Empirical Analysis of the Determinants of E-commerce Adoption. Evidence from the European Union

Table of Content

1 Introduction

2 Related literature
2.1 Literature on psychological determinants and socio-demographics influencing the online purchasing behavior
2.2 Literature on the impacts of broadband on various economic outcomes

3 Framework development

4 Data
4.1 Sample construction
4.2 Introducing the variables
4.2.1 The dependent variable
4.2.2 Explanatory variables

5 Econometric model

6 Estimation results
6.1 Main estimation results
6.2 Results of subgroups of individuals
6.3 Robustness checks and limitations

7 Discussion

8 Conclusion

References

Abbreviations

Appendix

Abstract

Motivated by a rising popularity and economic as well as political importance of the E­commerce sector, this research investigates how the high-speed broadband internet cov­erage and the usage intensity of people influence the share of web buyers in a country. This question is examined by studying a comprehensive panel data set covering the EU- 28 member states in the period from 2003 until 2018.

Findings suggest that a more widespread availability of fixed broadband internet exerts a significant positive influence on the amount of online shoppers, while mobile broad­band connectivity is found to be adversely related. Furthermore, the results claim that the more frequent internet users, the higher the national percentage of internet purchas­ers. These outcomes are of relevance to all stakeholders with interest to push the devel­opment of the European E-commerce sector further.

Table of Figures

Figure 1. Individuals ordering goods or services online, by all individuals (European Commission 2018b)

Figure 2. Conceptual model (own presentation)

Figure 3. Individuals ordering goods or services online (EU), by all individuals (European Commission, 2018b)

Figure 4. NGA broadband coverage/ availability (as a % of households), by total (European Commission, 2018b)

Figure 5. NGA broadband coverage and standard fixed broadband coverage, by total (European Commission, 2018b)

Figure 6. 4G mobile broadband (LTE) coverage, by total (European Commission, 2018b)

Figure 7. 4G mobile broadband (LTE) coverage and advanced 3G mobile broadband (HSPA) coverage, by total (European Commission, 2018b)

Figure 8. Individuals who are frequent internet users, by all individuals (European Commission, 2018b)

Figure 9. Comparing standard deviations and values between subgroups - Frequent internet users (own presentation)

List of Tables

Table 1. Model setup comparison (own presentation)

Table 2. Model setup comparison (own presentation)

Table 3. Comparison between standard and high-speed broadband (own presentation)

Table 4. Subgroup comparison (own presentation)

Table 5. Stepwise introduction of the model components (own presentation)

1 Introduction

Bill Gates has once predicted that the internet is becoming the town square for the glob­al village of tomorrow. Being a vision at that time, current developments show that this statement addresses no longer only the future - it has never before described the present so suitably. Within the last years, the internet has evolved to be a central information hub for individuals and is nowadays tightly embedded into our everyday life. Infor­mation on nearly everything can be gathered from the web, a big part of social life takes place in the virtual sphere and the internet has entered the professional space a long time ago - the progressing digitalization moves a steadily increasing share of activities online. Since access to high-speed internet is vastly increasing, people get accustomed to an ubiquitous connectivity.

One application of the internet that steadily gained popularity for many years now re­lates to an initial purpose of the 'town square', which used to be the location of a mar­ket. Facilitated by the broad deployment of network technologies and their rapid devel­opment, companies increasingly offer their products via online channels. Consumers value the convenient shopping experience accessible around the clock and benefit from a greater variety of merchandise as well as often lower prices. Firms profit by cost sav­ings, an augmented customer base and new sales options in return.

The relevance of this distribution channel is emphasized by the fact that the E­commerce share of total retail sales has risen significantly, already making up around 14% of global total retail revenue in 2019 (eMarketer 2019). Consequently, a rising share of the population engages in internet shopping activities, spanning across coun­tries and demographics. In the European Union (EU), the percentage of individuals who order goods or services online has tripled over the last 15 years (European Commission 2018a). Figure 1 shows the evolution of the EU average, illustrating the constant up­ward trend. Starting with one fifth of the population in 2004, already 60% of Europeans state to make purchases online in 2018 with the tendency to grow even further.

