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Internet Adoption by Small Firms - INTRODUCTION, BACKGROUND, INTERNET ADOPTION, Innovation (Technological) Factors, Organizational Factors, Environmental Factors, FUTURE TRENDS, CONCLUSION

technology support research business

Paul B. Cragg
University of Canterbury, New Zealand

Annette M. Mills
University of Canterbury, New Zealand


Research shows that small firms make significant contributions to their economic environment. With the significant advances being made in Information and Communication Technologies (ICTs), the Internet has become very important to many small firms, enabling them to overcome various inadequacies attributed to factors such as firm size, availability of resources and other technological, operational and managerial shortfalls. Despite the contributions that the adoption of Internet technology can make to the well being of such firms, research shows that many small firms have not yet embraced the technology in ways that will allow them to capitalise on potential benefits. It is therefore important for firms and researchers to understand the factors that enable (or hinder) the adoption of various technologies.


The adoption of a technology (in this case, the Internet) can be viewed as an innovation for a firm, where that technology represents something that is new to the adopting organization (Damanpour, 1991). Thus, adopting the Internet for e-mail could be seen as an innovation, so too Web browsing and engaging in electronic commerce (e-commerce) to sell or purchase goods. Innovation theory suggests that the adoption of an innovation may have a number of stages. For example, Zaltman, Duncan and Holbek (1973) suggested the adoption of an innovation may take place in two stages: the initiation stage, involving knowledge and awareness of the innovation, the formation of attitudes toward the innovation and decision making (i.e., whether to adopt the innovation); this is followed by the implementation stage, when the actual implementation of the technology takes place. Rogers (2003) proposed a similar view of adoption; namely, the innovation-decision process, which comprises the stages of knowledge , persuasion , decision , implementation and confirmation . It is at the decision stage that the organization determines whether to accept or reject the innovation.

An adoption can also be examined in terms of the ways in which the technology has been used. This view is especially relevant to Internet adoption, which can include simpler forms such as e-mail adoption and Web searching (without a Web site presence); or a firm’s Internet presence, whether the firm has a Web site that provides general information only or information pertinent to customers; or one in which Internet activity is an integral part of the firm’s business processes (e.g., Teo & Pian, 2003).


Whether one views the adoption of an innovation in terms of stages or the way in which a technology is used, such adoption is influenced (i.e., enabled or inhibited) by various classes of factors, innovation (technological) factors (e.g., perceived benefits, complexity and compatibility, including business strategy), organizational factors (e.g., firm size, technological readiness, IT support, management support, financial readiness) and environmental factors (e.g., pressure from clients, competitors and trading partners). Similar frameworks have been successfully used to identify factors that influence the adoption of various ICTs by small firms, including electronic data interchange (EDI) (Chwelos, Benbasat & Dexter, 2001; Iacovou, Benbasat & Dexter, 1995), the Internet (Mehrtens, Cragg & Mills, 2001; Poon & Swatman, 1999; Teo & Pian, 2003; Walczuch, Van Braven & Lundgren, 2000), e-commerce (Pearson & Grandon, 2004; Kendall, Tung, Chua, Ng & Tan, 2001; Raymond, 2001) and other ICTs (Thong, 1999). The following sections discuss these influences in more detail.

Innovation (Technological) Factors

Innovation factors include perceived benefits and compatibility (McGowan & Madey, 1998). Perceived benefits refers to the direct (e.g., operational savings related to internal efficiency of the organization) and indirect benefits (opportunities derived from the impact of the Internet on business processes and relationships) that a technology can provide the firm (Iacovou et al., 1995). Research shows that small firms expect to derive various benefits, such as improved communications, cost savings, time savings and increased market potential from Internet adoption, direct and indirect advertising, and internationalization (Chwelos et al., 2001; Iacovou et al., 1995; Kendall et al., 2001; Mehrtens et al., 2001; Poon & Swatman, 1997; Pollard, 2003; Walczuch et al., 2000).

For example, Mehrtens et al. (2001) identified the relative advantage of the Internet as a communication and business tool when compared to traditional methods of communication (such as telephones and faxes) as a key decision factor. The opportunity to present information on a Web site was also seen as an advantage over traditional forms of advertising and retailing. The concept of global sourcing of information also forms part of the relative advantage of the Internet.

