Internet Diffusion in Chinese Companies

The Internet is increasingly indispensable to national economies worldwide. Here, we focus on the Internet diffusion process in Chinese businesses and its link to the general growth of IT spending throughout the Chinese economy. Our results are based on our 10-year investigation of IT adoption in Chinese companies and industry-specific patterns of Internet diffusion and related IT spending growth. IT applications in China were introduced relatively late in Internet evolution compared to those in the developed countries, forcing business managers to contend with a lack of experience, know-how, and infrastructure. This late start has also meant that Chinese companies are able to choose from relatively more advanced technologies, learn from the experience of others, and be less bothered by the problems associated with legacy systems. In addition, because China generally uses IT differently from other countries, it is worth investigating the process through which Chinese companies adopt new technology, as well as any patterns that have emerged within it, so as to better understand how IT affects the overall Chinese economy.

The competence of an organization’s IS oversight and its IT spending decisions are often closely related [9, 10]. Our study of the IT management literature and practices of 94 commercial enterprises in China reassessed this hypothesis in the Chinese context, concluding that IT spending and organizational learning with regard to IT management are not as tightly linked as might be expected. Rather, aggregate IT spending could be better explained through a technology diffusion process operating in all companies. Our results provide a new way to explore IT adoption by combining observations of real-world IT spending and technology diffusion. It is because we live in the network era (the Internet is the dominant technology) that we focus on the diffusion of the related technologies.

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Four Stages of Diffusion

In 2002, we collected data from the participating companies, most in Beijing, Guangzhou, and other large cities in the eastern part of the country, concerning their strategies for IT spending (defined as expenditures for computer hardware and software and for IT services) and other variables from 1989 to 2001. Inspection of the aggregate IT spending curve of these companies indicates that the curve follows an S-shape, reflecting the potential link between overall IT spending and technology diffusion.

The Internet was introduced in China in 1992, the year generally viewed as the starting point of the network era in China. To link IT spending growth with the stages of diffusion, we plotted the Internet’s adoption rate in the companies against time, or the percentage of companies beginning to use Internet technology each year. The bell-shape curve in Figure 1 is indicative of the diffusion process of all the companies [11]. Combining the IT spending growth curve and the pattern of Internet adoption, we projected that the IT diffusion process in China’s network era would experience four stages and is today (early 2005) near the beginning of the fourth. This projection is further supported by newly collected data and cases we’ve mined and analyzed from 20 Chinese companies we surveyed from 2002 to 2004.

Initiation (1993–1995). The Internet was publicly implemented for the first time in China in late 1992 and early 1993. In 1994, the country’s first backbone network—the National Computing and Networking Facility of China—was built and connected to the global Internet through a joint project of the China Academy of Science, Tsinghua University, and Peking University [2]. Supported by the Chinese government’s Golden Bridge Project, a number of Chinese enterprises followed by building their own local area networks, and some of them—the innovators—began using email for the first time.

The Internet in China really took off in the second half of 1994. The most notable achievements at that time were the construction of ChinaNet (the Chinese public computer network) and the China Education and Research Network [2]. Many different kinds of Internet services soon emerged. By 1995, 24 of the 30 provinces and municipalities of mainland China had been connected to the Internet [2] and adoption of Internet technology had reached a critical mass that would be strongly subject to network externalities, including those involving the telephone and the railroad systems [7].

It is worth noting that the initiation stage of the network era in China was rather brief compared to the corresponding stage of the microcomputer era in the 1980s [1]. There are three possible reasons for this stage being so short-lived: First, having experienced the micro era, many Chinese managers had come to appreciate IT’s strategic value, learning to focus on IT development. Second, since 1992, the Chinese government’s economic reform efforts and open-door policy toward Western technology and business partnerships became even more urgent than it had been in the years following paramount leader Deng Xiaoping’s tours through Guangdong Province. Driven by the government’s economic policies, Chinese enterprises and entrepreneurs eagerly sought development opportunities. And third, the Internet’s practical application and influence significantly exceeded that of microcomputers in the previous technology era [5].

Contagion (1995–2000). The contagion stage of the network era began in late 1995 as Chinese companies began to implement network technology, and aggregate IT spending increased dramatically. Redundant projects and wasted resources were common then. Beginning in 1997, the emergence and flourishing of e-commerce helped advance the “leaping” pattern of network growth, first altering the foreign trade industry, then sweeping through other industries. With the collapse of the dot-com bubble in 2000, increasing numbers of enterprises began to weigh the value of including networking and e-commerce in their long-term business plans.

