Global Spread Of E Commerce

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  • 1. International Journal of Information Management 22 (2002) 181–194 Legal determinants of the global spread of e-commerce Gordian Ndubizu1, Bay Arinze* Management Department, Bennet S. LeBow College of Business, Drexel University, Philadelphia, PA 19104, USA Abstract This paper examines the effects of quality of legal rules and enforcement, creditor rights, shareholder rights and the level of technology integration in the market on the global spread of e-commerce. We report three primary results. First, consistent with our hypotheses, quality legal rules and enforcement and creditor rights in each country are significantly and positively related to 1998 global e-commerce revenues. The relationships between shareholder rights, technology integration and e-commerce revenues are weak. Second, consistent with 1998 results, quality legal rules and enforcement and creditor rights are significantly and positively associated with 1999 global e-commerce revenues. Finally, when 1998 and 1999 data are pooled together, the results are stronger and consistent with the individual year findings. All our results are robust to alternative model specifications, time periods and scaling or non-scaling of the dependent variable. Taken together, the results underscore the importance of quality legal rules and creditor protection in global spread of e-commerce. r 2002 Elsevier Science Ltd. All rights reserved. Keywords: Quality legal rules and enforcement; Creditor rights in each country; Customer governance; E-commerce revenues and global spread of e-commerce 1. Introduction This paper examines whether the type of international legal institutions (i.e., the quality of legal rules and investor protections) and the level of technology integration in the market are related to the global spread of e-commerce, as measured by e-commerce revenues. Our inquiry is motivated by current debate among lawmakers and market participants on the relationship between quality legal rules and their enforcement and the global spread of e-commerce (Zabala, 2000; Dolven, Slater, & Song, 2000). There appears to be a widespread impression that electronic hackers and poor legal rules and enforcement are major threat to global spread of e-commerce. In particular, many claim that poor legislation and law enforcement create incentives for hackers to intensify *Corresponding author. Tel.: +1-215-895-1798; fax: +1-215-895-2891. E-mail address: arinzeob@drexel.edu (B. Arinze). 1 Also correspond to: G. Ndubizu, P.O. Box 91, Princeton JCT, NJ 08550, USA. 0268-4012/02/$ - see front matter r 2002 Elsevier Science Ltd. All rights reserved. PII: S 0 2 6 8 - 4 0 1 2 ( 0 2 ) 0 0 0 0 4 - X
  • 2. G. Ndubizu, B. Arinze / International Journal of Information Management 22 (2002) 181–194 182 their fraudulent activities on the world-wide Web. Such fraud is likely to increase the transaction costs of e-commerce (Bell, 1998). The higher cost creates incentives for market participants to withdraw from e-commerce, leading to a reduction in e-commerce revenue. However, the validity of these claims has not been subjected to empirical examination. Consistent with the claims, the eGlobal study (1999) finds that as the number of people online doubled from 44 million in 1997 to 95.4 million in 1998, the total global revenue from e-commerce tripled, from $10.8 billion to $37.6 billion over the same period. The revenue figures include both business-to-business (B–B) and business-to-consumer (B–C) spending on the global web. The eGlobal study (1999) projects global e-commerce revenue (ECR) to grow beyond one trillion dollars by 2003 if illegal activity on the web is controlled. The projected growth in the size of e-markets is likely to reduce the marginal cost of transacting globally, making e-commerce an attractive means of processing transactions compared to the traditional paper-based method and even to electronic data interchange (EDI) (Baum, Chen, & Granitsas, 2000). However, the growth of Internet-based commerce is likely to depend on, among other things, the quality of legal rules and enforcement in ensuring that transaction data are protected and secured from electronic hackers worldwide. This concern, if not adequately addressed, is likely to increase transaction costs and reduce the incentive to transact on the web. Consistent with this prediction, Diamond and Verrecchia (1991) and Bartov and Bodnar (1996) show that high transaction costs reduce trading liquidity in US equity markets. In related studies, La Porta et al. (1997) and Dolven et al. (2000) find that countries with a poor tradition of law and order have smaller equity and debt markets relative to countries that have a high-quality law and order. Presumably, the willingness to transact on the web depends on transaction costs, which decreases with quality legal rules and enforcement. The Securities and Exchange Commission (SEC) offers the position that the use of advanced electronic transaction in business enhances the efficiency of the market by allowing for the rapid dissemination of information in a more cost-efficient manner than traditional paper-based methods.2 The commission concludes that the use of advanced technology in business decreases cost relative to the paper-based economy. One implication of the SEC conclusion is that global spread of e-commerce depends on the level of technology integration in each country. Therefore, we hypothesize that technology integration is positively related to global spread of e-commerce, particularly in the long run when economy of scale and costs substitution have taken place. We hypothesize that quality legal rules and enforcement, creditor rights, shareholder rights, and technology integration are positively related to e-commerce revenues. Consistent with our prediction, quality legal rules and enforcement and creditor rights are significantly and positively associated with e-commerce revenues. The findings are robust to alternative model specifications, time periods and pooling of data to ensure asymptotic efficiency. The results suggest that the anticipated growth in e-commerce depends on the existence of quality legal rules and enforcement and creditor rights regulating the global e-commerce environment. Our results underscore the importance of customer protection in the development of global e-commerce. 2 Securities and Exchange Commission, Rulemaking for Edger System, Securities ACT Release No. 33-7684, May 17, 1999. ‘‘Corporate Websites: Links to Litigation’’ Investor Relations Business (November 23, 1998): 4–5. Securities and Exchange Commission, Report to the congress: The impact of recent technological advances on the securities markets, July 8, 1997.