On the other hand, concern that expected benefits (such as lower costs or greater efficiency) would not be achieved, mismatch between business strategy and Internet technology, and lack of direct benefits were factors that inhibit adoption among small firms (Chan & Mills, 2002; Cragg & King, 1993; Walczuch et al., 2000).

Compatibility describes the degree to which an innovation is perceived as consistent with the existing values, past experiences and needs of a potential adopter (Rogers, 2003). For example, research shows that compatibility with existing systems is positively associated with technology adoption (e.g., Duxbury & Corbett, 1996). Compatibility also includes the extent to which a technology aligns with the firm’s needs, including the alignment of a firm’s IT strategy with its business strategy (King & Teo, 1996; Walczuch et al., 2000). For example, research has shown that business strategy directly influences the adoption and integration of IT into the organization (Teo & Pian, 2003), and that without a corporate e-commerce strategy for guidance, firms may adopt non-integrated information systems with conflicting goals (Raghunathan & Madey, 1999).

Teo and Pian (2003) identified alignment with business strategy as the most important factor impacting the level of Internet adoption. For example, Walczuch et al. (2000) found that small firms were reluctant to adopt particular Internet technologies (e.g., Web site) where the firm believed that the technology was not compatible with its business purpose. Similarly, Chan and Mills (2002) found that small brokerages were reluctant to adopt online (Internet-enabled) trading where this was not regarded as compatible with business strategy. Firms that believed Internet-enabled technologies yielded benefits and were compatible with the firm’s values and needs were found to be earlier adopters of the technology, while firms that were not convinced regarding benefits and compatibility aspects of the technology tended to be later adopters, or reject the technology or perceive these factors as key inhibitors of adoption (Chan & Mills, 2002; Walczuch et al., 2000). Similarly, Pearson and Grandon (2004) found that compatibility was a key factor distinguishing adopters from non-adopters.

Organizational Factors

Organizational factors address the resources that an organization has available to support the adoption (McGowan & Madey, 1998). These include firm size, financial and technological resources (including IT support), and top management support. While some studies have focused on individual factors, some recent research has emphasized all of these organizational factors under the title of “dynamic capabilities” (Helfat & Raubitschek, 2000). Dynamic capabilities are firm-level attributes that enable firms to be innovative, for example, by introducing new products and processes and adapting to changing market conditions. Adopting new technologies like the Internet is one example of innovative activity. Firms with superior dynamic capabilities are better able to introduce and assimilate new technologies. Both Daniel and Wilson (2003) and Wheeler (2002) have applied dynamic capability perspectives to examining e-business in large firms. For example, Wheeler (2002) argues that specific capabilities, such as choosing new IT and matching opportunities to IT, have the potential to distinguish successful firms from less successful firms. Daniel and Wilson (2003) identified eight capabilities that distinguish successful and unsuccessful firms, including the ability to integrate new IT systems. The concept of dynamic capability, therefore, has the potential to be useful for understanding small firm adoption.

Firm size is also a key adoption factor; prior research suggests that smaller firms may be less likely to adopt e-commerce (Teo & Pian, 2003). For small firms that adopt information technologies, prior research identifies individual factors (within each of the adoption factor classes) as key drivers of Internet-enabled technology adoption research. These include alignment with business strategy, perceived benefits, relative advantage, compatibility, complexity, trialability, proactivity towards technology, organizational support, financial readiness, technological readiness, IT knowledge of non-IS professionals, management support, CEO attitudes, internal and external IS support and external pressure (Chan & Mills, 2002; Chwelos et al., 2001; Cragg & King, 1993; Pearson & Grandon, 2004; Iacovou et al., 1995; Kendall et al., 2001; Mehrtens et al., 2001; Thong, 1999).

Firm size not only impacts a firm’s ability to adopt Internet technology but also the level at which a firm is likely to adopt the technology. For example, Teo and Pian (2004) found that while larger firms tend to adopt Web technology at higher levels, small firms tend to adopt the technology at the lower levels of e-mail, establishing a Web presence and providing limited Web services, such as information provision and some product access to customers.

Financial support refers to financial assistance from within or outside the firm’s resources (e.g., loans and subsidies) that equip the firm to acquire Internet technology. Access to sufficient financial resources is generally acknowledged as a factor that enables adoption. For example, only firms that have adequate financial resources are likely to adopt IT (Pearson & Grandon, 2004; Iacovou et al., 1995; Thong, 1999). Although the cost of technology adoption can vary widely, limited financial resources can inhibit uptake, especially for small firms. For example, research shows that the cost of development and maintenance, concerns over expected benefits (such as lower costs or greater efficiency) and inadequate financial resources are factors that may slow or inhibit adoption among small firms (Cragg & King, 1993; King & Teo, 1996; Walczuch et al., 2000). Although, Mehrtens et al. (2001) found no significant relationship between adoption and financial support, this was likely because firms could readily afford the cost of adopting the Internet at a basic level. Similarly, Chan and Mills (2002) explored a more costly adoption (i.e., online stock trading), but found insufficient evidence to conclude whether financial readiness was a key factor. Nonetheless, it is reasonable to expect that having access to adequate financing is a critical step in the adoption process and in determining the level of adoption.

Technological readiness includes internal IT sophistication and access to external IT support. Internal IT sophistication refers to the level of sophistication of IT usage, IT management and IT skill within the organization (Iacovou et al., 1995). For example, research has found that firms that are more IT sophisticated (e.g., have a formally established IT department and other IT assets, such as IT knowledge and IT capabilities) are more likely to adopt technologies such as EDI and e-commerce technology (Iacovou et al., 1995; Lertwongsatien & Wongpinunwatana, 2003). CEO knowledge of IT has also been identified as a key factor influencing adoption and the championing of IT (Bassellier, Benbasat & Reich, 2003; Thong, 1999), while lack of knowledge appears to inhibit uptake (e.g., AC Nielson, 2001).

External IT support refers to IT-related assistance received from outside the firm (e.g., external consultants). Since small firms in particular often lack access to sufficient internal IT resources, external support is a key enabler of technology adoption (e.g., Cragg & King, 1993; Pollard, 2003; Raymond & Bergeron, 1996). For example, research suggests that strong support from external technical sources may lead to or accelerate Internet adoption (Chan & Mills; 2002). A study of Internet non-adopters also showed that lack of IT expertise, lack of employee IT knowledge and skills, lack of business relevance and concern that staff would waste time surfing were reasons for not adopting the Internet (Teo & Tan, 1998).

Top management characteristics and support . Researchers argue that top management characteristics and top management support of an innovation could lead to adoption or early adoption (King & Teo, 1996; Raymond & Bergeron, 1996). For example, top management characteristics such as CEO knowledge of IT, CEO values and CEO attitude towards an innovation are considered important factors influencing IT adoption (Bassellier et al., 2003; Thong, 1999). The support of a top management champion can have a positive impact on adoption (e.g., Mehrtens et al., 2001). For example, Chan and Mills (2002) found that the strong commitment of top management led to early adoption, while lack of top management commitment inhibited adoption. On the other hand, while research suggests that top management support is a significant determinant of a firm’s decision to adopt a technology, the non-significant findings regarding its influence on the level of adoption may suggest that top management support does not directly influence the level of adoption (Teo & Pian, 2003; Thong, 1999).

Environmental Factors

The environmental context includes external pressures and support for technology adoption. For example, research shows that external pressures most often derive from competitors, clients and trading partners (including suppliers and contractors), and other characteristics of the marketplace such as legal requirements (Iacovou et al., 1995). For example, the e-commerce adoption decision of traditional firms may be influenced by other “e-commerce-able” firms (Chircu & Kauffman, 2000). Similarly, small firms with close and significant trading relationships with EDI initiators may feel pressured to adopt EDI in order to maintain their business relationships, even to the extent of adopting the EDI vendor recommended by their trading partner without further investigation (Chen & Williams, 1998). Chwelos et al. (2001) also found that competitive pressure was the single most important factor contributing to EDI adoption.

