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The Impact of E-Commerce on Labour Productivity in Iranian Manufacturing SMEs

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The Impact of E-Commerce on Labour Productivity in Iranian Manufacturing SMEs
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  Middle-East Journal of Scientific Research 15 (7): 1005-1020, 2013ISSN 1990-9233© IDOSI Publications, 2013DOI: 10.5829/idosi.mejsr.2013.15.7.2001 Corresponding Autor: Sarvenaz Hojabr Kiani, Chinnasamy Agamudai Nambi Malarvizhi Faculty of Business,Multimedia University, Malaysia. 1005 The Impact of E-Commerce on Labour Productivity in Iranian Manufacturing SMEs Sarvenaz Hojabr Kiani, Elsadig Musa Ahmed  Chinnasamy Agamudai Nambi Malarvizhi Faculty of Business, Multimedia University, Malaysia Abstract: This study determines the impact of E-commerce (EC) on labor productivity of Iranian manufacturingSMEs through analyzing and calculating interrelated issues. The model is based on both econometrics andgrowth accounting approach to fill the gaps of previous studies. On the first step, this research fulfills the gapof growth accounting by transforming the model to parametric model and providing statistical analysis. Andon the second step, it closes the gap of econometric estimation of the Cobb-Douglas production function bycalculating productivity indicators. This research applies Intensive growth theory to express growth in output per worker. Model has six EC measurements: number of employees using computer, number of employees usinginternet, using internet to gather and offer information, e-buying and e-selling and uses two years panel data.Labor productivity of the Iranian manufacturing SMEs in this study showed significant increase in the usageof some of the EC measurements where there wasn’t any effect on the others. The results showed that e-selling,using internet to offer information and number of employees using internet had positive impact on labor  productivity indicated by highly significant coefficients of EC. Three other measures of EC (number of employees using computer, e-buying and using internet to gather information) did not have any significantimpact. This can be appointed to the quality of labor involved in these manufacturing SMEs. There are unskilledlabors and family owners in these enterprises who still follow traditional methods in some of their productionand other systems which can be the reason that the effect didn’t show up in some cases. Key words: E-commerceSME Labor Productivity Human capital Panel data INTRODUCTION Small and Medium Enterprises (SME) as the Nowadays,convergence between information andconsiderable contribution to economic development of  businesses offers new kind of business whichisdeveloped and developing countries. The majority of calledElectronic-commerce (EC).Depending on the way ofmanufacturing enterprises in Iran are SMEs [5]. Duringusage;1.5 billion people’s life and their socio-economic90th, some Iranian SMEs tried to have EC in their standingsare under influence of internet [1]. Due to thebusiness by using online transaction and communication;fact that the outcome of this technological progress couldor even providing diligent online services [6]. SMEs be higher employment, lower inflation, productivityglobalization through E-commerce and rapid ches ingrowth and may be Gross Domestic product (GDP)technology generates many new opportunities for growth,some experts have called such circumstances asbusinesses. This matter has, also, some risk for businessa New Economy. New Economy describes an economyenvironment [7].which intensely uses innovative or new technologies [2]Due to the regional strategic importance of Iran in thesuch as EC. EC has been accepted as one of the potentialMiddle- East, adaptation and using EC could make moremeasures which could improve effectiveness andbenefits for Iranian SMEs and affect their productivityefficiencyof the firms operation [3]. It can be a majorwhich is Iranian government’s concerns [8]. Moreover,component in countries’ performance andincreasing productivity of SMEs through adoptionof competitiveness which could lead to the economic growthEC, can affect many economic factors such as production,[4].trade, competition and employment. Therefore, most backbone of the private sector can havea   Middle-East J. Sci. Res., 15 (7): 1005-1020, 2013 1006developingcountries including Iran are seeking for a roadreveals the importance of having individual research onmap to increase productivity and reach higher economiceachcountry. According to OECD [21], EC has threegrowth.stages;E-readiness, E-intensity and E-impact. E-impact isThe importance of SMEs in Iran revealed whenwhat this study looking at and is the value addedunexpected reduction in the oil price occurred afterpotentially created by EC. Statistics are needed tomid-July2008. Iran experienced GDP growth, in spite ofevaluate whether and to what extent EC makesathat its economy was based on oil resource. It is believeddifference in terms of efficiency and/or the creation of newthat the GDP growth in Iran was the result of highsources of wealth. performance of non-oil sector. Therefore, the governmentMaliranta and Rouvinen [22], Hagen and Zeed [23]decidedto rely more on private investment andand Farooqui [24], studied the impact of ICT ondeveloping of non-oil sector. Manufacturing industry ofproductivity and used capital and labor in their models inIran had highest average labor productivity growthwhichthere is no mention of human capital and material.