophisticated and takes more time to implement by a firm. SMEs can sign up for one or all available services. In order to reduce costs, some firms opt to outsource this component or use an application service provider (ASP) that provides functional software capabilities over the Internet. Figure 5 lists the major types of products.

Figure 5:Major Products of Advanced Information Technology
Enterprise Resource Planning (ERP) ERP offers a single repository for information on all business functions – human resources, manufacturing, inventory, marketing, sales, accounting, and tax. It allows all levels of a business to obtain real-time management information for their area of responsibility.
Customer Relationship Management (CRM) CRM software integrates people and technology to maximize external relationships. Functionality includes: sales contact management, activity history, order entry, customer service and support, field service, lead generation, data mining, etc.
Supply Chain Management (SCM) SCM software helps streamline the procurement of raw materials and delivering of finished products. It helps to decrease error rates, delays, and to increase efficiency. e-Procurement is often a part of SCM.
Enterprise Application Integration (EAI) EAI integrates different types of ERP and other software systems through a common problem in order to synchronize the processing, storing, and transmitting of information.
Rapid Prototyping and Manufacturing (RPM) Over the next 20 years, RPM will have a profound effect upon the global manufacturing technology. RPM can reduce the new product design phase from 90 days to just three days. It is still an infant industry based upon newly invented technologies, but it is apparent that RPM will dramatically reduce the cost and time required to convert a new product design to a practical manufacturing process.
Knowledge Management (KM) KM systems help a firm to better organize and share the knowledge of its employees. They help the firm take better advantage of its human resources.