Raymond (2001) suggested the ways in which small firms used Internet-based technologies were determined by the environment in which these firms operated. In a study of small firms in the travel industry, Raymond found that environmental pressures derived from a need to imitate competitors, coercive pressure from suppliers and business partners, and the expectations of a sales or promotional presence or a Web site presence for current and potential customers.

Mehrtens et al. (2001) also found that the pressure to adopt the Internet came from other Internet users, typically from customers or potential customers; this was expressed more as an expectation that the organization have an e-mail address and a Web site rather than as a specific pressure factor. There was also an expectation that the organization be active on the Internet, including regular browsing and being as up to date as clients. Contrary to other research (e.g., Chwelos et al., 2001), the firms studied by Mehrtens et al. (2001) did not indicate that their adoption of the Internet was influenced by competitors. However, as the Internet gains in popularity, this pressure to adopt could be felt by small firms who are slow to adopt the Internet. Similarly, Rogers’ (1991) diffusion study suggested that interactive technology had zero utility until other individuals had adopted the technology as well, so until a critical mass of adopters was achieved, the rate of adoption would be slow.

Government initiatives and support as well as support from non-competitive industry players may also encourage adoption (e.g., Pollard, 2003; Scupola, 2003). For example, Scupola (2003) found that government interventions by way of subsidies, state support, financial incentives (e.g., tax breaks) and training encouraged e-service usage. Changes in public administration operations (e.g., using the Internet to provide citizen and company information or administer tax systems) were also found to encourage Internet adoption.


Mehrtens et al. (2001) found that even small firms in the IT sector lacked sufficient knowledge to rapidly adopt the Internet. As such, the greater mass of small firms without such IT awareness can be expected to take even longer to adopt various Internet technologies. This suggests there are business opportunities to assist small firms to adopt Internet technologies. For example, Lockett and Brown (2000) indicate the potential role for firms to act as intermediaries to assist the formation of “eClusters,” a relatively new business model enabled by the Internet where one or more intermediaries do much of the computing for a group of related small firms. Such intermediaries could address numerous IT management tasks (e.g., the determination of needs, selection implementation and operation of hardware and software), enabling firms to concentrate on core business activities rather than carry out IT management themselves.

There are also opportunities for further research into Internet adoption by small firms. In particular, while most studies focus on adopters, only a few studies include non-adopters (Chan & Mills, 2002; Mehrtens et al., 2001; Teo & Tan, 1998) or address the decision not to adopt the Internet. Although some research has investigated post-adoption satisfaction (Liu & Khalifa, 2003), little is known about Internet post-adoption stages, including implementation. In-depth longitudinal case studies of individual firms could also add significantly to current understanding.

There are also opportunities to examine each type of influence in-depth by focusing on individual factors. For example, research indicates that business strategy is a key determinant of Internet adoption. However, many small firms do not have a particular Internet strategy, despite their expectation of particular benefits, such as advertising, marketing, enabling customer feedback and globalization (Webb & Sayer, 1998). A study of organizational readiness could also help determine how a firm attains the desired level of IT use and IT knowledge for Internet adoption.

There is also a need to extend small firm research to include the development of a predictive adoption model. Furthermore, most studies of small firm Internet adoption have focused on relatively simple applications of the Internet (e.g., e-mail, Web browsing and Web site presence). There has been little study of more sophisticated applications of business-to-business (B2B) and business-to-consumer (B2C) e-commerce involving transactions over the Internet (Brown & Lockett, 2004). It is likely that different factors (such as firm size, IT expertise and financial readiness) may have a greater influence on the adoption of these more sophisticated applications.


Research has shown that innovation factors, organizational factors and environmental factors are significant factors influencing small firms’ decision to adopt the Internet. More specifically, such research identifies perceived benefits (including relative advantage), compatibility, technological readiness, firm size, top management characteristics and support, and the influence of customers, trading partners, competitors and government as factors influencing the small firm adoption decision. However, as many small firms have not adopted sophisticated Internet technologies, a major research opportunity exists to improve our understanding of how small firms can successfully become more sophisticated users of the Internet.

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