Cooling (2000–2004). Following their adoption of network technology, most Chinese companies shifted focus to improving control of their IT resources. Since 2000, adjusting business strategy and restructuring business processes have been popular in Chinese enterprises, while strategic IT consulting has taken an increasingly important role in IT application management; such well-known global consulting firms as McKinsey, Boston Consulting Group, and Roland Berger have thus strengthened their presence in the country’s biggest cities. More than half of the 94 Chinese companies in our study cut their budgets for IT implementation and increased their budgets for IT consulting and outsourcing. Overall, the cooling stage lasted about four years and has now come to an end.

Permeation (2004–?). The current and final stage of the network era is just beginning. Most Chinese companies have adopted Internet technology, leaving few would-be adopters on the sidelines. The technology permeates the operations of all major businesses today, while adopters continue developing their applications. Meanwhile, as new technological innovation emerges, the IT diffusion process can be expected to help trigger the initiation stage of the next era, which may ultimately be dominated by mobile commerce or business intelligence, though yet other more powerful and innovative technologies could take the lead.

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Correlations and Patterns

Scholars and practitioners alike still frequently question whether certain categories of businesses and regions will be adversely affected by the adoption and use of Internet-related technology [6]. Based on the data we collected in 2002, we generally found profitability is positively correlated with Internet adoption, while business sector and company size lack regular correlation with Internet adoption [4]. However, from a combined view of IT spending and technology adoption, the patterns we found among different company types might have reflected specific characteristics (such as management style and organizational structure) of IT applications in China. Based on our look at IT spending growth curves and Internet adoption frequencies (see Figure 2), we’ve now identified three major patterns:

Pattern 1. In our 2002 study, we categorized the 94 participating companies into six major business sectors: headquarters of business groups; IT and electronics; traditional manufacturing; commerce and trade; services; and agriculture. By analyzing their IT spending and Internet adoption frequencies (see Figure 2a), we classified their Internet diffusion as consistent, steady, or fluctuating.

The IT spending curves (1992–2001) we studied are S-shaped for IT and electronic equipment manufacturers, business group headquarters, and traditional manufacturing companies. Notably, spending by IT and electronic equipment manufacturers began to emerge earlier than it did in the business groups and the traditional manufacturing companies. Moreover, the steepness of their spending curves is the most pronounced; an example is Digital China, an IT product manufacturer and distributor in Beijing, whose IT spending increased dramatically with its planned ERP implementation in 1997 [8]. IT and electronic equipment manufacturers had the broadest and longest exposure to IT and were thus more familiar and confident using the technology when other companies were still taking a wait-and-see approach (reflected in the Internet adoption frequency rates in Figure 2).

Although service and agriculture companies differ profoundly in terms of products, markets, and business strategies, their IT spending and Internet adoption frequencies are surprisingly similar. Their IT expenditures have increased steadily without sudden periods of expansion or contraction. They are neither overly active in trying to implement new technologies nor eager to revise their business strategies to take advantage of technology, usually acting as followers or even laggards in terms of IT deployment.

The firms belonging to the third business sector—commerce and trade—are characterized by significant oscillation, with clear peaks and troughs in the growth rates of their IT spending that are generally out of line with the other business sectors. Regarding adoption frequency, most companies in this sector are likely to be at the extremes of the innovator-to-majority-to-laggard spectrum in the Internet diffusion process. The irregular pattern of their IT spending rates and Internet diffusion may be due to contextual influences (such as information flows in commerce and trade), as well as to historical reasons (such as the early use of e-commerce by foreign trade companies).

Pattern 2. We found at least some smaller Chinese companies adopted the Internet earlier than their larger counterparts. Empirical research in Western countries suggests that the size of an organization usually has a strong positive influence on how it adopts and uses new technologies. Moreover, because larger organizations usually have more readily available financial resources and in-house technical expertise they are also generally more likely to experiment with new technologies [3].

However, our statistical analysis of sample data culled from the 94 companies in our study found that Internet adoption in China is not positively related to company size. Bigger companies are no more likely to adopt the Internet earlier than their smaller counterparts. Instead, some smaller companies have adopted the technology earlier than their larger counterparts (see Figure 2b). This unexpected pattern might result from the fact that adding Internet technology does not require prohibitively large expenditures.

Pattern 3. We found that more profitable companies are more aggressive about adopting Internet technology. More profitable companies would seem to have have more options regarding resources, and therefore would be more likely to adopt new technologies more quickly than their less-profitable counterparts.

However, companies losing money (those with fewer than two profitable years out of the past five) are not necessarily laggards (see Figure 2c). Some adopt technology rather early. Regarding IT spending, there is a notable early steep increase in the curve of unprofitable companies. Comparing this pattern to the irregular rise of adoption frequency in this category, we may infer that some unprofitable companies hope to use the technology to help turn themselves around.

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Conclusion

Knowing the process of Internet diffusion and IT spending patterns in Chinese companies helps managers doing business in China better understand the nature of the technological and competitive circumstances they face. Armed with such knowledge, they are better able to position themselves and their companies and make more effective strategic IT decisions.

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