(9.9 percent) compared to the other industries duringAtrostic and Nguyen [25, 26]; Criscuolo and Waldron2000- 2005. [27], OECD [4] expanded the model by using the materialIn populous Asian economies, like Iran, where theyin their models but still have a gap for human capitalhave plenty of unskilled or low skilled labor, there isausage. Hojabr Kiani andBagheri [28] used the proxy of tendency to use more labor in production which iscapital at the industry level to estimate the impact of ICTrelatively cheap and has higher supply. Yet, nowadaysonlabor productivity and wage in Tehran province productionlines are increasingly globalized and there isindustries in Iran. They selected their sample from three-nojustification for low skilled labor intensive productiondigit ISIC codes. The short comings of the study is: (1)with little capital usage. Production lines and supplythey only worked on Tehran provinces, (2) due to the lack chainsare designed to demand more skilled labors withof data they distributed a limit number of questionnaireshigher productivity.(i.e. for only one province), (3) their proxy of capital stock The developed countries experience greatwascalculated by using depreciation rate at country levelcontribution of ICT on the economic growth and someand (4) due to the lack of data then they worked withstudiesshow the impressive impact of EC in terms ofcross sectional data for the year 2002. This study has productivity growth [9, 10]. This transforming technologyshown the impact of ICT on industry level, but doubtshasnot had the same result in developing countries. Forhave been raised about microeconomic view and labor example, Malaysian economy is input-driven instead ofmarket in particular and especially on EC point of view. beingTFP driven, according to Elsadig [11]. Therefore, itIn developing countries, SMEs increasingly try tois impossible to expect the same result of ICT and ECuse technology as an effective factor and strategy tousage in different countries. The existing literatures onreach international markets [29] and EC has a greatdeveloping countries are mostly about the contribution ofpotential for growth simulation, cost reduction and jobICT on different economic factors [11-14]. Moreover,creation [19,20]. SMEs have critical role in countries’comparingto developed countries, where there is a higheconomy including developing countries. SMEs arelevel of data availability, literature on this subject incontributing in economic growth, social structure anddeveloping countries, such as Iran is restricted by lack ofemployment; so they are becoming important ininformationand data. According to Mohamad et al  .economical environment. Moving through globalization[15, 16], most of the studies on developing countries areandnew technologies like internet and E-commerce can basedon upstream issues which are e-readiness, adoptioncreate new opportunities for SMEs [30].There are severaland diffusion [17, 18 and 6], yet there are limited reportedstudies nothing that E-commerce can bring aboutstudies and research on downstream aspect of EC, namelyadvantages such as cost reduction [31,32] or evenimpact. Although, some studies [19, 20] have beenincrease competitiveness [33] and lead-time reductiondone based on EC, lack of concern on quantitative[32]. Some researchers claim that E-commerce can reduceapproaches is visible. Therefore, there is a gap betweeninventory overheads and supply real-time to SMEs [34].empiricaland theoretical studies on downstream issues onThe Industry sector in Asia has been main driver of ECin developing countries like Iran. Yet, there is noAsian aggregate labor productivity. Iran, being a member comprehensive study about the impact of EC on economicof Asian Productivity organization (APO), has enjoyedfactorsin these countries including Iran. This issuelabor productivity growth which was much higher than   Middle-East J. Sci. Res., 15 (7): 1005-1020, 2013 1007employment rate [35]. The purpose of this paper is tomarginal product of the factor. Under the growthstudy the impact of EC on labor productivity in Iranianaccounting framework, all incomes are treated asSMEs. The paper organized as follows: next section givespayments to production factors. Given this condition,a brief review of literature. In section 3, methodology andgrowth rate of output equals to the average weightedmodelsare explained. In section 4, data collection andgrowth of production factors, plus the growth which isestimation procedures are described. Section 5, includesnot taken into account. The ignored growth is total factor resultsand discussion. Finally, the last section is devotedproductivity (TFP). Therefore, as is mentioned by manyto the conclusion of the paper.researchers, total productivity remains as a measure of our  LiteratureReview: Over two centuries ago, the termtaken into account by the firm’s costs. This is really the productivity was used by Quesnay (1766) and from thatportion that is called Solow’s residual [42- 44]. This issuetime it has been applied to various situations in differentled to a well-known claim by the Nobel Prize winner levels in relation to economic systems [36]. ProductivityRobert Solow [45], known as Productivity Paradox: “Yourepresents one of the most important basic variablescan see computer age everywhere, but productivity”.governing economic production activities [37].Despite of huge investment in U.S and other According to Quah [38] knowledge-driven new economycountries in late 1990’s, due to the productivity paradox,can effect production (supply side) and consumptionthe productivity benefit of the investment was not(demand side).The growth accounting model assumessignificant [46]. For this phenomenon, economists and ITthatinvestment in ICT has its impact on output throughresearchers have different claims and reasons. Accordingcapital-deepening. This means that labors have access toto David [47], existing considerable time lags betweencommunication equipment are more efficient compared toinvestment and its return is the main reason for thethosewho do not have access. In this framework ICTproductivity Paradox due to the structural changes in firmcapital is an additional input in production function.or industry, while Griliches [48] points to measurement Nowadays, ICT and especially EC, becomesaproblem (especially in services sector). Oliner and Sichelcommon issue in both developed and developing[49,50] believe that investment in IT Compared to totalcountries [39]. Also, EC becomes important for enterprisesinvestment has been insignificant, despite of increase inin their economies and development. EC activities requireIT investment. Brynjolfsson and Hitt [51] blame themore artists, designers, writers or even editors. Thissmallness of the sample size due to the shortage of informatics revolution makes the possibility ofinformation.outsourcing jobs which could be a good opportunity forRecently some analysts claim that in growthemploymentsand help to develop countries [20].In fact,accounting models, computed coefficients of the costsECis a part of the widespread transformation process(income) share, are smaller than their correspondingwhichis created by information and communicationcoefficients, estimated econometrically. In other words, if technology.EC is part of investment in ICT. Cohen andthe coefficients are estimated (econometrics) instead of Kallirroi [40], concentrated on the basic elements of ICT,computed (growth accounting), ICT capital deepeningemphasized and reminded that they are also applied to EC(more capital per labor) is an important factor for the project evaluation.growth of labor productivity in econometric models. ThisThefirst wave of empirical analysis on the impact ofdifferent result may be related to the ICT spillover effectICT or EC on productivity showed no signs of computer’swhichis hidden in growth accounting approach, while inimpact on production increase. The growth accountingeconometric models appears in estimated elasticizes.methodology has been used in many studies related toSince, ICT goods and services are both the ICTdirect effect of ICT or EC on production. Growthindustries’ output and inputs [52], production and usingaccounting framework attempts to break down the growththe ICT, increases the productivity in the sectors that doinoutput into that stemming from changes in inputs andnot produce ICT and hence increase total productivitythatfrom productivity. Typically the framework is based(spillover effects).The methodologies for measuring ICTona production function [41].Based on this approach; theshare in productivity growth are mainly based on theoutputs can be obtained, using the services of differentinitial work of Solow [45], Jorgenson and Griliches [53]inputs. The cost minimizing firm will continue to use itswhich accordingly have been expanded by Oliner,inputs, until marginal cost of each factor equals to theSichel [50] and Jorgenson and Stiroh [54]. One of ignorance, i.e. part of the growth that is not explicitly   Middle-East J. Sci. Res., 15 (7): 