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Still, differences across geographic regions become apparent when globally comparing E-commerce adoption. In 2016, 96% of Americans that buy on the internet compare with a share of only 55% of European online shoppers (BigCommerce 2016; European Commission 2018a).

This development and discrepancies in light of the enormous economic importance of the topic raises the question which factors are impacting the online purchasing behavior of individuals. Conceivable would be cultural predispositions that change the attitude towards shopping on the web, economic influences or variations in the availability or progressivity of the technical infrastructure. This diversity of possible determinants places even greater urgency on a more thorough examination of the domain.

Picking up on one aforementioned point, a pleasant online shopping experience is ena­bled by the advanced contemporary technological infrastructure and massively further improved by a rising connection speed. The transition to broadband internet access has had far-reaching consequences not only on E-commerce activities but also by affecting various economic outcomes as well as triggering a shift in the overall internet usage intensity of individuals (Qiang et al. 2009; Hitt and Tambe 2007). The amount of fre­quent internet users in the EU has tripled in the period between 2004 and 2018 (Europe­an Commission 2018a), placing the deployment of network technologies high on the agenda of the economy, society and politics.

Acknowledging the importance and central role of information and communication technologies (ICT) early on, the European Commission (EC) included already in 2010 the 'Digital Agenda for Europe' in the Europe 2020 strategy. As one of seven flagship initiatives, the creation of a digital single market (DSM) aims at “providing better ac­cess for consumers and businesses to digital goods and services across Europe, creating the right conditions for digital networks and services to flourish, and maximising the growth potential of the digital economy” (European Parliament 2019, p. 1). Key build­ing blocks that are addressed within the Digital Single Market strategy are among others the access to fixed and mobile broadband, internet usage and E-commerce behavior. Next to the public and private interest in the topics of online shopping and high-speed broadband internet access, the joint inclusion in the Digital Agenda for Europe demon­strates the strategic significance and interrelation of the subjects.

Linking these current developments to the general urge to investigate determinants of the online purchasing behavior, this research wants to examine a new approach to E­commerce.

This thesis places its focus on the technical infrastructure as one potential source of var­ying shares of online shoppers between countries. More precisely, the possible influence of availability of high-speed broadband internet on web buying will be examined. Consequently, the central topic of this paper will be investigating if and how broadband deployment affects online purchasing. Connecting the research furthermore to the aforementioned emphasis of the European Union to strengthen the supply and exploit­ing of digital networks and services, it is geographically concentrated on Europe by studying data from the European Union.

The rest of the thesis is set up as follows. Related literature covering determinants of the online purchasing behavior as well as impacts of broadband internet will be analyzed and presented in the next section. Afterwards, the development of the conceptual framework is outlined, followed by an introduction of the data. The econometric model and the estimation results will then be explained. The study will be summarized and completed by a discussion and conclusion.

2 Related literature

This research examines online purchasing from a new viewpoint by connecting it to the supply of broadband. Being a rather new approach, literature at the topic intersection is yet missing, while both subjects have independently been attracting great academic at­tention. Subsequently, prior studies related to the determinants of online purchasing behavior and impacts of broadband internet will be introduced.

2.1 Literature on psychological determinants and socio-demographics influencing the online purchasing behavior

The literature covering online buying behavior predominantly comprises studies on psy­chological determinants or dispositional inclinations. Following this approach, individ­uals and their intention to buy goods online are examined by gathering information on factors that are intrinsic to each person. Examples for this kind of personal predisposi­tions are convenience, risk aversion or innovativeness (Rohm and Swaminathan 2004; Limayem et al. 2000; Bhatnagar et al. 2000; Blake et al. 2003). However, studies on such characteristics were neglected for the purpose of this review as they do not add significant value to the theoretical foundation of the research.

Yet another line of research adopts a lifestyle perspective while often considering socio­demographics, addressing behavioral outcomes as well as extraverted attitudes. Among these studies, a consensus on several important influencing factors has been reached. Two main drivers have been repeatedly mentioned, which are relevant for the research question of this paper.

Firstly, the internet usage intensity is identified to have a positive effect on online pur­chasing. Already in 1999, the scholars Donthu and Garcia find that a person who spends more time on the internet is more likely to shop online (see also Swinyard and Smith 2003). A year later, Lohse et al. consistently discover that the “percentage [...] making a purchase on the Internet increases as a function of time spent online” (p. 21).

Furthermore, the computer experience is stated to be positively related to the attitude towards internet shopping (Swarnakar et al. 2016). Authors receiving similar results refer to associated notions like computer or digital literacy (Swinyard and Smith 2003) or computer skills (Drouard 2010). Drouard additionally mentions in his paper that online experience is one of the key drivers of the diversity of internet use.

Due to their dependence, the concepts of usage intensity and computer literacy are how­ever not easily kept apart and sometimes even used interchangeably. Spending more time on the internet will enable an individual to get more familiar with the web and thus lead to a greater experience and therefore a higher digital literacy. On the other hand, highly-experienced users will in return spend longer time on the internet than the aver­age, influencing their usage intensity.

Moreover, many authors claim that a customer's online buying behavior is dependent upon socio-demographics. With regard to the age of online shoppers, the findings differ among scholars. Drouard (2010) detects age to have a negative impact on the internet adoption (see also Lohse et al. 2000). This would plead for generally younger internet shoppers as found in Swinyard and Smith (2003). Opposingly, Donthu and Garcia (1999) record in their work on the internet shopper that people who buy online are older than non-shoppers. Following the debate concerning the digital divide between age groups (for instance Paul and Stegbauer 2005), this assumption may however well be questioned.

Concerning the gender of online purchasers, the literature agrees on men being more likely to make purchases over the web (Van Slyke et al. 2002; Wu 2003). Men further display a greater usage diversity (Droaurd 2010) and spend slightly more than female shoppers (Lohse et al. 2000).

A last significant demographic variable is the educational difference between individu­als. Better-educated consumers are thus more highly represented within the frequent web buyer category (Swinyard and Smith 2003; Li et al. 1999).

To put the findings on behavioral determinants and socio-demographical influences in a nutshell, the internet usage intensity as well as computer literacy of an individual have an impact on the intention to buy on the internet. Even though not always unanimously in the results, a person's age, gender and education level are also labeled important pre­dictors of the online purchasing.

2.2 Literature on the impacts of broadband on various economic outcomes

The second building block of the research question of this paper is the deployment of high-speed broadband internet. The impacts of broadband have been examined from multiple angles. To classify them, a categorization introduced by Qiang et al. (2009) is adopted.

Impact on individuals and their roles in economic processes

Broadband adoption has been described as a “significant technological development, providing users with fast, always-on access to new services, applications, and content” (Qiang et al. 2009, p. 45). It enhances the variety of product information, reviews or specialty retailers an individual has access to. Therefore, it does not surprise that schol­ars find broadband connectivity to increase the internet usage of adopters (Hitt and Tambe 2007) as well as their usage diversity (Drouard 2010).

Users spend more time online and profit from a greater selection of consumed content. Firm efficiency and productivity

On a firm level, the deployment of ICT including broadband is considered an important driver of firm performance (Falk and Hagsten 2015). Literature demonstrates that broadband reduces inefficiency as well as improves input productivity (Thompson and Garbacz 2008). By implementing internet business solutions, firm can realize lower costs and increased revenues (Qiang et al. 2009).

Community competitiveness

As aforementioned, broadband connectivity ensures a broader access to information. Furthermore, communication costs are reduced. Thereby, broadband connectivity con­tains the inherent potential to link communities and unfold positive impacts on commu­nity competitiveness. Job creation, company and community retention and retail sales are among others mentioned in prior research (Qiang et al. 2009).

Overall economy

Crandall and Jackson (2001) claim that a “widespread adoption of broadband access service will bring enormous economic benefits to our economy” (p. 63). This statement is widely accepted in the scholarly realm. Other authors talk about economic benefits, economic transformation, economic growth potential and even improved quality of live (Falk and Hagsten 2015; Thompson and Garbacz 2008; Hitt and Tambe 2007). Even the European Union acknowledges the key role of broadband, stressing its significance for competitiveness, social inclusion and employment (European Commission 2013). The European Commission stated further that “broadband connectivity is of strategic im­portance for European growth and innovation [...] and for social [...] cohesion” (p.1).

This underlying potential together with the extensive possible benefits make the de­ployment of high-speed broadband internet access a central matter in all types of devel­opment strategies, economically and of private nature or politically on a national or pan­European level. Therewith, ensuring the most widespread access to digital services as possible is one central political effort within the European Union. In order to reinforce the realization of the full capacities of broadband, governments have to set up support­ing conditions. These may include introducing regulatory and policy reforms, placing strategic investments or forming public-private partnerships (Qiang et al. 2009). Ac­cording to a release of the European Commission on the digital agenda for Europe (2014), European efforts in regards to high-speed broadband include “new rules on cost reduction, a recommendation on next generation access networks, revised state aid guidelines for broadband and a proposal to complete the telecoms single market” (p. 5). Resulting from the public as well as private involvement, the two topics of E-commerce and high-speed broadband deployment enclose an interdependence of mixed interests, making it a very attractive combination for a scientific study. The balance between these stakeholders and the impact on society, economy and politics call for a closer investiga­tion of the causal links connecting the availability of broadband to the online purchasing behavior of individuals.

3 Framework development

Resting on the prevalent upward trend and omnipresence of E-commerce, a deeper un­derstanding of possible influencing factors is of great relevance. Accessory is the fact that online shopping activities in the European Union are left far behind by patterns in other parts of the world. The European Commission (2014) refers to an insufficient de­velopment of E-commerce in the EU, claiming that “consumers have difficulties access­ing online shops, and businesses find it hard to offer their services in other EU coun­tries” (p. 5).

Since broadband internet serves as the technological infrastructure that makes shopping online possible in the first place, it seems evident to examine if a more widespread availability of high-speed connectivity will display a significant causal impact on the adoption of internet purchasing.

As highlighted previously, the economic and political importance that these two topics possess promotes a study on a national level rather than looking at individuals only. Tying this furthermore to the focus of the European Union to provide connectivity to citizens and to strengthen the digital industry and therewith E-commerce activities, a geographical limitation to the EU member states is decided upon. In doing so, this re­search augments the existing literature with a comprehensive investigation capturing interactions between several actors. To achieve a broad representation of determinants from diverse sectors, the following set of factors have been included in the conceptual model of this thesis.

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Figure 2. Conceptual model (own presentation)

Since the primary goal of this study is to assess the influence of broadband coverage on online buying, it is represented dominantly by integrating two related indicators in the framework. Both fixed and mobile high-speed broadband coverages are included since they are found to be complements rather than substitutes (Falk and Hagsten 2015). Due to its mediating and enabling function, a higher coverage with next generation high­speed broadband is expected to positively impact the share of individuals that order goods online.

To also incorporate relevant determinants identified in prior literature into the conceptu­al model, internet usage intensity and computer literacy were taken into consideration. As addressed before, both concepts are closely connected and even interdependent. A more intense internet usage will thereby result in a higher computer literacy, whereas highly-experienced users will in return spend longer time on the internet than the aver­age. For the sake of the model clarity, one of the two indicators had to be selected. The decisive criterion ultimately was the comparatively more straightforward measurability of the usage intensity, captured in time spent online. The notion of usage intensity has been linked to both online buying as well as broadband in the literature (Lohse et al. 2000; Hitt and Tambe 2007), making it a suitable addition to the model components. In line with previous findings, a higher share of frequent internet users is anticipated to exhibit a positive influence on the share of internet purchasers.

Furthermore, to produce more comprehensive insights into E-commerce behavior, dif­ferences in online shopping that result from diverse economic situations among member states of the EU are to be included in the model. Since the study will use nationally ag­gregated data, the average national income is added to the model to control for a varied purchasing power across countries.

To summarize the setting, this research introduces a conceptual model of determinants influencing online buying behavior, as depicted in Figure 2. As the four influencing factors, fixed and mobile high-speed broadband availability, internet usage intensity as well as the average national income constitute the model parameters.

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