174
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Chapter 1.12
EU SMEs and E-Business
Innovation
Anne Wiggins
The London School of Economics and Political Science, UK
INTRODUCTION
Although motivating electronic business (e-busi-
ness) adoption and implemention by small- and
medium-sized enterprises (SMEs) is endorsed by
policies and initiatives introduced by the European
Union (EU), a number of challenges arise as the
result of a limited conceptual understanding of the
relationship between SMEs and information and
communication technologies (ICTs). Relatively
little is known about how SMEs respond to the
opportunities provided by ICTs, and even less is
known about why and how small businesses use
ICTs (Dixon, Thompson, & McAllister, 2002).
,QWKH¿UVWVHFWLRQRIWKLVFULWLFDOUHYLHZRIWKH
academic and government bodies of literature re-
lated to EU SMEs, e-business and policy initiatives
DQGGH¿QLWLRQVRI60(VDUHH[SODLQHGWKHXQLTXH
characteristics of SMEs and entrepreneurial
characteristics are outlined, and the case is made
that there is a clear need for more comprehensive
research on SMEs in the European Union.
The second section concentrates on e-business.
Many of the factors that compel organisations to
adopt and implement innovation are pertinent to

the adoption and implementation of e-business.
These have hitherto largely been treated as sepa-
rate bodies of literature, however. In this section,
WKHEHQH¿WVRIHEXVLQHVVDUHH[SORUHGWKHIDF-
tors that motivate or act as barriers to e-business
adoption and implemention are outlined, and the
organisational and management attributes that
would seem to ensure the success of the innova-
tion of adopting and implementing e-business
are discussed.
The third and penultimate section explores
EU policy initiatives relevant to SMEs and to the
promotion of e-business. The most wide-ranging
and prominent initiatives directed at SMEs are
H[DPLQHGKHUH7KH¿QDOVHFWLRQRIWKHSDSHUFRQ-
cludes with suggestions for further research.
BACKGROUND
7KHUH LV QR VLQJOH GH¿QLWLRQ RI DQ 60( EXW
schemes that are targeted at SMEs usually adopt
D YDULHW\ RI ZRUNLQJ GH¿QLWLRQV GHSHQGLQJ RQ
175
EU SMEs and E-Business Innovation
their particular objectives. The importance of
the SME sector as the cornerstone of a country’s
economic prosperity is widely recognised: SMEs
comprise approximately 95% of the enterprises in
most nations, and are responsible for employing
between 60-70% of a nation’s workforce (OECD,
2002). Consequently, the SME sector is crucial to
the EU’s competitive development, collectively

and for each individual member nation (Mul-
hern, 1995). SMEs contribute to local economic
growth by providing local services, employment
opportunities, and by enabling participation in the
economic development of their own communities.
They also play a vital role in innovation, as the
intermediaries between the public research infra-
structure and large organisations, as developers
of new ideas, and as adopters of new technolo-
gies. SMEs have the potential to act as vehicles
for the industrial and economic change of entire
regions, as entrepreneurship attracts many who
would otherwise withdraw from the labour market.
Entrepreneurship can provide a positive way out
of unemployment, particularly in disadvantaged
FRPPXQLWLHVZKHUHWKHSRWHQWLDOZLGHUEHQH¿WV
RIHQWHUSULVHFDQEHHYHQPRUHVLJQL¿FDQW6PDOO
businesses often stimulate productivity growth
amongst rival businesses (BarNir & Smith, 2002;
Jeffcoate, Chappell, & Feindt, 2002, 2004; Small
Business Service, 2004), and their dynamism can
stimulate competition and innovation throughout
the economy as a whole.
The unique characteristics of SMEs that set
them apart from larger organisations create par-
ticular issues, because in day-to-day business
operations the organisational, entrepreneurial,
familial, and social structures in SMEs differ from
those of larger organisations. An understanding
of the constitution and circumstances of SMEs