1005-1020, 2013 1008these methodologies is Inclusion of e-commerceeffective in obtaining the contradictory results from themeasures, such as, sale, purchase and sale and purchaseindustry and firm-level studies. They estimatedaovercomputer mediated networks in economic modelsgeneralized model by using panel data at firm-level and[27,55,25, 26,22,56,23 and 24].showed that spillover effect is significant factor. SomeThere are four sources of labor productivity growth.studies show that EC had an impressive performanceThe first one is ICT capital deepening, i.e. the shareparticularly in terms of productivity growth [10].weighted increase of ICT capital services per hourBresnahan et al  . [59] found that hardware capital hadworked. The second source is the share weightedsignificantly positive effect on productivity, using 331deepening of other capital. The third component is thefirm’s panel data in U.S. they report the positive effects of improvement in labor quality which is defined as thethe ICT capital and skill on value added.difference between the growth rates of labor services andWaldron and Criscuolo [27] studied the impact of hours worked multiplied by labor’s income share.various measures of e- commerce on productivity inaThe fourth source is a general advance in multi-factorresearch titled e-commerce and productivity. This productivitywhich increases labor productivity point forresearch is very similar to the work done by Clayton et al  . point [57]. Van Leeuwen and Wiel [43] tried to justify the[55] at firm-level in England. It covers only thedifference between results based on the growthmanufacturing sector due to the lack of information on theaccounting and econometrical model, by defining andcapital stock in services sector. They found a positiveadding the ICT spillover variable as a separateeffect on firm productivity associated with use of independentvariable. According to the researchers, ICTcomputer networks for trading. However, there is ancanincrease productivity through three well-knownimportant difference between e-buying and e-selling inmechanisms: First, rapid increase in technicaltheirstudy. E-buying has positive impact on outputimprovement in ICT related industry can havegrowth while e-selling typically has negative impact. Theyconsiderableshare in growth, providing that ICT relatedclaim that this is likely due to pricing effects, since at leastindustries expand more rapidly than other sectors.part of the gain from investment in electronic procurementSecond, ICT can be a stimulant for labor force inby firms comes from the ability to use the price production process. Low prices of ICT related goods andtransparency which is offered by e-procurement to secureservices, can encourage its use and this cause capitalmore competitive deals.deepening and increases labor productivity. Third, byMost of the researches in developing countries arespillovereffect of technology, ICT can increaseabout e-readiness and adoption and there is a lack of  productivity. Spillover effect emerges when social returnstudy on impact issue [15, 16]. According to the literatureofinvestment is greater than private return, the casethere is still a gap in studies and researches on the impactwhichis suitable for investment in informationof EC in developing countries [19, 20 and 4] includingtechnology. The researchers then refer to the twoIran.empirical growth accounting approaches at industry orThe results of the growth model estimations with ICTmacro-leveland micro-level studies, mostly using firmleveldata, which both are based on production function.However, empirical evidence on the ICT s’ share in productivity are different in the two approaches.The evidence based on firm’s data magnifies theimportanceof the capital deepening, as it is confirmed inthe studies by Brynjolfsson and Hitt [58]; Van LeeuwenandWiel [43]. Then, a question may arise as; which partof the productivity is channelized through TFP (indirect)andwhich part is related to capital deepening (Direct)? Inreply to the above mentioned question (which isacontroversial issue among analysts), Van Leeuwen and Niel [53] applied econometric technique at firm-level dataof Netherlands services’ market and analyzed the extentto which omitting the ICT spillover indicator had beeninvestments as an explanatory variable using Panel Datamethod in the context of the OPEC member countries byHosseini Nasab [60] show that ICT has significant effectonthe economic growth of these countries. Thecoefficient measuring the effect of the ICT investment oneconomic growth was positive, indicating that ICTinvestmentshad a positive impact on the economicgrowth of the OPEC member countries. Brynjolfsson andHitt [58] had research on ICT investment and they foundthat this investment has direct effect on labor’s productivity but had an important influence on TotalFactor Productivity (TFP) which will be on its climaxaftera time period of 4-7 years. According to Hoq et al  .