**Main Street in the Digital Age:\
*How Small and Medium-Sized Businesses Are Using the\
Tools of the New Economy***

**\
**

By

Patricia Buckley and Sabrina Montes

<Patricia.Buckley@esa.doc.gov> Sabrina.Montes@esa.doc.gov

U.S. Department of Commerce

Economics and Statistics Administration

February 2002

Table of Contents

[Executive Summary iv](#executive-summary)

[Introduction 1](#introduction)

[The Diffusion of Information Technology
1](#the-diffusion-of-information-technology)

[Annual Capital Expenditure Survey: A Note on the Data
2](#annual-capital-expenditure-survey-a-note-on-the-data)

[Investment by Size of Company 3](#investment-by-size-of-company)

[Investment, Size of Company, and Industry Sector
4](#investment-size-of-company-and-industry-sector)

[Some Possible Explanations 7](#some-possible-explanations)

[Small & Medium-Sized Firms, the Internet, and E-Commerce: Current
Business Practices
10](#small-medium-sized-firms-the-internet-and-e-commerce-current-business-practices)

[Computers 10](#computers)

[Connectivity 11](#connectivity)

[Connection Speed 12](#connection-speed)

[Online Activities 13](#online-activities)

[Employee Skills in Small and Medium-Sized Firms
15](#employee-skills-in-small-and-medium-sized-firms)

[The Survey of Income and Program Participation
15](#the-survey-of-income-and-program-participation)

[Regular Computer Use by Size of Employer
16](#regular-computer-use-by-size-of-employer)

[Regular Computer Use by Size of Employer and Industry Sector
16](#regular-computer-use-by-size-of-employer-and-industry-sector)

[Regular Computer Use by Size of Employer and Occupation
17](#regular-computer-use-by-size-of-employer-and-occupation)

[Conclusion 21](#conclusion)

Figures

[Figure 1: Capital Equipment Expenditures Per Employee by Industry, 1998
6](#__RefHeading___Toc536845736)

[Figure 2: Employee Distribution by Size of Company in Major Industry
Groups, 1998 6](#__RefHeading___Toc536845737)

Tables

[Table 1: Capital Expenditures Per Employee by Size of Company, 1998
4](#__RefHeading___Toc536857297)

[Table 2: Investment in Computer and Communication, Audio, and Video
Equipment As a Percent of Total Investment by Size of Company, 1998
4](#__RefHeading___Toc536857298)

[Table 3: Capital Expenditures Per Employee by Industry Sector and Size
of Company, 1998 8](#__RefHeading___Toc536857299)

[Table 4: Internet Access for Manufacturing Plants, 2000
12](#__RefHeading___Toc536857300)

[Table 5: Personal Computer Use Experience of Employed Individuals by
Size of the Employer, 1999 16](#__RefHeading___Toc536857301)

[Table 6: Employed Individuals Who Regularly Use A Personal Computer At
Work By Industry and Size of the Employer, 1999
18](#__RefHeading___Toc536857302)

[Table 7: Employed Individuals Who Regularly Use A Personal Computer By
Occupation and Size of the Employer, 1999
20](#__RefHeading___Toc536857303)

**Main Street in the Digital Age:\
*How Small and Medium-Sized Businesses Are Using the\
Tools of the New Economy***

# Executive Summary

Robust investment in information technology (IT) played a major role in
the acceleration of output and productivity growth from 1996 to 2000.
Until now, however, very little was known about the extent to which
small and medium size enterprises (SMEs) were taking part in the digital
economy. This report examines new evidence of how small and medium-sized
businesses are faring in the new economy---their IT investment, their
online activities, and the computer experience of their employees.

Small businesses are indeed investing in and using the tools of the new
economy. Small and medium-sized firms invest about a quarter of their
total capital expenditures on computers and communications equipment. A
Federal Reserve Board study found that over 70 percent of small and
medium-sized firms use computers in their businesses and our best
evidence from a combination of Census and private sector data suggests
that a majority of SMEs are also Internet subscribers.

Yet, the evidence also shows that while SMEs and larger firms spend
roughly the same proportion of their investment budget on IT, SMEs
invest less on a per employee basis. In two IT categories, computers and
communications, enterprises with more than 500 employees invested
roughly \$8,700 per employee in 1998, those with between 100 and 499
employees \$3,700, and those with fewer than 100 employees less than
\$2,500. As a result, firms with more than 500 employees invested twice
as much per worker in IT as the 100 to 499 group and four times as much
as the below 100 employee firm.

SMEs are also less likely than larger firms either to buy and sell over
the Internet. And finally, employees of SMEs are much less likely than
those at larger firms to regularly use a computer at work.

However, these general facts paint too simple a picture, obscuring the
differences that arise from industry and occupational
variations---differences that explain much of the disparity that exists
at the aggregate level. SMEs are a very heterogeneous group and some of
the differences observed in capital spending arise from the fact that
smaller firms are more prevalent in industry sectors such as retail,
services and construction that have overall lower levels of capital
equipment. For example, in construction where firms with fewer than 25
employees account for almost one-half of total employment, average
industry expenditures on computers and peripherals was only \$151 per
employee. In durable manufacturing, on the other hand, where firms of
500 or more employees account for over 60 percent of total employment,
average industry expenditures on computers and peripherals was \$1,088
per employee.

Despite their lower investment per employee, SMEs in every industry are
investing and exploring new business uses of information technologies.
The Internet aids this process by offering businesses of every size a
low cost entry point to examine the possibilities for themselves and
businesses of all size are increasingly connected. For example, 84
percent of all manufacturing plants responding to a Census survey had
Internet access in 1999. Over 75 percent of manufacturing plants with
between 20-49 employees (still small for a manufacturer) reported having
Internet access.

Census Bureau data indicate, that as early as 1999, selling goods and
services online was taking place in almost all sectors of the economy,
but at low levels relative to overall sales revenues or shipments in
most industries. In manufacturing (where we have data by plant size),
e-commerce transactions (e.g., Internet sales, EDI, etc.) accounted for
a smaller proportion of the shipments made by small manufacturing plants
than those made by large manufacturing plants. A National Association of
Purchasing Managers/Forrester Research report based on more recent data
confirm the Census Bureau's findings: Although, large volume purchasers
(firms purchasing more than \$100 million per year) are the furthest
along, most firms are in the early stages of incorporating Internet
technologies into their purchasing processes.

And, even though employees of smaller firms are less likely to use a
computer at work, a substantial proportion of the SME employees who do
not use a computer at work, regularly use a computer at home or some
other location. This means that with their current workforce, SMEs have
a pool of workers capable of using computers at work should the business
need arise.

# Introduction

Robust investment in information technology (IT) played a major role in
the acceleration of growth and productivity from 1996 to 2000. However,
until now, very little was known about the extent to which small and
medium size enterprises (SMEs) were taking part in the IT investment
boom. This report examines how small and medium sized businesses were
faring in the digital economy before the beginning of the economic
slowdown---their IT investment, their online activities, and the
computer experience of their employees.

The report finds that firm size matters. SMEs, in general, were
investing far less in IT than larger enterprises, on a per employee
basis. In terms of using information technology in their business
practices, SMEs were less likely than larger firms either to buy and
sell over the Internet or to have interactive websites. And finally,
employees of SMEs were much less likely than those at larger firms to
regularly use a computer at work.

However, these general facts paint too simple a picture. SMEs are a very
heterogeneous group, including firms from the software start-up, to the
small credit union and the mom-and-pop grocery store. These differences
help to explain some of the variations in IT investment by firm size,
but not all of it.

# The Diffusion of Information Technology[^1]

Real business investment in information technology (IT) has increased
rapidly through the end of 2000. Little, however, is known about the
distribution of that investment among firms of various sizes. Using a
special previously unpublished tabulation of Census data, this section
considers the capital expenditure patterns for two categories of IT
investment, computers and peripherals (computers) and communications,
audio, and video equipment (communications), by four company size
categories. The analysis shows that, on average, smaller companies tend
to invest less heavily on a per employee basis in these tools of the new
economy than do their larger counterparts.

Some of the variation in IT investment by company size stems from
smaller firms investing less in capital equipment in total when compared
to larger firms. This would make their expenditures on any given
category less, if investments across categories were proportional.[^2]

In addition, some of the variation in IT investment by company size is
explained by industry characteristics. Some industries are less capital
intensive than others. Variations in capital expenditures among firms of
different sizes, therefore, could reflect the fact that smaller firms
are concentrated in those less capital-intensive industries. The data
reveal that this is indeed the case; smaller firms are more prevalent in
industries that have lower average rates of per employee capital
equipment expenditure.

However, even when industry differences are taken into account, smaller
firms invest less in total equipment and in both the computers and
communications equipment categories.

### Annual Capital Expenditure Survey: A Note on the Data

In the Census Bureau's 1998 Annual Capital Expenditure Survey (ACES),
firms with employees were asked for the first time to provide detailed
information on their capital expenditures by type of equipment. The
published survey results include information on capital expenditures by
industry and broad equipment type. These data show that while the
manufacturing sector accounted for the largest share of total capital
equipment expenditures (28.5 percent), the communications industry
accounted for the largest share of expenditures on information
processing equipment (27.8 percent).[^3]

The ACES information processing equipment category is quite broad,
including computer and peripheral equipment; office equipment (other
than computers and peripherals); communications, audio, and video
equipment; navigational, measuring, electromedical, and control
instruments; medical equipment and supplies; and capitalized software
purchased separately. For the purpose of this study, only three
components of this category were considered "IT": computer and
peripheral equipment; communications, audio, and video equipment; and
purchased software. However, this level of equipment detail is only
reported in the published data at the most aggregate level (i.e.,
expenditures by all companies with employees). Of the \$574.4 billion
this group spent on equipment in 1998, about one-fourth was for
computers and peripheral equipment (\$82.5 billion) and communications,
audio, and video equipment (\$59.5 billion). Purchased software
accounted for only a very small proportion of the total (\$11.8 billion
or 2.0 percent). [^4]

*Published* ACES data do not include measures that enable analysis by
firm size. However, the underlying survey data contain information on
the number of employees for each of the sample firms. With a simplifying
adjustment, these data can be used to create estimates of expenditures
per employee for firms in different industries and size categories.
Based on such estimates, this section offers an examination of IT
investment by firm size using "expenditure per employee" as the measure
of investment intensity.[^5]

### Investment by Size of Company 

In 1998, total U.S. capital equipment expenditures averaged \$5,585 per
employee, with \$801 of that total being spent on computers and
peripherals (computers) and \$579 being spent on communication, audio,
and video equipment (communications).[^6] As shown in Table 1, however,
investment per employee varied substantially by size of the employing
firm, with large firms investing considerably more per employee than
small firms.

Table 1 indicates that per employee expenditures for computers and
communications equipment, specifically, and total equipment, more
generally, are positively related to firm size. Size-of-firm variations
in communications equipment expenditures are particularly pronounced,
with firms of fewer than 25 employees undertaking only 11 percent of the
national average investment in that category and firms in the 500 and
above employee category undertaking 178 percent of the average
investment. Over half of the employees of companies covered by ACES[^7]
worked for companies of less than 500 employees, with the smallest size
category (less than 25) accounting just over 20 percent of total
employment.

[]{#__RefHeading___Toc536857297 .anchor}Table 1: Capital Expenditures
Per Employee by Size of Company, 1998

  --------------- ------------- ----------------- ----------- -----------------
  Employment Size Computers &   Communications,   Total       Total Employment\
  Category        Peripherals   Audio, Video      Equipment   (1,000s)

  All Firms       \$801         \$579             \$5,585     102,837

  Less than 25    \$367         \$64              \$2,133     21,774

  25 to 99        \$432         \$90              \$2,363     16,256

  100 to 499      \$681         \$345             \$3,701     14,818

  500 and above   \$1,147       \$1,031           \$8,698     49,989

  Source: Bureau                                              
  of the Census,                                              
  U.S. Department                                             
  of Commerce,                                                
  *Annual Capital                                             
  Expenditures                                                
  Survey: 1998*,                                              
  unpublished                                                 
  data.                                                       
  --------------- ------------- ----------------- ----------- -----------------

The composition of a firm's IT expenditures also varies by firm size
(Table 2). In 1998, companies with employees devoted an average of 14.3
percent of their total capital equipment expenditures to computers and
10.4 percent to communications equipment. In the computer category,
firms of all sizes devoted roughly the same share of their total
investment to IT, though the largest firms invested proportionally less
per employee (13.2 percent). In the communications category, the
proportion of capital invested varied positively with firm size. In
effect, large firms spent more on communications equipment
proportionally, as well as, absolutely.

[]{#__RefHeading___Toc536857298 .anchor}Table 2: Investment in Computer
and Communication, Audio, and Video Equipment As a Percent of Total
Investment by Size of Company, 1998

+-----------------------+----------------------+----------------------+
| Employment Size       | Computers &          | Communication,       |
| Category              | Peripherals          | Audio, and Video     |
|                       |                      |                      |
|                       | (Percent)            | (Percent)            |
+-----------------------+----------------------+----------------------+
| All Firms             | 14.3                 | 10.4                 |
+-----------------------+----------------------+----------------------+
| Less than 25          | 17.2                 | 3.0                  |
+-----------------------+----------------------+----------------------+
| 25 to 99              | 18.3                 | 3.8                  |
+-----------------------+----------------------+----------------------+
| 100 to 499            | 18.4                 | 9.3                  |
+-----------------------+----------------------+----------------------+
| 500 and above         | 13.2                 | 11.9                 |
+-----------------------+----------------------+----------------------+
| Source: Bureau of the |                      |                      |
| Census, U.S.          |                      |                      |
| Department of         |                      |                      |
| Commerce, *Annual     |                      |                      |
| Capital Expenditures  |                      |                      |
| Survey: 1998*,        |                      |                      |
| unpublished data.     |                      |                      |
+-----------------------+----------------------+----------------------+

### Investment, Size of Company, and Industry Sector

Lower rates of total investment by smaller firms are only one possible
source of the differences in the aggregate distributions of IT
investment by size of company evident in Table 1. Another possibility is
that smaller firms are more prevalent in industry sectors with lower
overall levels of capital investment.

Investment intensity, as measured by expenditure per employee, varies
substantially among industry sectors, both in total and in the type of
investment undertaken. As shown in Figure 1, the Transportation,
Communications, Electric, Gas, and Sanitary Services sector spent the
highest amount per employee on capital equipment in 1998 of any sector
listed, \$16,394 per employee. Retail and Health Services are at the
opposite end of the spectrum with total 1998 capital equipment
expenditures of \$1,609 and \$2,124, respectively, per employee.

A comparison of Figure 1 with Figure 2 reveals that in industry sectors
with high per employee capital expenditures, large firms tend to
predominate. In the three industry sectors with the highest levels of
capital expenditures per employee---Nondurable Goods Manufacturers,
Durable Goods Manufacturers, and Transportation, Com­munications,
Electric, Gas, and Sanitary Services industries (Figure 1)---more than
50 percent of the industry's total employment is accounted for by
largest firm category (Figure 2).

These three industrial sectors are also remarkable in that virtually all
of the individual industries that comprise each sector, large firms also
dominate. Smaller firms are present in substantial numbers only in a
very few of the individual industries.

Exceptions to this pattern are evident in the case of Retail, Health
Services, and FIRE, where per employee capital expenditures are low
although large firms dominate. In this second group, firm size
distributions at the industry level vary from the sectoral pattern in
many cases. Further, smaller firms are more prevalent in the industries
that have per employee capital expenditures well below the sectoral
average. For example, in the FIRE sector, small firms are more prevalent
in industries, such as Insurance and Real Estate, that have relatively
low per employee capital equipment expenditures while large firms
dominate industries such as Commercial Banks and Savings Institutions
that have relatively high per employee capital expenditures.

[]{#__RefHeading___Toc536845736 .anchor}Figure 1: Capital Equipment
Expenditures\
Per Employee by Industry, 1998

![](media/image1.wmf){width="5.0in" height="3.752083333333333in"}

[]{#__RefHeading___Toc536845737 .anchor}Figure 2: Employee Distribution
by Size of Company in Major Industry Groups, 1998

![](media/image2.wmf){width="4.999305555555556in"
height="3.752083333333333in"}

Table 3 presents per employee capital expenditures for computers,
communications, and total equipment by industry sector and size of
company. Though investment intensity generally continues to vary
positively with firm size even when industry sector is accounted for,
this does not hold true in all cases. In Health Services, for example,
the smallest firms have higher per employee total capital expenditures
and computer expenditures than do the two intermediate size categories.
This variation is due, again, to variations in size distribution at the
industry level. According to an unpublished Census Bureau tabulation, in
Health Services sector, one half of the firms that comprise the 100 to
499-employee category are in Nursing and Personal Care facilities---an
industry with very low investment intensity. Three-fourths of the
smallest firms are doctors and dentist offices, industries that
undertake much higher investment per employee.

These data, when taken together, support the notion that, on average,
smaller firms tend to invest less heavily in capital equipment in
general and in the two IT equipment categories specifically. However,
the data also confirm that, although they may invest less than their
larger counterparts, small firms are nonetheless making substantial
investments in the tools of the new economy.

### Some Possible Explanations

Variations in IT spending by firm size could arise from a variety of
possible sources, and most likely a combination of sources. For example,
there may be inherent differences between the business models employed
by small firms and larger firms that make high levels investment in
computers and communications equipment unnecessary. Alternatively,
smaller firms may wish to invest more, but do not because of difficulty
in financing additional investment. Small firms may also limit their
investment in information technology because they find it too difficult
or too expensive to hire people with the technical expertise needed to
make the best use of IT investments. Smaller firms may also invest less
because they find it more cost effective to outsource IT activity. Work
performed by an outside contractor would be counted as an increase in
purchased services not capital investment. Further study is required to
determine what role, if any, these various factors play in the
distribution of capital equipment expenditures by firms of various
sizes.

[]{#__RefHeading___Toc536857299 .anchor}Table 3: Capital Expenditures
Per Employee by Industry Sector and Size of Company,\
1998

+-------------------+----------+-------------+---+------------+----------+
| Industry Sector   | C        | Comm        |   | Total      | Total    |
| And               | omputers | unications, |   | Equipment  | Emp      |
|                   | &        | Audio, and  |   |            | loyment\ |
| Firm Size         | Per      | Video       |   |            | (in      |
|                   | ipherals |             |   |            | 1,000s)  |
+-------------------+----------+-------------+---+------------+----------+
| Construction      | *        | **\$17**    |   | *          | *        |
|                   | *\$151** |             |   | *\$3,300** | *5,186** |
+-------------------+----------+-------------+---+------------+----------+
| Less than 25      | 83       | 14          |   | 3,124      | 2,463    |
+-------------------+----------+-------------+---+------------+----------+
| 25 to 99          | 113      | 15          |   | 3,329      | 1,432    |
+-------------------+----------+-------------+---+------------+----------+
| 100 to 499        | 204      | 31          |   | 3,512      | 753      |
+-------------------+----------+-------------+---+------------+----------+
| 500 and above     | 493      | 16          |   | 3,731      | 538      |
+-------------------+----------+-------------+---+------------+----------+
| Durable           | **\      | **\$397**   |   | **         | **       |
| Manufacturing     | $1,088** |             |   | \$14,224** | 10,767** |
+-------------------+----------+-------------+---+------------+----------+
| Less than 25      | 388      | 11          |   | 4,187      | 965      |
+-------------------+----------+-------------+---+------------+----------+
| 25 to 99          | 504      | 21          |   | 3,933      | 1,364    |
+-------------------+----------+-------------+---+------------+----------+
| 100 to 499        | 539      | 133         |   | 5,232      | 1,820    |
+-------------------+----------+-------------+---+------------+----------+
| 500 and above     | 1,463    | 604         |   | 20,291     | 6,618    |
+-------------------+----------+-------------+---+------------+----------+
| Nondurable        | *        | **\$91**    |   | *          | *        |
| Manufacturing     | *\$667** |             |   | *\$8,502** | *8,333** |
+-------------------+----------+-------------+---+------------+----------+
| Less than 25      | 457      | 29          |   | 2,458      | 526      |
+-------------------+----------+-------------+---+------------+----------+
| 25 to 99          | 343      | 19          |   | 4,171      | 1,023    |
+-------------------+----------+-------------+---+------------+----------+
| 100 to 499        | 398      | 78          |   | 5,847      | 1,280    |
+-------------------+----------+-------------+---+------------+----------+
| 500 and above     | 809      | 113         |   | 10,502     | 5,504    |
+-------------------+----------+-------------+---+------------+----------+
| Finance,          | **\      | **\$244**   |   | *          | *        |
| Insurance, and    | $2,639** |             |   | *\$5,297** | *7,362** |
|                   |          |             |   |            |          |
| Real Estate       |          |             |   |            |          |
+-------------------+----------+-------------+---+------------+----------+
| Less than 25      | 1,384    | 68          |   | 2,716      | 1,434    |
+-------------------+----------+-------------+---+------------+----------+
| 25 to 99          | 2,069    | 270         |   | 3,769      | 861      |
+-------------------+----------+-------------+---+------------+----------+
| 100 to 499        | 2,412    | 327         |   | 4,581      | 756      |
+-------------------+----------+-------------+---+------------+----------+
| 500 and above     | 3,213    | 283         |   | 6,592      | 4,311    |
+-------------------+----------+-------------+---+------------+----------+
| Health Services   | *        | **\$30**    | * |            | **       |
|                   | *\$370** |             | * |            | 10,133** |
|                   |          |             | \ |            |          |
|                   |          |             | $ |            |          |
|                   |          |             | 2 |            |          |
|                   |          |             | , |            |          |
|                   |          |             | 1 |            |          |
|                   |          |             | 2 |            |          |
|                   |          |             | 4 |            |          |
|                   |          |             | * |            |          |
|                   |          |             | * |            |          |
+-------------------+----------+-------------+---+------------+----------+
| Less than 25      | 256      | 18          | 1 |            | 1,904    |
|                   |          |             | , |            |          |
|                   |          |             | 4 |            |          |
|                   |          |             | 4 |            |          |
|                   |          |             | 8 |            |          |
+-------------------+----------+-------------+---+------------+----------+
| 25 to 99          | 179      | 11          | 1 |            | 989      |
|                   |          |             | , |            |          |
|                   |          |             | 2 |            |          |
|                   |          |             | 5 |            |          |
|                   |          |             | 1 |            |          |
+-------------------+----------+-------------+---+------------+----------+
| 100 to 499        | 233      | 27          | 1 |            | 1,476    |
|                   |          |             | , |            |          |
|                   |          |             | 0 |            |          |
|                   |          |             | 9 |            |          |
|                   |          |             | 5 |            |          |
+-------------------+----------+-------------+---+------------+----------+
| 500 and above     | 476      | 39          | 2 |            | 5,764    |
|                   |          |             | , |            |          |
|                   |          |             | 7 |            |          |
|                   |          |             | 6 |            |          |
|                   |          |             | 0 |            |          |
+-------------------+----------+-------------+---+------------+----------+
| Retail Trade      | *        | **\$26**    | * |            | **       |
|                   | *\$349** |             | * |            | 21,173** |
|                   |          |             | \ |            |          |
|                   |          |             | $ |            |          |
|                   |          |             | 1 |            |          |
|                   |          |             | , |            |          |
|                   |          |             | 6 |            |          |
|                   |          |             | 0 |            |          |
|                   |          |             | 9 |            |          |
|                   |          |             | * |            |          |
|                   |          |             | * |            |          |
+-------------------+----------+-------------+---+------------+----------+
| Less than 25      | 180      | 24          | 8 |            | 4,647    |
|                   |          |             | 9 |            |          |
|                   |          |             | 6 |            |          |
+-------------------+----------+-------------+---+------------+----------+
| 25 to 99          | 106      | 10          | 7 |            | 3,684    |
|                   |          |             | 7 |            |          |
|                   |          |             | 9 |            |          |
+-------------------+----------+-------------+---+------------+----------+
| 100 to 499        | 221      | 22          | 1 |            | 2,283    |
|                   |          |             | 3 |            |          |
|                   |          |             | 7 |            |          |
|                   |          |             | 1 |            |          |
+-------------------+----------+-------------+---+------------+----------+
| 500 and above     | 537      | 33          | 2 |            | 10,560   |
|                   |          |             | 2 |            |          |
|                   |          |             | 6 |            |          |
|                   |          |             | 3 |            |          |
+-------------------+----------+-------------+---+------------+----------+

**Table 3: Capital Expenditures Per Employee by Industry Sector and Size
of Company,\
1998, Continued**

+-------------------+----------+-------------+---+----------+---+----------+
| Industry Sector   | C        | Comm        | T |          |   | Total    |
| And               | omputers | unications, | o |          |   | Emp      |
|                   | &        | Audio, and  | t |          |   | loyment\ |
| Firm Size         | Per      | Video       | a |          |   | (in      |
|                   | ipherals |             | l |          |   | 1,000s)  |
|                   |          |             | E |          |   |          |
|                   |          |             | q |          |   |          |
|                   |          |             | u |          |   |          |
|                   |          |             | i |          |   |          |
|                   |          |             | p |          |   |          |
|                   |          |             | m |          |   |          |
|                   |          |             | e |          |   |          |
|                   |          |             | n |          |   |          |
|                   |          |             | t |          |   |          |
+-------------------+----------+-------------+---+----------+---+----------+
| Services          | *        | **\$163**   |   | **\      | * |          |
| excluding Health  | *\$694** |             |   | $2,973** | * |          |
| Services          |          |             |   |          | 2 |          |
|                   |          |             |   |          | 5 |          |
|                   |          |             |   |          | , |          |
|                   |          |             |   |          | 6 |          |
|                   |          |             |   |          | 8 |          |
|                   |          |             |   |          | 0 |          |
|                   |          |             |   |          | * |          |
|                   |          |             |   |          | * |          |
+-------------------+----------+-------------+---+----------+---+----------+
| Less than 25      | 435      | 113         |   | 1,761    | 6 |          |
|                   |          |             |   |          | , |          |
|                   |          |             |   |          | 6 |          |
|                   |          |             |   |          | 3 |          |
|                   |          |             |   |          | 2 |          |
+-------------------+----------+-------------+---+----------+---+----------+
| 25 to 99          | 456      | 104         |   | 1,616    | 4 |          |
|                   |          |             |   |          | , |          |
|                   |          |             |   |          | 7 |          |
|                   |          |             |   |          | 6 |          |
|                   |          |             |   |          | 5 |          |
+-------------------+----------+-------------+---+----------+---+----------+
| 100 to 499        | 875      | 140         |   | 2,321    | 4 |          |
|                   |          |             |   |          | , |          |
|                   |          |             |   |          | 5 |          |
|                   |          |             |   |          | 7 |          |
|                   |          |             |   |          | 6 |          |
+-------------------+----------+-------------+---+----------+---+----------+
| 500 and above     | 902      | 237         |   | 4,773    | 9 |          |
|                   |          |             |   |          | , |          |
|                   |          |             |   |          | 7 |          |
|                   |          |             |   |          | 0 |          |
|                   |          |             |   |          | 7 |          |
+-------------------+----------+-------------+---+----------+---+----------+
| Transportation,   | *        | **\$6,674** |   | **\$     | * |          |
| Communications,   | *\$919** |             |   | 16,394** | * |          |
| Electric, Gas,    |          |             |   |          | 7 |          |
| and Sanitary      |          |             |   |          | , |          |
| Services          |          |             |   |          | 0 |          |
|                   |          |             |   |          | 2 |          |
|                   |          |             |   |          | 6 |          |
|                   |          |             |   |          | * |          |
|                   |          |             |   |          | * |          |
+-------------------+----------+-------------+---+----------+---+----------+
| Less than 25      | 149      | 399         |   | 5,020    | 8 |          |
|                   |          |             |   |          | 8 |          |
|                   |          |             |   |          | 0 |          |
+-------------------+----------+-------------+---+----------+---+----------+
| 25 to 99          | 854      | 952         |   | 7,127    | 5 |          |
|                   |          |             |   |          | 7 |          |
|                   |          |             |   |          | 1 |          |
+-------------------+----------+-------------+---+----------+---+----------+
| 100 to 499        | 1,059    | 5,558       |   | 14,148   | 6 |          |
|                   |          |             |   |          | 6 |          |
|                   |          |             |   |          | 8 |          |
+-------------------+----------+-------------+---+----------+---+----------+
| 500 and above     | 1,046    | 8,623       |   | 19,820   | 4 |          |
|                   |          |             |   |          | , |          |
|                   |          |             |   |          | 9 |          |
|                   |          |             |   |          | 0 |          |
|                   |          |             |   |          | 6 |          |
+-------------------+----------+-------------+---+----------+---+----------+
| Wholesale Trade   | **       | **\$114**   |   | **\      | * |          |
|                   | \$1522** |             |   | $5,629** | * |          |
|                   |          |             |   |          | 5 |          |
|                   |          |             |   |          | , |          |
|                   |          |             |   |          | 9 |          |
|                   |          |             |   |          | 2 |          |
|                   |          |             |   |          | 7 |          |
|                   |          |             |   |          | * |          |
|                   |          |             |   |          | * |          |
+-------------------+----------+-------------+---+----------+---+----------+
| Less than 25      | 434      | 23          |   | 2,589    | 1 |          |
|                   |          |             |   |          | , |          |
|                   |          |             |   |          | 8 |          |
|                   |          |             |   |          | 0 |          |
|                   |          |             |   |          | 4 |          |
+-------------------+----------+-------------+---+----------+---+----------+
| 25 to 99          | 529      | 34          |   | 2,399    | 1 |          |
|                   |          |             |   |          | , |          |
|                   |          |             |   |          | 3 |          |
|                   |          |             |   |          | 6 |          |
|                   |          |             |   |          | 8 |          |
+-------------------+----------+-------------+---+----------+---+----------+
| 100 to 499        | 917      | 69          |   | 4,222    | 1 |          |
|                   |          |             |   |          | , |          |
|                   |          |             |   |          | 0 |          |
|                   |          |             |   |          | 6 |          |
|                   |          |             |   |          | 3 |          |
+-------------------+----------+-------------+---+----------+---+----------+
| 500 and above     | 3,862    | 302         |   | 12,360   | 1 |          |
|                   |          |             |   |          | , |          |
|                   |          |             |   |          | 6 |          |
|                   |          |             |   |          | 9 |          |
|                   |          |             |   |          | 3 |          |
+-------------------+----------+-------------+---+----------+---+----------+
| Source: Bureau of |          |             |   |          |   |          |
| the Census, U.S.  |          |             |   |          |   |          |
| Department of     |          |             |   |          |   |          |
| Commerce, *Annual |          |             |   |          |   |          |
| Capital           |          |             |   |          |   |          |
| Expenditures      |          |             |   |          |   |          |
| Survey: 1998*,    |          |             |   |          |   |          |
| unpublished data. |          |             |   |          |   |          |
+-------------------+----------+-------------+---+----------+---+----------+

#  

# 

# Small & Medium-Sized Firms, the Internet, and E-Commerce: Current Business Practices 

Available data on the penetration of technologies associated with
electronic commerce (broadly defined) and the adoption of various online
activities suggest that on average larger firms may be faster to adopt
the latest technologies or online activities. However, these data also
suggest that many SMEs have nonetheless adopted many of the basic tools
of the information economy. The penetration of computers among small
firms is high and many small firms are Internet subscribers.

The data suggest that SMEs have been somewhat slower than larger firms
to adopt more sophisticated information technology tools like online
buying and selling. However, firms across the economy are still in the
early stages of integrating the Internet's capabilities into their
business processes and our understanding of what constitutes "best
practices" is not fully developed.

Moreover, SMEs are incredibly diverse and what works for one firm could
be inappropriate for another firm. A venture capital funded applications
software development start-up in Silicon Valley that has five people on
staff is a fundamentally different type of firm than a 15-year-old small
town antique shop with a five person staff. Both firms have the
potential to use and benefit from the Internet, but they face different
opportunities and different constraints.

No single benchmark describes effective business use of the Internet or
other information technology tools. Whether the Internet matters to SMEs
(or large firms for that matter) depends on how effectively firms use
Internet applications to achieve business goals. With respect to the
take-up of Internet technologies by SMEs, a common misperception is that
there is a linear progression from Internet access, to a brochure Web
page, to a transaction capable Web site, to a Web site fully integrated
with back office computers. Take-up and use surveys often reinforce this
misperception by implying that firms deploying more complex
technologies, which require a greater degree of technological
sophistication, are somehow more in tune with the digital economy than
other firms. However, investing in the most technically sophisticated
tool is not necessarily the best strategic decision.

### Computers

Businesses have been using computers in their operations over the last
50 years. It was not until the early 1980s, however, that relatively
affordable desktop computers were first introduced. Since that time,
businesses across the economy have adopted this technology. Although
computers are not ubiquitous in U.S. businesses, levels of computer use
appear to be high. A 1998 survey of firms with 500 or fewer employees
(one of the commonly used definition of SME[^8]) found that about 76
percent of firms had computers. About 71 percent of firms with 0 to 4
employees had computers at that time.[^9]

Market research confirms that computer penetration rates are high among
small firms. Dun & Bradstreet reports that by May 2001 over 80 percent
of small firms (25 or fewer employees) had a computer on site that was
used for business purposes.[^10]

### Connectivity

We have no direct measure of how many of the roughly 7.6 million
business establishments in the United States have Internet access;
nonetheless, Internet penetration in businesses of all sizes is likely
high.[^11] Market research estimates suggest that the majority of small
firms have Internet access.[^12] Dun & Bradstreet survey results suggest
that about 67 percent of firms with 1-25 employees had Internet access.
Since, as shown below, these firms in these size classes likely have the
lowest rates of Internet penetration, we can infer that overall Internet
access is likely high.

Surveys of specific industries, such as the Census Bureau's survey of
e-commerce and e-business processes at manufacturing plants tells a
similar story of generally high levels of Internet subscribership.[^13]
In 2000, 83.9 percent of responding U.S. manufacturing plants reported
having Internet access. However, larger plants are more likely to have
Internet access than small plants.[^14] (Table 4)

+------------------------------------+---------------------------------+
| []{#__RefHeading___Toc536857300    |                                 |
| .anchor}Table 4: Internet Access   |                                 |
| for Manufacturing Plants, 2000     |                                 |
|                                    |                                 |
| (Percent)                          |                                 |
+------------------------------------+---------------------------------+
| Employment Size                    | With Internet Access            |
+------------------------------------+---------------------------------+
| 1-4                                | 47.1                            |
+------------------------------------+---------------------------------+
| 5-9                                | 52.1                            |
+------------------------------------+---------------------------------+
| 10-19                              | 64.7                            |
+------------------------------------+---------------------------------+
| 20-49                              | 76.2                            |
+------------------------------------+---------------------------------+
| 50-99                              | 84.9                            |
+------------------------------------+---------------------------------+
| 100-249                            | 91.5                            |
+------------------------------------+---------------------------------+
| 250-499                            | 94.1                            |
+------------------------------------+---------------------------------+
| 500 +                              | 94.9                            |
+------------------------------------+---------------------------------+
| Total                              | 83.9                            |
+------------------------------------+---------------------------------+
| Notes and Source: Data for the     |                                 |
| 38,985 manufacturing plants        |                                 |
| responding the survey. This is a   |                                 |
| plant level survey and is not      |                                 |
| comparable with firm or company    |                                 |
| level data; a give firm may own    |                                 |
| multiple plants. The Annual Survey |                                 |
| of Manufactures (ASM) uses a       |                                 |
| probability-proportionate-to-size  |                                 |
| sample design that results in a    |                                 |
| sample primarily comprised of      |                                 |
| larger manufacturing plants. While |                                 |
| a number of small plants are       |                                 |
| included in the ASM, the number is |                                 |
| disproportionately small in        |                                 |
| comparison to the entire           |                                 |
| manufacturing population. Thus,    |                                 |
| these comparisons are suggestive,  |                                 |
| but not definitive. Detail may not |                                 |
| add to total due to rounding. U.S. |                                 |
| Bureau of the Census, "E-Stats     |                                 |
| Manufacturing 1999 and Mid-2000",  |                                 |
| Table 7, June 8, 2001 (http://www. |                                 |
| census.gov/estats).                |                                 |
+------------------------------------+---------------------------------+

### Connection Speed

Although Internet penetration is generally high among businesses, all
Internet access is not equal. Some companies have high-speed (broadband)
access while others rely on relatively slow dial-up connections.
Broadband access, such as that provided by fiber optics, digital
subscriber lines and certain wireless technologies, make it possible for
a business to conduct a greater variety of online activities. IDC
estimates that nearly 15 percent of small businesses had broadband
communications capabilities in 2000.[^15] Dun & Bradstreet found that
about 28 percent of small firms (with 25 or fewer employees) had high
speed Internet access while that 57 percent used telephone modems for
their Internet access. [^16]

Cost and availability are key factors in whether a business has
broadband access. Large firms can typically afford the broadband
Internet connections, such as T1 lines that cost \$500 to \$1,000 or
more a month.[^17] Small and mid-sized firms may not have the
communications volume to justify such an investment.

Or, broadband may simply not yet be available in the businesses
geographic location. Availability of high-speed lines is, however,
increasing. Communications companies are in the process of deploying a
variety of broadband alternatives to dial-up Internet access (e.g.,
cable modems, digital subscriber lines, wireless local loop). But, these
options are not yet universally available. The Federal Communications
Commission reports that during the second half of 2000, the number of
high-speed lines connecting residences and businesses increased by 63
percent, to a total of 7.1 million. The growth rate for the full year
was 158 percent.[^18]

### Online Activities

As businesses and people have gained access to the Internet, the market
potential of the online world has grown. The Census Bureau reports that
e-commerce (defined in terms of whether the commitment to sell was made
online) is taking place across the economy.

Levels of activity are, however, uneven across industries and low.
Online sales account for a relatively substantial portion of total
shipments by manufacturers (12.0 percent) and total sales by wholesale
merchants (5.3 percent), but they account for a very small proportion of
total sales made by retailers and selected service providers (0.5
percent and 0.6 percent, respectively).[^19]

Some industries, such as manufacturing, also have a long history of
using computer networks for sales (e.g., some firms have used electronic
data interchange since the 1960s), which explains manufacturing's levels
of e-commerce shipment. But, even in sectors with low average e-commerce
sales, almost all of the component industries have at least some online
transactions.

Dun & Bradstreet reports that 27 percent of small firms (1-25 employees)
with Internet access used the Internet for sales in 2001. [^20]

The same Dun & Bradstreet survey found that 44 percent of small firms
(1-25 employees) with Internet access used the Internet for business
purchases.[^21] This finding is somewhat counter to broader surveys
indicating that all businesses are in the early stages of integrating
Internet tools into purchasing. The National Association of Purchasing
Managers (NAPM)/Forrester Research survey found that as of September
2001 most of the NAPM members surveyed were in the early stages of
adopting online purchasing.[^22]

Researchers are at the beginning of understanding how firms of all sizes
are using the Internet for activities that go beyond the selling and
buying associated with e-commerce. For example, businesses use the
Internet for marketing, customer service, human resources and so forth.
Recent research suggests large companies have been more aggressive in
implementing some of the more sophisticated "Internet business
solutions" than small firms such as Internet-based supply chain
management. However, the same research suggests that firms of all sizes
are using the Internet for business activates, like as "e-marketing",
customer service and support, finance and accounting, human resources,
sales force automation, and supply chain management, etc.[^23]

# 

#  Employee Skills in Small and Medium-Sized Firms

Challenges facing SMEs in the United States appear to be less about
access to the technology than whether firms have the information and
resources necessary to make the most effective, strategic use of the
tools offered by the Internet. Census data indicate that although a
lower proportion of employees of small firms report regularly using a
computer at work, the difference among employees of firms of various
sizes narrows if computer use from any location is considered. A
substantial proportion of employees in smaller firms appear to possess
knowledge-base skills necessary for exploiting the tools of the new
economy, even if these skills are not currently being used in their
workplace.[^24]

### The Survey of Income and Program Participation

Conclusions in this section are based on the Survey of Income and
Program Participation (SIPP), a panel survey of households in which
respondents are asked about their employment status, including their
occupation and the industry and size (in terms of total number of
employees) of their employer. For the survey conducted between August
and November 1999, questions about Internet access and computer use were
included for the first time.[^25]

According to the SIPP, in the latter part of 1999, 127.7 million people
held paid jobs in the United States.[^26] Approximately 65 percent of
these people worked for an employer that had 100 or more employees. Only
22 percent worked for a firm of fewer than 25 employees and 13 percent
worked for a firm of between 25 and 99 employees.[^27]

The personal computer (PC) is currently the primary mechanism by which
people access the Internet and other private computer networks.[^28]
Overall, 55.2 percent of the employed population reports regularly using
a PC with 40.6 percent reporting that they regularly use a PC at
work.[^29]

### Regular Computer Use by Size of Employer

People who work for an employer with fewer than 25 employees are less
likely to use a PC at work than people who work for larger employers
(Table 5). However, among those who do not use a computer at work, a
higher proportion of individuals who work for employers with less than
25 employees regularly use a PC at home or some other location (16.9
percent) than do individuals who work for medium (15.2 percent) or large
(13.6 percent) employers. Therefore, although people who work for
smaller companies generally are less likely to be PC users, whether at
work or anywhere else, the differences are less than exist when only
considering computer use at work.[^30]

[]{#__RefHeading___Toc536857301 .anchor}Table 5: Personal Computer Use
Experience of Employed Individuals\
by Size of the Employer, 1999

+-------------+-------------+-------------+-------------+-------------+
| Employment  | Regularly   | Regularly   | Regularly   | Total       |
| Size        | Uses a PC\* | Uses a PC   | Uses a PC,  | employed\   |
| Category    |             | at Work     | but not at  | (1,000s)    |
|             | (Percent)   |             | Work        |             |
|             |             | (Percent)   |             |             |
|             |             |             | (Percent)   |             |
+-------------+-------------+-------------+-------------+-------------+
| All         | 55.2        | 40.6        | 14.6        | 127,677     |
| Employees   |             |             |             |             |
+-------------+-------------+-------------+-------------+-------------+
| Less than   | 47.5        | 30.6        | 16.9        | 28,695      |
| 25          |             |             |             |             |
| employees   |             |             |             |             |
+-------------+-------------+-------------+-------------+-------------+
| 25 to 99    | 50.9        | 35.7        | 15.2        | 16,378      |
| employees   |             |             |             |             |
+-------------+-------------+-------------+-------------+-------------+
| 100 and     | 58.7        | 45.1        | 13.6        | 82,605      |
| over        |             |             |             |             |
| employees   |             |             |             |             |
+-------------+-------------+-------------+-------------+-------------+
| \*          |             |             |             |             |
| Respondents |             |             |             |             |
| were asked  |             |             |             |             |
| whether     |             |             |             |             |
| they        |             |             |             |             |
| regularly   |             |             |             |             |
| used a      |             |             |             |             |
| computer at |             |             |             |             |
| home, work, |             |             |             |             |
| or other    |             |             |             |             |
| location    |             |             |             |             |
|             |             |             |             |             |
| Source:     |             |             |             |             |
| Bureau of   |             |             |             |             |
| the Census, |             |             |             |             |
| U. S.       |             |             |             |             |
| Department  |             |             |             |             |
| of          |             |             |             |             |
| Commerce,   |             |             |             |             |
| Survey of   |             |             |             |             |
| Income and  |             |             |             |             |
| Program     |             |             |             |             |
| Par         |             |             |             |             |
| ticipation, |             |             |             |             |
| research    |             |             |             |             |
| data file   |             |             |             |             |
| (Augu       |             |             |             |             |
| st-November |             |             |             |             |
| 1999, Wave  |             |             |             |             |
| 11)         |             |             |             |             |
+-------------+-------------+-------------+-------------+-------------+

### Regular Computer Use by Size of Employer and Industry Sector

Within industry sectors (except for agriculture), employees of smaller
firms are less likely than those of larger firms to be "regular computer
users at work[^31]." The proportion of employees using a computer at
work also varies across industry sectors---from a high of 68.0 percent
in the Communications sector to a low of 13.2 percent in Agriculture
(Table 6 at the end of this section).

Again, however, variations by firm size and variations across industry
are less pronounced, if one considers *computer use from any location*.
Further, in several industry sectors, the positive relationship between
computer use anywhere and firm size does not hold. Employees in firms of
less than 25 employees working in Agriculture, Public Utilities,
Entertainment and Recreation Services, and Health Care are more likely
to be PC users than their counterparts in larger firms.

The gap between computer use at work and computer use at any location is
particularly wide in those industry sectors where on-the-job computer
use is less prevalent. Three industry sectors among those that have the
lowest proportion of employees using a computer at work (Retail,
Personal Services, and Entertainment and Recreational Services) have the
largest proportion of employees that use a PC from someplace other than
work. That differential is very pronounced for employees working in the
Entertainment and Recreational Services sector where PC use on the job
is substantially below average (28.7 percent compared to 40.6 percent
for all employees). PC use from any location in this sector is above
average (59.1 percent compared to 55.2 percent for all employees).

### Regular Computer Use by Size of Employer and Occupation

Occupation appears to be a significant determinant of computer use at
work. For employees in most occupations, PC use at work varies with firm
size (Table 7). However, variations by firm size within occupational
categories are less pronounced than differences across the occupational
categories themselves. In two occupations, Managerial and Professional
Specialty and Technical, Sales, and Administrative Support, over 45
percent of employees use a PC at work, irrespec­tive of firm size. These
two categories account for just under 60 percent of total employment.
When the broader category of regular PC use from any location is
considered, there is some narrowing of the differences between employees
of the top two occupational categories and the others, but a fairly
substantial difference remains.

[]{#__RefHeading___Toc536857302 .anchor}Table 6: Employed Individuals
Who Regularly Use A Personal Computer\
At Work By Industry and Size of the Employer, 1999

+------------------+------------+------------+------------+------------+
| Industry         | Regularly  | Regularly  | Regularly  | Total      |
|                  | Uses a PC  | Uses a PC  | Uses a PC, | employed   |
|                  |            | at Work    | but not at |            |
|                  | (Percent)  |            | Work       | (1,000s)   |
|                  |            | (Percent)  |            |            |
|                  |            |            | (Percent)  |            |
+------------------+------------+------------+------------+------------+
| **Agriculture**  | **31.0**   | **13.2**   | **17.8**   | **2,597**  |
+------------------+------------+------------+------------+------------+
| Less than 25     | 35.2       | 14.5       | 20.7       | 1,848      |
+------------------+------------+------------+------------+------------+
| 25 to 99         | 28.1       | 13.1       | 15.0       | 324        |
+------------------+------------+------------+------------+------------+
| 100 and over     | 15.2       | 7.7        | 7.5        | 425        |
+------------------+------------+------------+------------+------------+
| **Construction** | **31.4**   | **18.0**   | **13.4**   | **7,015**  |
+------------------+------------+------------+------------+------------+
| Less than 25     | 27.5       | 14.7       | 12.8       | 3,073      |
+------------------+------------+------------+------------+------------+
| 25 to 99         | 32.3       | 18.4       | 13.9       | 1,531      |
+------------------+------------+------------+------------+------------+
| 100 and over     | 36.0       | 22.0       | 14.0       | 2,411      |
+------------------+------------+------------+------------+------------+
| **Durable        | **50.6**   | **38.9**   | **11.7**   | **12,449** |
| Manufacturing**  |            |            |            |            |
+------------------+------------+------------+------------+------------+
| Less than 25     | 44.4       | 28.9       | 15.5       | 1,276      |
+------------------+------------+------------+------------+------------+
| 25 to 99         | 44.0       | 29.6       | 14.4       | 1,667      |
+------------------+------------+------------+------------+------------+
| 100 and over     | 52.7       | 41.8       | 10.9       | 9,505      |
+------------------+------------+------------+------------+------------+
| **Nondurable     | **46.2**   | **35.3**   | **10.9**   | **7,876**  |
| Manufacturing**  |            |            |            |            |
+------------------+------------+------------+------------+------------+
| Less than 25     | 39.8       | 29.2       | 10.6       | 862        |
+------------------+------------+------------+------------+------------+
| 25 to 99         | 39.1       | 29.1       | 10.0       | 1,113      |
+------------------+------------+------------+------------+------------+
| 100 and over     | 48.4       | 37.3       | 11.1       | 5,901      |
+------------------+------------+------------+------------+------------+
| **               | **47.9**   | **32.3**   | **15.6**   | **5,468**  |
| Transportation** |            |            |            |            |
+------------------+------------+------------+------------+------------+
| Less than 25     | 44.4       | 27.7       | 16.7       | 838        |
+------------------+------------+------------+------------+------------+
| 25 to 99         | 44.6       | 31.8       | 12.8       | 594        |
+------------------+------------+------------+------------+------------+
| 100 and over     | 49.2       | 33.3       | 15.9       | 4,036      |
+------------------+------------+------------+------------+------------+
| **               | **75.9**   | **68.0**   | **7.9**    | **1,870**  |
| Communications** |            |            |            |            |
+------------------+------------+------------+------------+------------+
| Less than 25     | 61.1       | 48.4       | 12.7       | 120        |
+------------------+------------+------------+------------+------------+
| 25 to 99         | 63.9       | 51.7       | 12.2       | 180        |
+------------------+------------+------------+------------+------------+
| 100 and over     | 78.5       | 71.3       | 7.2        | 1,569      |
+------------------+------------+------------+------------+------------+
| **Public         | **60.0**   | **49.8**   | **10.2**   | **1,331**  |
| Utilities**      |            |            |            |            |
+------------------+------------+------------+------------+------------+
| Less than 25     | 62.7       | 41.3       | 21.4       | 108        |
+------------------+------------+------------+------------+------------+
| 25 to 99         | 51.6       | 42.9       | 8.7        | 148        |
+------------------+------------+------------+------------+------------+
| 100 and over     | 60.9       | 51.6       | 9.3        | 1,075      |
+------------------+------------+------------+------------+------------+
| **Wholesale      | **57.6**   | **44.9**   | **12.7**   | **4,921**  |
| Trade**          |            |            |            |            |
+------------------+------------+------------+------------+------------+
| Less than 25     | 52.5       | 39.3       | 13.2       | 1,316      |
+------------------+------------+------------+------------+------------+
| 25 to 99         | 52.7       | 41.1       | 11.6       | 887        |
+------------------+------------+------------+------------+------------+
| 100 and over     | 61.8       | 48.9       | 12.9       | 2,719      |
+------------------+------------+------------+------------+------------+

Table 6: Continued

+---------------------+-----------+----------+------------+------------+
| Industry            | Regularly | R        | Regularly  | Total      |
|                     | Uses a PC | egularly | Uses a PC, | employed   |
|                     |           | Uses a   | but not at |            |
|                     | (Percent) | PC at    | Work       | (1,000s)   |
|                     |           | Work     |            |            |
|                     |           |          | (Percent)  |            |
|                     |           | (        |            |            |
|                     |           | Percent) |            |            |
+---------------------+-----------+----------+------------+------------+
| **Retail Trade**    | **48.3**  | **25.3** | **23.0**   | **21,967** |
+---------------------+-----------+----------+------------+------------+
| Less than 25        | 43.2      | 20.7     | 22.5       | 5,831      |
+---------------------+-----------+----------+------------+------------+
| 25 to 99            | 50.9      | 28.4     | 22.5       | 2,337      |
+---------------------+-----------+----------+------------+------------+
| 100 and over        | 50.0      | 26.8     | 23.2       | 13,799     |
+---------------------+-----------+----------+------------+------------+
| **Finance,          | **75.1**  | **66.5** | **8.6**    | **7,873**  |
| Insurance And Real  |           |          |            |            |
| Estate**            |           |          |            |            |
+---------------------+-----------+----------+------------+------------+
| Less than 25        | 67.9      | 58.1     | 9.8        | 1,578      |
+---------------------+-----------+----------+------------+------------+
| 25 to 99            | 65.5      | 58.1     | 7.4        | 846        |
+---------------------+-----------+----------+------------+------------+
| 100 and over        | 78.6      | 70.3     | 8.3        | 5,450      |
+---------------------+-----------+----------+------------+------------+
| **Business and      | **59.1**  | **46.1** | **13.0**   | **7,877**  |
| Repair Services**   |           |          |            |            |
+---------------------+-----------+----------+------------+------------+
| Less than 25        | 50.9      | 36.9     | 14.0       | 2,495      |
+---------------------+-----------+----------+------------+------------+
| 25 to 99            | 60.6      | 43.6     | 17.0       | 1,163      |
+---------------------+-----------+----------+------------+------------+
| 100 and over        | 63.5      | 52.1     | 11.4       | 4,219      |
+---------------------+-----------+----------+------------+------------+
| **Personal          | 38.0      | 21.3     | **16.7**   | **3,676**  |
| Services**          |           |          |            |            |
+---------------------+-----------+----------+------------+------------+
| Less than 25        | 31.3      | 13.9     | 17.4       | 1,779      |
+---------------------+-----------+----------+------------+------------+
| 25 to 99            | 46.0      | 19.7     | 26.3       | 390        |
+---------------------+-----------+----------+------------+------------+
| 100 and over        | 43.8      | 30.4     | 13.4       | 1,507      |
+---------------------+-----------+----------+------------+------------+
| **Entertainment and | **59.1**  | **28.7** | **30.4**   | **2,733**  |
| Recreation          |           |          |            |            |
| Services**          |           |          |            |            |
+---------------------+-----------+----------+------------+------------+
| Less than 25        | 62.0      | 25.8     | 36.2       | 826        |
+---------------------+-----------+----------+------------+------------+
| 25 to 99            | 56.5      | 27.3     | 29.2       | 518        |
+---------------------+-----------+----------+------------+------------+
| 100 and over        | 58.4      | 31.0     | 27.4       | 1,389      |
+---------------------+-----------+----------+------------+------------+
| **Health Care       | **56.2**  | **42.9** | **13.3**   | **11,342** |
| Services**          |           |          |            |            |
+---------------------+-----------+----------+------------+------------+
| Less than 25        | 58.2      | 43.1     | 15.1       | 2,057      |
+---------------------+-----------+----------+------------+------------+
| 25 to 99            | 46.7      | 31.6     | 15.1       | 1,464      |
+---------------------+-----------+----------+------------+------------+
| 100 and over        | 57.4      | 45.0     | 12.4       | 7,822      |
+---------------------+-----------+----------+------------+------------+
| **Other             | **68.0**  | **54.9** | **13.1**   | **20,286** |
| Professional        |           |          |            |            |
| Services**          |           |          |            |            |
+---------------------+-----------+----------+------------+------------+
| Less than 25        | 63.0      | 47.5     | 15.5       | 3,988      |
+---------------------+-----------+----------+------------+------------+
| 25 to 99            | 64.4      | 51.9     | 12.5       | 2,646      |
+---------------------+-----------+----------+------------+------------+
| 100 and over        | 70.2      | 57.6     | 12.6       | 13,651     |
+---------------------+-----------+----------+------------+------------+
| **Public            | **67.3**  | **58.4** | **8.9**    | **7,589**  |
| Administration**    |           |          |            |            |
+---------------------+-----------+----------+------------+------------+
| Less than 25        | 57.4      | 49.8     | 7.6        | 460        |
+---------------------+-----------+----------+------------+------------+
| 25 to 99            | 69.6      | 55.2     | 14.4       | 483        |
+---------------------+-----------+----------+------------+------------+
| 100 and over        | 67.8      | 59.2     | 8.6        | 6,645      |
+---------------------+-----------+----------+------------+------------+
| Source: Bureau of   |           |          |            |            |
| the Census, U. S.   |           |          |            |            |
| Department of       |           |          |            |            |
| Commerce, Survey of |           |          |            |            |
| Income and Program  |           |          |            |            |
| Participation,      |           |          |            |            |
| research data file  |           |          |            |            |
| (August-November    |           |          |            |            |
| 1999, Wave 11)      |           |          |            |            |
+---------------------+-----------+----------+------------+------------+

[]{#__RefHeading___Toc536857303 .anchor}Table 7: Employed Individuals
Who Regularly Use A Personal Computer By Occupation and Size of the
Employer, 1999

+-------------------------+----------+----------+----------+-----------+
| Occupation              | R        | R        | R        | Total     |
|                         | egularly | egularly | egularly | employed  |
|                         | Uses a   | