What Factors Drive the Assimilation of Internet Technologies in China?

The globalization of Internet technologies has brought about tremendous changes in how a business should be and could be run regardless of where the business is. As a leader in the transition from a planned economy to a market economy, China is believed to be the world’s “super economic power” in the decades to come.⁴ In fact, China seems to have become a “super power” in the Internet economy with over 110 million Internet users, according to the most recent 2006 survey by China Internet Network Information Center (CNNIC). Although this number is only second behind the US, most of the Chinese Internet users have not used Internet to conduct business transactions but as a recreational medium.¹¹ There are “formidable challenges” in the further development of Internet technologies in China⁴ and the penetration of these technologies into business applications of Chinese firms has just begun.³

Consequently, aside from very limited evidence about Internet’s application in Chinese firms’ business operations, it is certainly important to reveal the patterns of how Chinese firms assimilate Internet technologies and how they are different from the firms in the West. By assimilation, we mean two distinct perspectives.¹ The first is strategy assimilation, which highlights the strategic importance of Internet technologies when a firm makes strategic decisions about ERP, CRM, global competition, business alliances, and so on. The second is activity assimilation, which refers to the extent to which a firm uses Internet technologies in its business activities and day-to-day operations, such as communication, information sharing, customer services, marketing, and advertising. The two aspects clearly distinguish assimilation from initial adoption or mere using the number of Internet users as a measure of the reach of Internet in business operations.

In this article, we adopt well-established models and business concepts rooted in the market economy to examine the factors driving Chinese firms’ Internet assimilation, instead of investigating contextual factors unique to China. This approach allows us to present how the universal Western thoughts concerning IT implementation are reflected and adapted in the context of Chinese firms. Therefore, the special features of Chinese firms’ assimilation of Internet technologies can be manifested in comparing and contrasting our findings with those from the Western countries.

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Assimilation of Internet Technologies in Chinese Firms

The ultimate goal of China’s economic transition is to establish a market economy. The fundamental logic of market economies is market orientation.⁶ As the core philosophy of the corporate culture and strategy in market economies, a market orientation emphasizes the creation of superior customer value and business performance. While this philosophy is a business necessity for firms in the West, it is relatively new to Chinese firms. Along with decreased government intervention and weakened bureaucratic control, Chinese firms are being pushed to the market, as such, these firms have to learn and develop market-oriented business strategies.^2,7

Meanwhile, Chinese firms are facing various institutional and resource constraints.^7,8 Externally, the establishment of stable institutions and infrastructures, upon which market economies are founded and rooted, is far behind the rapid growth of China’s economy.^2,7 Internally, most firms in China do not have sufficient capital, financial, strategic, and managerial resources and capabilities, which are required for growth in the transition process. They must depend on resources from their business partners and from intermediate organizations (in the fields of accounting, finance, HR, logistics, and so on) that have emerged recently.²

From both the opportunities and the constraints that Chinese firms face, we have identified two groups of factors that influence the assimilation of Internet technologies in Chinese firms (Figure 1).

In the first group labeled as market orientation,⁶ customer orientation determines whether a firm has sufficient knowledge of its targeted customers in order to generate superior customer value. Customer-oriented firms put the interests of customers first to build customer relationships, identify market opportunities, and sustain business growth. Internet technologies not only empower these firms to broaden the scope of their existing customer information and preference data but also enable these firms to reach potential customers.¹

Competitor orientation refers to a firm’s ability to identify, understand, and respond to the strengths, weaknesses, capabilities, and strategies of its competitors.⁶ Competitor-oriented firms may seek and be more aware of the potential opportunity of Internet technologies to gain advantage over their competitors. Applying Internet technologies to CRM and SCM can help these firms compete for a broader domestic and global customer base and stay ahead of their competitors who might lack such technologies.

Inter-functional coordination indicates a firm’s ability to utilize interdependent, internal resources in a coordinated manner through effective communication, integration, and exchange.⁶ Firms that emphasize and encourage the culture of inter-functional coordination and collaboration are more likely to implement innovative ICT to support the sharing and exchange of information within and between functional units. Because of their open architectures (e.g., TCP/IP and XML), Internet technologies may help these firms connect people inside and outside the organization.¹⁰

The second group defines the environmental constraints that must be overcome during the transitional process.^5,7,8 Market force readiness indicates whether the focal firm’s competitors, customers, suppliers, and other business partners are ready to implement and assimilate Internet technologies.⁵ Inter-organizational information systems, such as EDI and SCM, are used to create, store, transform, and transmit information among at least two companies. The implementation of these systems is beyond organizational boundaries, thus collective action, coordination, and collaboration are required. A firm’s assimilation of Internet technologies may be constrained by whether its own market forces, such as trading communities and peer firms, are ready to implement or have implemented these technologies.

Internet infrastructure maturity refers to the extent to which Internet technologies are diffused in an industry as a foundation to support the business activities of firms in the industry. Because Chinese firms are generally short of various resources required for firm growth and survival in transitional process,^7,8 a mature external infrastructure provided by various service providers can improve and complement the IT capabilities of the firm. Guided by the Chinese government,¹⁰ many service providers have taken advantage of the open architecture of the Internet and have constructed public infrastructures in which other firms can easily participate.² These open-architecture public infrastructures may greatly facilitate the assimilation of Internet technologies.¹⁰

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The Study and the Results

We conducted a field survey with 307 international trading companies located in the Beijing area. Realizing the imbalance in Internet diffusion between different regions,⁴ we believe our findings based on Beijing area, one of the most developed regions, will provide valuable insights and guidance for less-developed areas that will implement and assimilate Internet technologies in the near future. Trading companies were selected because the trading business is responsible for all the export/import activities in China. These companies are very active in adopting Internet technologies³ and are undergoing the transition from central governmental control to free-market coordination, and thus the pattern of the assimilation of Internet technologies in these companies is likely to reflect the institutional changes. Table 1 shows the profile of the participating firms.

Survey questions (see Appendix) were based on previous literature. We included two control variables, firm age and size, that have been found to affect IT implementation. We used Partial Least Squares analysis to examine both the psychometric properties of the measurements and the effects of the five factors. After getting good results of the measurements, we tested the research model in Figure 1. The results are shown in Figure 2. As shown, 43% of the variance in Internet assimilation was explained by the five factors. Customer orientation had a significant effect on Internet assimilation (path coefficient = 0.13, p <0.05), which indicates that H1 was supported. H2 was also supported (path coefficient = 0.16, p <0.01), which suggests that the more competitor oriented a firm is, the higher the level of Internet assimilation. H3, which deals with the effect of inter-functional coordination, did not have significant effect (path coefficient = 0.10, p>0.05). The effect of market force readiness (H4) was significant (path coefficient = 0.17, p <0.01). H5 on the relationship between Internet infrastructure maturity and Internet assimilation was supported (path coefficient =0.38, p <0.001). In addition, the two control variables of firm size and age were not significant.

Therefore, our major findings include: a). Customer orientation and competitor orientation, rather than inter-functional coordination, had significant effects on Internet assimilation. This suggests that the more customer or competitor oriented a Chinese firm is, the higher the level of Internet assimilation; b). Both market force readiness and Internet infrastructure maturity affected Internet assimilation. In addition, firm size and age did not have any effect on Internet assimilation.

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So, What Factors Drive the Assimilation?

Based on the results presented above, we offer the following two key observations.

 1. An external view of market orientation rather than internal view is essential

Our results show that in the transition process towards a market economy, the assimilation of Internet technologies in Chinese firms is more influenced by their market orientation toward players that are external to the firm (customers and competitors) than by an orientation toward the employees and functional units that are internal to the firm (inter-functional coordination).

As the Chinese government has been deemphasizing its central planning system, firms are pushed into the market to develop relationships with customers and to compete with their rivals. By realizing the ubiquitous nature of Internet technologies, a customer-oriented firm will be more likely to utilize Internet technologies to connect to a much larger pool of customers from different geographical areas. For example, the 110 million Chinese Internet users constitute an extremely valuable customer base for firms engaging in the consumer market. On the contrary, firms that have not developed customer orientation and competitor orientation, e.g., state-owned firms whose businesses are planned and controlled by the Chinese government, may be less likely to be the players with Internet technologies.

 2. A reactive attitude toward the transition outweighs a proactive attitude

Environmental contingencies seem to exert significant constraints on the assimilation of Internet technologies by Chinese firms. Because of their concerns about the unpredictability of the institutional environment in the transition process, Chinese firms seem to be defensive or conservative with their innovation strategies. That is, without mature external support from their business partners and the industry, Chinese firms are risk averse and are less likely to be bellwethers for Internet technologies. This observation leads us to ask: if every firm waits for collective actions from their business partners, who are the first movers in applying Internet technologies? Our finding is also contrary to the popular idea in the West that environmental uncertainty, rather than maturity, has a positive influence on a firm’s proactive and innovative strategies and behaviors. However, the finding is consistent with the evidence conducted in the transitional economy.⁹

It seems that Chinese firms are more likely take a ‘reactive’ or defensive (toward the environment) rather than a ‘proactive’ or prospecting attitude (in terms of developing a market orientation) in Internet technology assimilation. A comparison of the strengths of the influence of the five factors (using the path coefficients) reveals that the two external environmental factors were generally more influential than the three market orientation factors. This suggests that in the transition process, Chinese firms are more influenced by inter-organizational relationships and the maturity of external legal, financial, managerial, and technological infrastructures than by their internal strategies. The greater effect of Internet infrastructure maturity (the path coefficient is the highest) also suggests that Chinese firms had the highest concern for the regulatory environment in which they and their business partners reside, rather than for the inter-dependence with these partners. This is understandable because the Chinese government in the transition process has still maintained powerful political influence and control over the development of Internet technologies and relevant national infrastructures such as transportation and telecommunications.

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Conclusions

We believe that our findings have several significant insights for firms, policy makers, and IT service providers in China. Our results suggest that market-oriented strategies have emerged in Chinese firms. However, market orientation itself is not a very strong enabler of Internet assimilation. This implies that Chinese firms need to develop market orientation (especially internally); that is, they need to stress the significance of Internet technologies in transforming their business operations. The Internet, as a platform for sharing information and knowledge within firms, seems to be an underdeveloped area in Chinese firms.

The Chinese government has an important role to play in alleviating Chinese firms’ concerns about their IT environments. Policy makers need to advance their efforts in building mature national and industrial IT infrastructures. The Chinese government may need to choose and support some firms to be the catalysts for the collective IT assimilation activities in supply chains and to be paragons and bellwethers for various industries.2 These firms could be either from the existing industries or some new intermediaries and service providers [10].

IT service providers who plan to initiate and advance their business operations in China will have many opportunities if they are allowed to provide integrated IT infrastructures to firms and industries to counter the current lack of internal and external IT capabilities. However, there are various barriers to providing and implementing mature applications and services at the industrial level, most of which are due to issues brought about by the government.

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