[61] e-commerce has a significant impact on business productivity. Due to its simple applications, EC has a large   Middle-East J. Sci. Res., 15 (7): 1005-1020, 2013 As will become clear in next section, sampling for this research is stratified random sampling optimized by Neiman assignment 1 approach. 1009economic impact and it gives the opportunity for changesThisresearch applies intensive growth theory to expressin technology. This increases competition and innovation,growth in output per worker as a function of relatedwhich are likely to boost overall economic efficiency.variables.Criscuoloand Waldron [27] use both value-added perIn this study, the number of employees usingemployee and sale per employee as dependent variable tointernet, number of employees using computer, usingstudy the impact of e-commerce.internet to gather information, using internet to offer Growth accounting is an approach used to exploreinformation, e-buying and e-selling activities in industrialthesources of economic growth. Applying this approachsector of Iranian SMEs will be our EC measurements anddecomposes output growth into growth coming fromcapital-labor ratio (i.e. per capital or capital deepening),separatecomponents of the production function;itper capita materials and per capita human capital arerevealsthat some of the growth may be driven by theindependent variables (IV) and the targeted variable labor growth of total factor productivity. In this article,productivity is dependent variable (DV). The consideredCobb-Douglasproduction function using panel-dataproductivity model is based on both econometrics andapproach for multiple regressions will be utilized to havegrowth accounting approaches to fill these approachesmore accurate results, compared to other studies in thegaps. On the first step, this research fulfills the gaps of literature at firm level, which usually employ cross-growth accounting by transferring the model to parametricsectional data.and providing statistical analysis. And on the second MATERIALSAND METHODS Cobb-Dauglas production function by calculatingAsstated in the literature, one way to study thestudies of Elsadig [11, 12, 69, 70, 71 and 72].impactof EC or ICT on output or its growth is tointroduce an appropriate measure of EC or ICT as an Estimation of Capital Stock for Iranian Manufacturing additional explanatory variable to a multiple regression SMEs One of the novelties of this study is to fill the gapequation of output. Therefore, the growth accountingof missing data for capital stock in Iranian data offeringframework developed by Solow [62,45], which were finallyorganizations like Central Bank of Iran (CBI) or Statistical brought to fruition by Kendrick [63] and further advancedCenter of Iran (SCI). Data for stock of capital at firm level byDenison [64], Griliches and Jorgenson [65] Denisonis not available for Iran as well as many developingand Edward [66], Jorgenson et al  . [67], Dollar and Sokoloffcountries. Based on acceleration theory of investment, the[68]and Elsadig [11,12,69,70,71,72] is applied in thisfollowing approach for rough estimation of 378research.The model in spirit is similar to those are usedselected sample of Iranian manufacturing SMEs is used. by Criscuolo and Waldron [27], Clayton et al  . [55] andThe approach could be used for any extended sample or Erken et al  . [73], Elsadig [11, 12, 69, 70, 71, 72].population of Iranian SMEs, as well as other developingFrom the past studies it has been found that there iscountries capital stock estimation at firm level or anya gapbetween empirical and theoretical studies onaggregation level such as industry, sector…..downstream issues and lack of quantitative andConsider the following relation between gross investmentcomprehensive analysis of the impact of EC on SMEsand capital stock:contribution to Iranian productivity and employment. Inthis regard, the main problem believed to be facing the  I  = k  +  K  (1)SMEscontribution to Iranian productivity andemployment is a low level of productivity andWhere,  I  is gross investment, k  is growth of capitalemployment. Therefore, to overcome the problem thisstock (i.e.  K  -  K  ) which is equal to net investment,  I  andstudy focused on downstream issue, namely, impact and is the rate of depreciation.contributes to the available literature by examining theIf for a period of time gross investment,  I  , does notapplications of EC of Iranian manufacturing SMEsfluctuate much( i.e. the condition of relatively stablethrough both extensive and intensive growth theories.period), one can assume that the capital output ratio isstep,it closes the gap of econometric estimation of the productivity indicators which is just mentioned in the 1 G tt-1 G ttt-1  N G
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