is essential in order to be able to identify the
fundamental differences between large and small
organisations and the effects of these differences
on innovation—especially e-business innova-
tion—adoption and implementation (Cheney,
Mann, & Amoroso, 1986). SMEs face both eco-
nomic and organisational constraints, a lack of
DFFHVVWRFDSLWDOFDVKÀRZGLI¿FXOWLHVOLPLWHG
ICT skills, a chaotic organisational structure, and
heavy workloads—all factors that may impede in-
novation (Small Enterprise Telecommunications
Centre, 2002). SMEs also have their own unique
qualities in terms of their environment, struc-
ture, psycho-sociological climate, management,
and technology usage and adoption (Castleman,
Coulthard, & Hewett, 2000; Smallbone, North,
Vickers, & McCarthy, 2000; Thong, 2001). SMEs
tend not to have the resources available to large
organisations, and this lack of resources creates
WLPH¿QDQFLDODQGH[SHUWLVHFRQVWUDLQWV)DFLQJ
these constraints, SMEs are likely to be more
cautious than large organisations to adopt new
technologies (Huang, Hart, & Wiley, 2004).
Entrepreneurial attributes such as creativity,
ÀH[LELOLW\ DQG G\QDPLVP DUH DVVRFLDWHG ZLWK
the SME sector. The importance of creating an
environment rich with opportunities through
the support of entrepreneurial characteristics
cannot be overstressed. Entrepreneurship relies
not only on individuals or groups possessing the

skills to recognise and harness potential, but
also on conditions that permit, encourage and
sustain them in their endeavours. Governments
FDQ FUHDWH WKH HFRQRPLF ¿VFDO DQG UHJXODWRU\
framework, infrastructure and environment in
which entrepreneurs and the organisations they
found and run are able to recognise, realise and
maximise potential competitive advantage. Al-
WKRXJKIHZJRYHUQPHQWSROLFLHVDUHVSHFL¿FDOO\
directed at creating an entrepreneurial culture,
cumulatively all government policies affect the
long-term factors that create conditions that (can)
foster entrepreneurs (HM Treasury, 2001). A stable
DQGWUDQVSDUHQWHFRQRPLFDQG¿VFDOHQYLURQPHQW
with steady economic growth can not only provide
entrepreneurs with appropriate opportunities to
foster entrepreneurial experiments, but also with
a chance to convince the market of their potential
contribution.
176
EU SMEs and E-Business Innovation
Entrepreneurship is closely liked to the psy-
chological and behavioural aspects of individuals,
and it would seem that an entrepreneur’s personal
initiative therefore dominates the potential for the
success of many SMEs (Howarth, 2002; Kuem-
merle, 2002; Quayle, 2002a, 2002b; Vrazalic,
Bunker, MacGregor, Carlsson, & Magnusson,
2002). Entrepreneurs share a commitment to
the consistent and methodological exploration

of possibilities to improve a business’s potential
(Drucker, 1998). Entrepreneurs also share the
distinctive characteristics of feeling comfortable
skirting the boundaries of propriety, assuming
enormous personal risk, being willing to shift
strategies quickly, being profoundly opportunis-
tic, and doing whatever it takes to close a deal
(Kuemmerle, 2002).
Having examined not only a number of the
characteristics of SMEs but also the issues
pertaining to their operations, we turn now to
examine e-business in more detail, as it is a form
of technological innovation that can profoundly
impact SMEs.
EU SMEs AND E-BUSINESS
INNOVATION
(EXVLQHVV SUHVHQWV VLJQL¿FDQW FKDOOHQJHV WR
academic research. These challenges arise from
its recent emergence, the rapid change that char-
acterises the domain, the variation in behaviour
in (apparently) similar contexts, the enormous
media attention it has generated (with its resultant
distortion of terminology and data), the lack of
familiarity with e-business technologies by many
management scholars, and the lack of established
research approaches (Drew, 2002). It has been
GLI¿FXOWIRUUHVHDUFKHUVWRLVRODWHWUHQGVLQWKH
separate innovation, ICT, and e-business canons
from more general economic and organisational
change drivers. Moreover, research has often failed

to examine the roles of size, age, sector experience
of ICTs and management support within single
integrated studies, types of exporting activities,
DZDUHQHVVRIEHQH¿WVW\SHVRIFXVWRPHUDQGLP-
position by larger trading partners. These factors
KDYHVHUYHGWRH[DFHUEDWHWKH³SDWFK\´QDWXUHRI
much research (Dixon et al., 2002).
1RQHWKHOHVVHEXVLQHVVKDVSURIRXQGEHQH¿-
cial consequences for business practice and re-
search. Technology-driven change is revolutionis-
LQJEXVLQHVVUHTXLULQJFRPSDQLHVWRUHGH¿QHWKHLU
strategies, products and processes in a business-
operating climate that has become increasingly
competitive, turbulent, and uncertain (Goldman,
Nagel, & Preiss, 1995). Organisations that have
adopted e-business believe that it contributes to
improved performance in four main ways:
• The development of new products and ser
-
vices;
• The generation of new customers and busi
-
ness channels;
• A reduction in costs; and
• Improved productivity (HM Treasury,
2001).
E-business is a resource that is rapidly inno-
vating not only traditional business processes but
also the very nature of competition, as e-business
enables market fragmentation, with its ability to

treat mass clients as individuals, convergence be-
tween products and services, generation of global
production networks, and simultaneous coopera-
tion and competition between organisations. As
e-business facilitates this radical transformation of
both technical and business operations, it is truly
innovative. Innovation is an important engine of
long-term competitiveness, growth and employ-
ment. The OECD estimated that between 1970 and
1995, more than half of the total growth in output
of the developed world resulted from innovation,
and that this proportion is increasing as economies
become more knowledge-intensive (Irwin, 2000).
The cross-functional nature of innovation man-
agement requires strong leadership in managing
through turbulence (Tushman, 2002).
177
EU SMEs and E-Business Innovation
The Innovation Scoreboard (which analyses
statistical data in the areas of human resources,
knowledge creation and the transmission and
application of new knowledge, and innovation
¿QDQFHRXWSXWDQGPDUNHWVIRXQGWKDWVDOHVRI
innovative products as a proportion of total turn-
over increases with organisation size: 15% for
small, 21% for medium-sized, and 38% for large
organisations. The Innovation Scoreboard (Eu-
ropean Commission, 2000a) also found that large
organisations spend nearly twice the proportion
of their turnover (4.2%) on innovation activities

as do SMEs. Similarly, the Statistics on Innova-
tion in Europe, 2000 (European Commission,
2000a) also found that the larger the organisation,
the more likely it is to be an innovator (36% of
VPDOORIPHGLXPDQGRIODUJH¿UPVDUH
innovators) and that SMEs account for only 18%
of Europe’s innovation productions. Building an
Innovation Economy in Europe, 2001 (European
&RPPLVVLRQEZDVWKH¿UVWLQDVHULHVRI
Innovation Policy Studies undertaken for the
European Commission’s Enterprise Director-
ate-General to promote the message that not
only is innovation important, as competitiveness
increasingly depends on the ability of industry
sectors to meet turbulent market needs quickly
DQGHI¿FLHQWO\WKDWLQQRYDWLRQLVSHUYDVLYHDQG
GLYHUVHWDNLQJSODFHLQ¿UPVRIDOOVL]HVDFURVV
all regions and all sectors, and that innovation is
unevenly distributed, but also that innovation is
systemic rather than linear, with multidimensional
processes.
In order to develop these ideas, we must draw
further upon the literature to explore and extend
questions concerning the motivation(s) for, and
genesis of, innovation. There is no single reason
for an organisation to innovate: In some cases,
innovation is triggered by new knowledge, in
RWKHUVE\WKHRSSRUWXQLW\WRIXO¿ODPDUNHW
need (Mahdjoubi, 1997). Multiple forces inhibit
change and maintain the status quo. Some of

these forces are group performance norms, fear
of change, member complacency, and a lack of
skills (Bergquist, 1993). For lasting change to
occur, new behaviours must be learned so that
attitudes and routines can be replaced (Senge,
1990). Although the implementation of innova-
tive ideas is an organisational change process
(Hoffer, George, & Valacich, 1996), lasting
competitive change takes application, time, and
involves individual and organisational learning
and adjustment. An organisation must possess
(and be willing to commit) the resources needed
to implement a new technology for innovation
adoption and implementation to be successful
(Amidon & Mahdjoubi, 1999). An organisation’s
VL]H¿QDQFLDOUHVRXUFHVDQGWHFKQLFDONQRZKRZ
D O OL Q ÀX H Q FH W K HDGR S W LR Q RI W H FK QROR J LF D O L Q Q RY D-
tion. Customer and competitive pressures, along
with support from business partners, can also be
VWURQJLQÀXHQFLQJIRUFHVLQWKHDGRSWLRQGHFLVLRQ
(Iacovou, Benbasat, & Dexter, 1995; Premkumar
& Roberts, 1997).
The 1999 KITE project’s Analysis of E-Busi-
ness Practice in SMEs reported that SMEs typi-
FDOO\KDYHPRUHGLI¿FXOW\LQDFKLHYLQJHEXVLQHVV
success because of these characteristic SME
attributes (Chappell & Feindt, 1999). The KITE
project also found that SME e-business adoption
and implementation success is dependent on the
following factors:

• Having an original idea and/or targeting a
unique market niche;
• Developing a business case for e-business;
 )LQGLQJVXI¿FLHQWIXQGLQJWRFDUU\RXWH
business properly, without being dependent
on third parties, or having to update sites
out of hours, etc;
• Finding the right business, technology and
promotional partners;
 (QVXULQJWKHULJKW³ILW´EHWZHHQWKH
company’s product or service and internet
demographics;
 %HLQJÀH[LEOHHQRXJKWREHDEOHWRUHVSRQG
to competition and changing technological
conditions; and
178
EU SMEs and E-Business Innovation
• Being able to manage and scale the growth
that may result (Chappell & Feindt, 1999).
Having examined the concepts of e-business
and innovation, we turn now to examine EU
policy initiatives directed at promoting e-business
innovation amongst SMEs.
FUTURE TRENDS
A series of EU SME policies have been intro-
duced to create a favourable competitive busi-
QHVVHQYLURQPHQWLQZKLFK60(VFDQÀRXULVK
However, relevant technological innovation policy
promoting e-business adoption and implementa-
WLRQGHSHQGVRQDQXQGHUVWDQGLQJRIZKDW³UH-

ally” drives adoption and implementation, of the
external barriers that prevent or delay it, and of
how it impacts on competitiveness and employ-
ment. Incentive schemes and policies intended
WR EHQH¿W WKH 60( VHFWRU QHHG WKHUHIRUH WR
take into account the culture, performance, and
abilities of SMEs. Although an evolution towards
more interactive support is visible, there is a high
degree of heterogeneity in policy instruments
aiming to foster innovation in SMEs throughout
the European Union (HM Treasury, 2001). Cur-
rent EU government-funded projects designed
to assist SMEs to adopt e-business include the
promotion of online trading and the creation of
virtual business networks to promote technol-
ogy diffusion (Papazafeiropoulou, Pouloudi, &
Doukidis, 2002).
A number of EU policies have been formulated
and introduced to facilitate the creation of a busi-
ness environment in which SMEs can innovate
DQGÀRXULVK0RVW(8PHPEHUVWDWHJRYHUQPHQWV
UHFRJQLVHWKDW60(VRIWHQKDYHGLI¿FXOW\¿QG-
ing appropriate independent sources of business
advice and information, and face skills shortages.
Accordingly, they have launched national and
regional initiatives to assist SMEs to acquire or
adapt e-business skills (Mulhern, 1995). Many
of these policies, schemes and programmes are
interlinked. For example, the European Union’s
1994 Regional Technology Plan (RTP), which

was inspired by the 1993 White Paper on Growth,
Competitiveness and Employment, was in turn
instrumental to the development of the 1996
Green Paper on Innovation, which was created to
develop an EU-wide strategy for the promotion of
innovation. The 1996 Action Plan for Innovation
in Europe paved the way for a common European
analytical and political framework for innovation
policy. Building on this framework, the Trend
Chart on Innovation in Europe was introduced
as a tool for policy makers. Formulated along the
lines of the 2001 Community Innovation Survey
(CIS), which is jointly implemented by Eurostat
and DG Enterprise under the aegis of the Euro-
pean Innovation Monetory System (EIMS), The
Trend Chart updates and analyses information on
innovation policies EU-wide and at national level,
and provides a forum for benchmarking and for
WKHH[FKDQJHRI³JRRGSUDFWLFHV´LQLQQRYDWLRQ
and technological policy development.
The 2001 Innovation and SME Programme
promotes innovation and supports SME participa-
tion in the Fifth Framework Programme (FP5)
in order to optimise their potential advantages
from such participation. FP5 aims to diffuse
good practices and to encourage interregional
cooperation in innovation by improving support
infrastructures, in addition to introducing comple-
mentary policies for innovation and technology
transfer through a set of interrelated projects: the

Regional Innovation Strategy (RIS), the Regional
Innovation and Technology Transfer Infrastruc-
tures and Strategies (RITTS) and the Regional
Technology Transfer Projects (RTT). The RIS
and RITTS projects share the same methodol-
ogy and philosophy as well as many objectives
in common. Both are based on building regional
consensus and agreement, referenced to the same
FRUHVSHFL¿FDWLRQVDQGDUHDEOHWRJLYHDFFHVVWR
international experience. Twenty-eight European
regions have been participating on RIS and RITTS
179
EU SMEs and E-Business Innovation
projects since they were launched in 1994, and an
additional forty regions have enlisted for similar
initiatives. This calculates to approximately one
region in four across the European Union par-
ticipating in projects concentrating on enhancing
local innovation capabilities, providing the most
comprehensive structure for the development of
regional systems of innovation in the world, by
far (European Commission, 2000e).
The DEEDS Forum generated from the G7
Policy Group project A Global Marketplace for
SMEs (1996-1999), and seeks to provide an open
forum of EU policy makers to stimulate, discuss,
exchange, and monitor national policies. The
project has a particular focus on the uptake of e-
business practices by SMEs, as did The Bologna
Charter on SME Policies. Held in 2000, it was

WKH¿UVWFRQIHUHQFHRI(8PLQLVWHUVUHVSRQVLEOH
VSHFL¿FDOO\IRU60(V7KHVXEVHTXHQW(XURSHDQ
Council Summit in Lisbon, 2000, announced the
(8¶VJRDORIEHFRPLQJWKH³PRVWFRPSHWLWLYHDQG
dynamic knowledge-based economy in the world”
by 2010. This objective necessitated the creation
of innovation policy initiatives at EU national and
regional levels (many of these initiatives were still
being framed in mid-2005). The Summit called
for a series of benchmarking exercises to monitor
progress by member states towards the implemen-
tation of effective policies in support of innova-
tion. The European Union responded in 2000 to
this request with The Integrated Programme for
SMEs: A General Framework for all Community
Actions in Favour of SMEs, which, combined with
Innovation in a Knowledge-Driven Economy,
2001, has contributed to an improved coherence
in technological innovation policy in Europe,
and also to the development of a framework for
dialogue on innovation policy making and policy
coordination. eEurope 2005 - An information soci-
ety for all: An Action Plan, endorsed by the Feira
European Council in June 2000, also forms part
of the overriding Lisbon strategy. Europe 2005
addresses issues relevant to internet and e-busi-
ness adoption and use, consisting of national and
multinational actions on e-government, e-health,
e-learning, and e-business, generated with the aim
to improve participation, to open up opportunities,

and to enhance skills.
The European Union has devised a number of
EURDGXPEUHOODSROLFLHVWRSURPRWHWKHEHQH¿WVRI
e-business and other technological innovations,
not least for SMEs. Such framework policies often
set clear and ambitious targets, and coordinate with
other policies to ensure that the various compo-
nents serve common goals. They cover a broad
spectrum of initiatives, from awareness actions, to
establishing SME support networks, to providing
consultancy and customised services to SMEs.
7KHVHLQLWLDWLYHVDLPWRLQÀXHQFHSROLF\DFURVVWKH
economies of countries or regions, and are often
both horizontal and vertical in concept: horizontal
in that they cover most business sectors and act
as a bridge between education, business and the
citizen; and vertical in that they can impact upon
primary, secondary and higher education (in the
form of training and up-skilling initiatives).
In 2002, the Go Digital (European Commis-
sion, 2002) initiative administered by the e-Busi-
ness Policy Group (EBPG), was launched as a
collaboration of representatives of the EU member
states and the European Commission services.
The Third Multiannual Programme for SMEs
in the European Union (European Commission,
1996) was also adopted as the cornerstone of the
European Union’s actions aimed at improving
the conditions in which SMEs operate. Under the
Fifth Framework Programme (FP5) (European

Commission, 1998), it supported European SMEs
to participate in FP5 actions and to optimise their
advantages—especially in relation to technol-
ogy—from such participation. The outcomes
are still being formulated. FP5’s successor, the
Sixth Framework Programme (FP6) (European
Commission, 2003), was formally launched in
November 2003 (Keown, 2002).
The SMESPRIT project aims to develop
a knowledge-based system that will provide
support to SMEs introducing and managing e-
180
EU SMEs and E-Business Innovation
business adoption and implementation. This is
interlinked with the COMPETE and Brite-Euram
programmes, both of which fall under the umbrella
of the Esprit research programme (Chappell &
Feindt, 1999). COMPETE aimed to strengthen Eu-
ropean SME competitiveness through technology.
Running from 1997 to 2002, COMPETE brought
together more than 45 companies delegating 70
specialists and representing more than 50 EU-
funded projects. Encouraging and facilitating col-
laboration and joint ventures for SMEs were also
key aims of Brite-Euram, which enabled groups
RI60(VZLWKLQVXI¿FLHQWUHVRXUFHVWRFRPPLV-
sion university laboratories and research centres
to carry out research and development (R&D)
activities for them, and encourage them to pool
resources with other SMEs. Thematic networks

brought together various individually run projects
that shared similar technological or industrial
objectives, with the intention of bringing greater
coherence to research activities and encouraging
the exchange of knowledge and technologies. The
outcome of the projects has been shared by all
participants, and has also served to inform the
decision-making process on future EU-funded
R&D (Chappell & Feindt, 1999).
CONCLUSION
Many organisations recognize the potential stra-
tegic opportunities offered by e-business, and
seek to realize them. However, other than the
need to adhere to legalities (such as tax and VAT
requirements) most SMEs seem to be unaware
of projects, policies or initiatives intended spe-
FL¿FDOO\WREHQH¿WWKHP7KLVVWURQJO\LQGLFDWHV
that such projects, policies and initiatives could
be better targeted to their intended audience.
The overall take-up rate of e-business amongst
SMEs also indicates a lack of success for these
initiatives. It would seem that crucial changes
could be made to policy formulation, in order to
render the outcome more relevant, coherent and
accessible to SMEs.
Through presenting an outline of the various
domains and approaches that are present within
the literature relating to SMEs, e-business and
policy initiatives, the implicit aim of this article
is to indicate gaps in the literature. A transdis-

ciplinary approach such as information systems
(IS) offers considerable scope for moving between
these theoretical and empirical parameters. The IS
perspective also creates an opportunity to study
relationships that have not as yet received adequate
attention between SMEs, e-business, and policy
initiatives. These include the relationship between
SMEs and their government(s), the organisational
implications of integrating e-business into a small
organisation’s business, and the implications of
governments adopting a more inclusive approach
to creating a dialogue with SMEs. By adding tex-
ture to the study of these subjects, the opportuni-
ties that e-business affords SMEs can be opened
up to scrutiny, with the potential to gain a more
nuanced understanding of how governments can
contribute to SMEs successfully adopting and
implementing e-business.
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KEY TERMS
EBPG (E-Business Policy Group): A col-
laboration of representatives of the EU member
states and the European Commission services.
E-Business (Electronic Business): Those
business activities related to the business opera-
tions of an organisation online. E-business encom-

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e-business that was agreed by the Organisation
for Economic Co-operation and Development
(OECD) and the European Union is the method
by which the order is placed, which determines
whether a transaction is e-business, not the pay-
ment or delivery channels. Shifting business
activities from paper-based, local, face-to-face
and manual processes to electronic, dispersed,
mediated, and automatic processes is the essence
of e-business, whether in dealing with customers
or suppliers (Wilkins et al., 1999). E-business
activities include, but are not limited to:
•Web sites;
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•Intranet;
•E-mail;
• E-procurement;
• Web catalogues;
• Staff remote online ERP via Web;
• Trading exchanges;
• Internet auctions;
•B2C;
• Online ordering on our ERP; and
• View orders on ERP online.
E-Government: The use by government
agencies of ICTs that have the ability to transform