  • 3. G. Ndubizu, B. Arinze / International Journal of Information Management 22 (2002) 181–194 183 The organization of the remainder of this paper is as follows. Section 2 describes the linkages between customers’ protection (customer governance), technology integration and global spread of e-commerce. Section 3 describes the sample and data. Section 4 presents empirical findings concerning the linkages between customers’ governance and e-commerce revenues and Section 5 offers conclusions. 2. Customer governance and e-commerce Critical factors that influence the global spread of e-commerce include quality legal rules that protect electronic commerce and their enforcement (see Baum et al., 2000; Dolven et al., 2000). Presumably, the willingness of traders in each country to trade electronically depends on the terms on which transaction can be made using e-commerce. If terms are costly, rational traders have economic incentive to withdraw from e-commerce. Countries that offer quality legal rules and enforcement to protect business activities provide economic incentives for rational traders to engage in e-commerce, compared to countries with inadequate trade protection. Also, we expect customers to withdraw from e-commerce if their country has inadequate legal rules and enforcement for protecting business activities. This prediction is consistent with La Porta et al. (1997) discussion of law and order tradition and capital market development in many countries.3 They find that a tradition of high-quality law and order is positively related to the size of capital markets. Similar findings are reported in Dimond and Verrcchia (1991) regarding the relationship between investor protection and US equity market liquidity. The United States and Western Europe are economic environments where the security of encryption keys, authentication codes, and bank transactions are highly protected against hacking and arbitrary government intrusion. One fear is that in third-world countries, the same protections may not be available. As examples, Dolven et al. (2000) and Nunes (2000) report on the lack of protective legislation and of infrastructure in Thailand and South Africa, respectively. In some cases, it is not far-fetched that the government agencies and central banks that are responsible for settlement of transactions might be involved in compromising the security of e-commerce. Significantly, China views safeguarding the integrity of e-commerce as essential to their national security (Kennedy, 2000). This is against the backdrop of the great desire of developing countries to obtain a share of global e-commerce revenues (Vesely, 2000). The relationship between international legal institutions, integration of technology in the market and global spread of e-commerce is shown graphically in Fig. 1. The figure is premised on quality legal rules and their enforcement preventing losses associated with hackers and reducing e-commerce transaction costs. Singapore also introduced their Electronic Transaction Act in 1998 (Endeshaw, 1999). The UK’s Electronic Commerce Bill and forthcoming European legislation (Carter, 2000) are examples of efforts to raise the legal protections around e-commerce to the same level as that of the United States. The reduction in cost is intended to create economic incentives for traders and customers to intensify their participation in e-commerce. Thus, we predict a positive relation between quality legal rules and enforcement and e-commerce revenues. 3 Presumably e-commerce, like most technology-oriented economic activities, is characterized by the economy of scale, particularly in the long-run.
  • 4. G. Ndubizu, B. Arinze / International Journal of Information Management 22 (2002) 181–194 184 Law and Order Transaction Creditor Rights Protection Factors 1 Stockholder Rights ± Other Protections Market 2 Transaction Costs for E-Commerce 3 Technology Development 1. Telephone access charges. 2. Loss due to credit card fraud. 3. Loss due to transaction fraud. 4. Delivery charges. Global E-Commerce Revenues 4 1. B - B 2. B - C Fig. 1. Customer governance and global E-commerce revenue. 1Quality legal rules and their enforcement, creditors’ right and shareholder’s right in each country reduce e-commerce transaction cost (À). The low cost creates economic incentives to engage in e-commerce (+). 2The level of technology integration in the market is inversely related to e-commerce transaction costs. Higher technology development is likely to reduce e-commerce transaction costs. This assumption is consistent with the trend in the US economy. 3Higher transaction costs reduce trading liquidity as reported in Diamond and Verrechia (1991) and Bartov and Bodnar (1996). In equilibrium, value-maximizing investors/ traders have economic incentives to avoid higher transaction costs, leading to a reduction in global e-commerce revenues. Holding marginal benefit constant, global e-commerce is likely to depend on marginal cost of engaging in e-commerce. 4E-commerce transaction cost may also depend on the volume of e-commerce business—it is quite conceivable that the higher volume of e-commerce would reduce unit cost, which in turn encourages more e-commerce. The existence of economy of scale in global e-commerce is likely to reduce per unit cost of transaction. Thus, transaction cost may have multiplier effects on global e-commerce revenues. Consistent with this prediction, eGlobal (1999) reports that shipping difficulty and fraud are major reasons US firms turn away international e-commerce orders. In e-commerce, customers and managers are physically separated and engage in a contractual relationship in which customers provide funds and firms promise to deliver merchandise. The essential problem is how can customers be sure that, once they release their funds, they will receive the merchandise as specified in their contract with the firm. Customer governance refers to this complex contractual relationship and the difficulty customers have in assuring that their funds are not expropriated. Specifically, customers become short-term creditors and the borrower (firm) promises to make a pre-specified delivery of merchandise in the future. If the firm defaults on delivery of merchandise, the customers possess certain rights in some countries, including the ability to recover their funds. An essential feature of e-commerce contracts is that a failure by firms to adhere to the contract triggers the transfer of funds or control rights to the customers if creditor rights exist in the country. Therefore, the amounts customers are willing to spend in
  • 5. G. Ndubizu, B. Arinze / International Journal of Information Management 22 (2002) 181–194 185 e-commerce depend on whether creditor rights exist. Grossman and Hart (1986) and Williamson (1985) report that managerial opportunism or expropriation of investors reduces the amount of funds that investors are willing to put up ex ante to finance the firm. Consistent with this view, we expect managers to put constraints on themselves or allow customers to set constraints so as to reduce ex post misallocation of payment. This in turn would induce customers to put more funds ex ante or engage in more e-commerce transactions. Managers and customers set constraints by signing legally enforceable contracts that specify what managers are allowed to do with funds received from customers. Thus, managers have economic incentives to protect customers. Such protection is likely if creditor rights are protected in the country. We, therefore, predict a positive relationship between the existence of creditor rights in a country and the global spread of e-commerce. Unlike creditors, shareholders are not promised returns on investment and have no claim to firms’ specific assets. The principal rights that shareholders typically get is the right to vote. This right to vote is not universal and is not enforceable in many countries. However, the existence and enforceability of shareholders’ voting rights creates an environment of trust, which is essential for the development of institutions utilizing e-commerce. Shleifer and Vishny (1997) point out that a complete contract is not technologically feasible because future contingencies are hard to foresee. Because of this problem, contract residual control rights (e.g., rights to make decisions in circumstances not foreseen by the contract) is allocated to contracting parties based on trust. The lack of trust increases the cost of allocating residual control rights in e-commerce contracts. The high costs create economic incentives for traders to withdraw from e-commerce contracts. Consistent with this view, La Porta et al. (1997) and Baum et al. (2000) argue that trust among citizens is the underlying factor that influences the development of all institutions, including contracts, in the country. Taken as a whole, these studies suggest that the global spread of e-commerce and transaction cost move inversely to one another, and that if the existence of trust decreases contracting cost then the global spread of e-commerce should have increased. Consistent with the existence of shareholder voting rights ensuring an environment of trust, we predict a positive relationship between shareholder voting rights and e-commerce revenues. Fig. 1 also shows that the degree to which technology is integrated into the market in each country affects e-commerce transaction costs. High-level technology integration is predicted to decrease transaction cost because of technological efficiency and the substitution of high labor cost with lower cost of technology. Consistent with this prediction, eGlobal (1999) reports higher telephone access charges in countries with low-level technology integration relative to countries with advanced technology integration. This report also reveals that Internet access rates differ dramatically based on the level of technology integration in the market. The cost of Internet access per hour varies from o1 cent in US to $13.90 in Gabon (eGlobal, 1999). If technology integration is inversely associated with e-commerce transaction costs, then as technology integration with the market intensifies so will the willingness of traders to transact on the web (Au & Kauffman, 2001). 2.1. The global e-commerce model Based on analysis of Fig. 1, we estimate a cross-sectional equation relating global e-commerce revenues to quality of legal rules and enforcement, creditor rights, shareholder rights and
  • 6. G. Ndubizu, B. Arinze / International Journal of Information Management 22 (2002) 181–194 186 technology integration in the market as follows: ECRI ¼ B0 þ B1 LAWI þ B2 CRERI þ B3 OSOI þ B4 MCAPI þ ei ; ð1Þ where ECR is total annual e-commerce revenues for each country. Variables LAW, CRER and OSO are proxies for various components of customer protection or governance. LAW reflects quality of legal rules and their enforcement in each country. Consistent with La Porta et al. (1997), we measure LAW variable using an average monthly index of assessment of law and order tradition in each country based on a scale of 0–10, with 0 representing a low level of law and order. CRER is an index that measures creditor right in each country based on a scale of 0–4, with 4 representing four important creditor rights. These rights are: (1) creditors’ consent to filings for reorganization, (2) secured creditors receive the collaterial if the debtor defaults, (3) the debtor loses rights to administer property pending the resolution of the re-organization and (4) secured creditors receive proceeds first from the disposition of assets in bankruptcy. For each creditor right that exists in a country, one is added to the index. OSO is the shareholders’ rights, measured as one if the country law requires ordinary shares to have one vote per share, and zero otherwise. MCAP measures the level of technology integration in business activities. We use total stock market values at the end of each year scaled by the gross national product (GNP) as proxy for MCAP. If non-financial markets are different technologically from the stock market in each country, then our proxy for technology integration may be spurious. However, we expect technology transfer between markets to mitigate the spuriousness of our proxy. Eq. (1) is used to empirically measure the theoretical relationship developed in Fig. 1. We fit Eq. (1) separately for 1998, 1999 and combination of the two years. The pooling of the two years of data provides asymptotic and more efficient estimators. Both level (un-scale) and scale specification of the dependent variable are used in our analysis. The scale specification removes biases due to differences in size of ECR across countries (Barth et al., 1999). 3. Sample selection procedure The initial sample consists of 42 countries that report e-commerce revenues for 1998 and 1999 in eGlobal (1999) published by eMarketer (821 Broadway, New York, NY 10003). This sample represents an exhaustive set of countries that report total annual e-commerce revenues. To remain in the sample, the country had to meet the following conditions: (1) an average monthly index of assessment of legal rules and quality of law enforcement must be available in International Country Risk Guide, (2) information about creditor rights in each country must be available in Company Law, Bankruptcy Laws, (3) right of ordinary shares to carry one vote per share must be available in the Company Law, Commercial Code of the country and (4) total stock market value and GNP for each year are available in the Emerging Stock Market Factbook and World Development Indicators database, World Bank. These sample selection criteria ensure that the final sample has measures of ECR, LAW, CRER, OSO and MCAP needed to estimate Eq. (1). The final sample consists of 34 countries that meet the sample selection criteria and are identified in Table 1. The results in Table 1 ranked countries based on their total annual e-commerce revenues for 1998 and 1999. The results reveal that US has the largest e-commerce revenues and is ranked 1 in 1998 and 1999, while Zimbabwe has the lowest e-commerce revenues
  • 7. G. Ndubizu, B. Arinze / International Journal of Information Management 22 (2002) 181–194 187 Table 1 Sample countries ranked based on total e-commerce revenues Country Rank 1998 Rank 1999 US 1 1 Germany 2 2 4a,b UK 3 Japan 4 3 Canada 5 5 France 6 6 Netherlands 7 7 Sweden 8 8 Australia 9 9 11a,b Italy 10 10a,b Finland 11 Spain 12 12 Brazil 13 13 Denmark 14 14 16a,b Norway 15 15a,c Taiwan 16 20a,b Hong Kong 17 17a,c South Korea 18 Singapore 19 19 18a,c Switzerland 20 23a,b New Zealand 21 21a,c Belgium 22 24a,b Ireland 23 22a,c Austria 24 Portugal 25 25 Greece 26 26 Philippines 27 27 29a,b India 28 Kenya 29 30 Malaysia 29 30 Nigeria 29 30 Pakistan 29 30 28a,c South Africa 29 Zimbabwe 29 30 World-wide e-commerce Revenues 98,400m a Indicates change in rank in 1999. b Reduce rank. c Improve rank. Rank is in ascending order with 1 being the best rank (has the largest e-commerce revenue). In 1998 six countries have tie rank of 29, while five countries have tie rank of 30 in 1999. Rank is developed based on each country’s total e-commerce revenue reported in eGlobal Report published by eMarketer 1999, (m) millions of US dollars. and is ranked 34. The top ten countries by e-commerce revenues represent 95% of global e-commerce revenues. The 1999 ranking changed slightly from 1998. The most noticeable change is Japan over taking UK in the third place and Finland replacing Italy as the tenth top country by
  • 8. G. Ndubizu, B. Arinze / International Journal of Information Management 22 (2002) 181–194 188 Table 2 Descriptive statistics on total sample Variables Mean Std. dev. Minimum Maximum LAW 6.8456 2.6155 1.90 10.00 CRER 2.3000 1.3600 0.00 4.00 OSO 0.2200 0.4200 0.00 1.00 MCAP 0.6787 0.6432 0.01 2.42 ECRC 1973.8 9256.6 0.00 71,400 ECR98 1095.8 4930.4 0.00 28,900 ECR99 2851.7 12,077 0.00 71,400 Variables are defined as follows: LAW proxies for quality of law enforcement and rule of law in each country; CRER proxies for creditors’ legal right; OSO proxies for shareholders’ legal right; MCAP proxies for degree of technology integration in the market; ECRC is e-commerce revenue 1998 and 1999 combined; ECR98 is e-commerce revenue 1998; and ECR99 is e-commerce revenue 1999. The ECR variables in this table are not scaled by World-wide e-commerce revenues. e-commerce revenues. world-wide e-commerce revenues grew by 160% in 1999, resulting in total e-commerce revenues of $98 billion. Taiwan, South Korea, Switzerland, Belgium, Austria and South Africa improve their rankings in 1999. In contrast, Norway, Hong Kong, New Zealand, Ireland and India receive relatively less favorable ranking in 1999. Table 2 presents the descriptive statistics on the 34 countries that meet our sample selection criteria. The variables LAW, CRER, OSO and MCAP are used in Eq. (1) as the independent variables, while ECR is the dependent variable. ECRC represents pooled e-commerce revenues for 1998 and 1999. E-commerce revenues for 1998 and 1999 are represented as ECR98 and ECR99, respectively. These variables have considerable dispersion, particularly the variable for e-com- merce revenues. As a consequence, we scaled the variable for e-commerce revenues by total global e-commerce revenues in each year. The scaled and non-scaled variables are used separately in estimating Eq. (1) and results are qualitatively similar. 4. Empirical results We created five sample portfolios based on the percentile of e-commerce revenues. The sample countries that constitute 10th, 25th, 50th, 75th and 90th percentiles based on ECR are identified as distinct portfolios. The mean LAW, CRER, OSO, and MCAP for each portfolio are reported in Table 3 Panel A. Portfolios with higher e-commerce revenues (75th and 90th percentiles) appear to have more quality law and order compared to other portfolios. This monotonic relationship between quality legal rules and e-commerce revenues is strikingly consistent with our prediction. Similarly, the portfolio with largest e-commerce revenues (90th percentile) has the highest level of technology integration in the market (MCAP). Consistent with this pattern, the 10th percentile with the least ECR appears to have weak tradition of Law and order. The same pattern continues in the 25th, 50th and 75th sample portfolios. The findings provide preliminary evidence that e-commerce revenues are associated with LAW and MCAP.
  • 9. G. Ndubizu, B. Arinze / International Journal of Information Management 22 (2002) 181–194 189 Table 3 Percentiles based on size of e-commerce revenue and correlation statisticsa ECR 10th 25th 50th 75th 90th Panel A: Mean legal rules (LAW), creditor rights (CRER), shareholder rights (OSO) and technology integration (MCAP) categorized by size of e-commerce revenues ECR98 0.0000 15.4000 88.1500 330.1500 1413.600 LAW 3.7100 4.3489 6.3389 9.5289 9.2700 CRER 3.3333 3.2222 2.7059 1.7778 2.6666 OSO 0.3333 0.4444 0.4118 0.1111 0.0000 MCAP 0.5667 0.5079 0.8357 1.2104 1.3639 Panel B: Correlation analysis for all samples ECR ECRW LAW CRER OSO MCAP À0.183 À0.100 ECR 1.000 0.188 0.224 (0.000)*** (0.278) (0.301) (0.574) (0.210) À0.183 À0.100 ECRW 1.000 0.188 0.224 (0.000)*** (0.287) (0.301) (0.574) (0.210) À0.178 À0.138 LAW 0.634 0.633 0.577 (0.000)*** (0.000)*** (0.231) (0.343) (0.000)*** À0.422 À0.424 À0.227 À0.051 CRER 0.027 (0.013)*** (0.013)*** (0.124) (0.858) (0.734) À0.142 À0.142 À0.157 À0.056 OSO 0.027 (0.424) (0.424) (0.282) (0.859) (0.706) À0.136 À0.063 MCAP 0.384 0.381 0.624 (0.027)** (0.029)** (0.000)*** (0.368) (0.672) a Percentiles are categorized based on e-commerce revenues in 1998. The sample of countries in each percentile (10th, 25th, 50th, 75th, and 90th) were used to calculate the mean for each variable and the result reported in this table. Percentiles based on 1999 e-commerce revenues for each country or combination of 1998 and 1999 e-commerce revenues provide qualitatively similar results. Consequently, only revenues for 1998 is reported. Upper (Lower) Diagonal: Pearson (Spearman). *** Correlation is significant at the 0.01 level (2-tailed). ** Correlation is significant at the 0.05 level (2-tailed). * Correlation is significant at the 0.10 level (2-tailed). The pattern of correlation is qualitatively similar for each year and pooled years. The upper right (lower left-)- hand side of Table 3 panel B contains the Pearson (Spearman) correlation coefficients. Consistent with panel A results, e-commerce revenues (ECR) are correlated with quality legal rules (LAW) and high-level technology integration in the market (MCAP). The correlation is positive and statistically significant at the 0.01 level. These correlation coefficients indicate the degree to which variation in one variable is related to variation in another. Also, creditors’ rights in each country are positively correlated with e-commerce revenues. The correlation coefficients indicate the strength of the bivariate relation between e-commerce and LAW, or MCAP or CRER. The finding provides another preliminary evidence of bivariate association between ECR and some independent variables.
  • 10. G. Ndubizu, B. Arinze / International Journal of Information Management 22 (2002) 181–194 190 4.1. Regression analysis for 1998 Table 4 presents the results of estimating Eq. (1), which regresses 1998 e-commerce revenues on LAW, CRER, OSO and MCAP. Panel A provides results in which the dependent variable is not scaled by total global e-commerce revenues, while Panel B-dependent variable is scaled. The adjusted r-squares in each panel are qualitatively similar and range from 0.42 to 0.47. This finding suggests that significant variations in e-commerce revenues are explained by our independent variables, particularly LAW and CRER. The coefficients on LAW and CRER are significantly and positively related to e-commerce revenues. The positive coefficients on LAW are significant at the 0.05 level in model 1 and at the 0.01 level in models 2–4. The variable CRER is significant at the 0.10 level. We exclude MCAP in models 2–4 because it is correlated with LAW. Other variables are excluded to ascertain the sensitivity of our coefficients estimate to model specification. In all analyses, coefficients on MCAP and OSO are not significant. The results in Panels A and B are qualitatively similar, indicating robustness of results to scale effects. This finding suggests that our results are robust to Table 4 1998 E-commerce revenues regress on customer governance measures and technology integration RÀ2 B0 B1 B2 B3 B4 Model Panel A: Unscaled dependent variable (ECR) ECR ¼B0 þ B1 LAWþB2 CRERþB3 OSOþB4 MCAPþe À1162.8 À338.89 À459.42 1 190.21 240.19 0.45 (À1.12) (2.16)** (1.94)* (À0.76) (À0.91) À1885.3 2 249.80 197.31 48.58 0.45 (À2.84) (4.25)*** (1.73)* (0.35) À1751.3 3 239.41 184.38 0.47 (À3.31) (4.82)*** (1.75)* À0.247 4 0.0051 0.43 (À3.70) (4.44)** Panel B: Scaled dependent variable (ECRW) ECR ¼B0 þ B1 LAWþB2 CRERþB3 OSOþB4 MCAPþe À0.0090 À0.0122 1 0.0309 0.0057 0.0064 0.45 (À1.12) (2.16)** (1.94)* (À0.76) (À0.91) À0.0501 2 0.0066 0.0052 0.0013 0.45 (À2.84)** (4.25)** (1.73)* (0.35) À0.0466 3 0,0064 0.0049 0.47 (À3.31)*** (4.82)*** (1.75)* À0.247 4 0.0051 (À3.70) (4.44)*** 0.43 In Panel B, ECR was scaled by world-wide e-commerce revenue in 1998. The t-statistics are in parentheses for 1-tailed tests. Measures of customer governance are LAW (quality legal rules and enforcement), CRER (creditor rights) and OSO (shareholder rights). MCAP measures level of technology integration. *** Significant at the 0.01 level. ** Significant at the 0.05 level. * Significant at the 0.10 level.
  • 11. G. Ndubizu, B. Arinze / International Journal of Information Management 22 (2002) 181–194 191 alternative model specifications. Taken together, the findings support the prediction that quality of legal rules and their enforcement in each country improve e-commerce revenues. Therefore, countries with a high level of legal rules and enforcement also have greater e-commerce revenues. 4.2. Regression analysis for 1999 Table 5 presents regression summary statistic for Eq. (1), which regresses LAW, CRER, OSO and MCAP on 1999 e-commerce revenues. Consistent with results in Table 4, Panel A (Table 5) provides results of analysis in which the dependent variable is not scaled by global e-commerce revenues for 1999, while Panel B results are based on scaled dependent variable. The results in panels A and B are qualitatively similar. The adjusted r-squares in Table 5 are slightly higher than in Table 4, except in model 4. These findings show that our models continue to explain a significant portion of the variation in e-commerce revenues in 1999. In particular, the importance of quality legal rules and creditors’ rights in the global spread of e-commerce continue in 1999. The coefficients on LAW and CRER are significantly and positively related to e-commerce Table 5 1999 E-commerce revenues regress on customer governance measures and technology integration RÀ2 B0 B1 B2 B3 B4 Model Panel A: Unscaled dependent variable (ECR) ECR ¼B0 þ B1 LAWþB2 CRERþB3 OSOþB4 MCAPþe À3114.2 À951.7 À326.2 1 541.6 650.3 0.49 (À1.13) (2.31)** (1.98)* (À0.79) (À0.99) À5199.6 2 713.6 526.5 167.9 0.49 (À2.94)*** (4.55)*** (1.73)* (0.45) À4736.8 3 677.7 481.8 0.51 (À3.35)*** (5.11)*** (1.71)* À2305.7 4 501.4 0.22 (À2.07)** (2.82)** Panel B: Scaled dependent variable (ECRW) ECR ¼B0 þ B1 LAWþB2 CRERþB3 OSOþB4 MCAPþe À0.0317 À0.0097 À0.0134 1 0.0055 0.0066 0.49 (À1.13) (2.31)** (1.98)* (À0.80) (À0.99) À0.0528 2 0.0072 0.0053 0.0016 0.49 (À2.94)*** (4.54)*** (1.74)* (0.44) À0.0483 3 0.0068 0.0049 0.51 (À3.36)*** (5.11)*** (1.72)* À0.0235 4 0.0051 0.22 (À2.07)** (2.82)*** In Panel B, e-commerce revenues (ECR) for each country was scaled by world-wide e-commerce revenues for 1999. The t-statistics are in parentheses for 1-tailed tests. Customer governance measures are LAW (quality legal rules and enforcement, CRER (creditor rights) and OSO (shareholder rights). MCAP proxies for technology integration in the market. *** Significant at the 0.01 level. ** Significant at the 0.05 level. * Significant at the 0.10 level.
  • 12. G. Ndubizu, B. Arinze / International Journal of Information Management 22 (2002) 181–194 192 revenues. These coefficients are generally higher than the corresponding coefficients for 1998 models. Consistent with our prediction, the results show that quality of legal rules and their enforcement and creditors’ right in each country are important factors related to the global spread of e-commerce. Also, the results are consistent with the 1998 results reported in Table 4. Taken together, the results are robust across different time periods. 4.3. Additional analysis The 1998 and 1999 data are pooled together in one regression using Eq. (1) to estimate the coefficients of our variable and results are presented in Table 6. We provide only the scaled results because non-scaled results are qualitatively similar to scale analysis. The pooled analysis provides asymptotic efficiency and estimators with minimum variance. The adjusted r-squares in Table 6 are consistently higher than numbers reported in Tables 4 and 5, indicating that the pooled models are asymptotically more efficient in explaining e-commerce revenues. Consistent with individual year results, the coefficients on LAW and CRER are significantly and positively related to e-commerce revenues, at the 0.01 level. Both the quality of legal rules and creditor protection have about the same impact on e-commerce revenues. Consistent with results in Tables 4 and 5, the additional results support our prediction. Thus, quality legal rules and creditor protection are important determinants of global spread of e-commerce. Consistent with Grossman and Hart (1986), our results show that protecting customers from managerial opportunism or expropriation of funds encourages the global spread of e-commerce. The coefficient on proxy for shareholder rights (OSO) is not significant. We attribute the weak result to our proxy inability to capture the effect of trust on global spread of e-commerce. Similarly, the coefficient on technology integration is not significant. The insignificant results suggest that technology integration is not cost effective in the short-run. This interpretation of our Table 6 Pooled e-commerce revenues regress on customer governance measures and technology integration RÀ2 B0 B1 B2 B3 B4 Model ECR ¼B0 þ B1 LAWþB2 CRERþB3 OSOþB4 MCAPþe À0.0313 À0.0094 À0.0128 1 0.0052 0.0065 0.57 (À1.67)* (3.32)*** (2.92)*** (À1.16) (À1.41) À0.0515 2 0.0069 0.0053 0.0014 0.50 (À4.24)*** (6.45)*** (2.55)*** (0.58) À0.0474 3 0.0066 0.0049 0.51 (À4.83) (7.21)*** (2.51)*** À0.0255 4 0.0054 0.46 (À5.44)*** (6.64)*** The t-statistics are in parentheses for 1-tailed test. Customer governance measures are LAW (quality legal rules and enforcement), CRER (creditor rights) and OSO (shareholder rights). MCAP proxies for technology integration in the market. *** Significant at the 0.01 level. ** Significant at the 0.05 level. * Significant at the 0.10 level.
  • 13. G. Ndubizu, B. Arinze / International Journal of Information Management 22 (2002) 181–194 193 results is not inconsistent with technology integration providing economy of scale and efficient cost substitution in the long-run. 5. Conclusions We test whether quality of legal rules and their enforcement, creditor rights, shareholder rights and market technology integration are related to global e-commerce revenues. Our analysis is motivated by recent claim that the global spread of e-commerce depends on the quality of law and order protecting e-commerce. We report three primary results. First, consistent with the claims, quality legal rules and their enforcement are positively associated with e-commerce revenues. Second, the existence of creditor rights in each country contributes to the global spread of e-commerce. Finally, contrary to our prediction, integration of technology in the market and shareholder rights are not significantly related to e-commerce revenues, particularly in the short- run. In summary, our empirical evidence support the claims that legal protection of business activities is important for global spread of e-commerce. While this paper has developed the theme that legal environments differ across countries, and that these differences matter for global spread of e-commerce, we have again refrained from answering a deeper question. This question is, what is it about legal rules and their enforcement that account for their influence on the global spread of e-commerce? Alternatively, are poor legal rules and enforcement just a proxy for an environment that is hostile to institutional development, including that of e-commerce? In this connection, La Porta et al. (1997) find that institutions are less effective in countries exhibiting low levels of trust among citizens. This finding suggests that the development of all institutions, including e-commerce, is related to trust or laws that ensure trust among citizens. In the context of e-commerce, trust reduces the cost of contracting or the desire to achieve a complete contract. From our results, creditor rights and quality legal rules and enforcement might capture some aspects of trust between customers and firms, and are significantly associated with the global spread of e-commerce. Consistent with our prediction, we find that imposing constraints on managers through quality legal rules and creditor rights induces customers to put up more funds in e-commerce transactions. Acknowledgements We thank Augustine Arize, R.S. Wallace, Sunso Kwon and Kingsley Olibe for their comments and support. Ndubizu and Arinze acknowledge research funding from the Bennet LeBow College of Business and Safeguard Scientific Center for E-Commerce. References Au, Y., & Kauffman, R. (2001). Should we wait? Network externalities, compatibility, and electronic billing adoption. Journal of Management Information Systems, 18(2), 47–63. Barth, M. E., & Kallapur, S. (1996). The effects of cross-sectional scale differences on regression results in empirical accounting research. Contemporary Accounting Research, 13, 527–567.
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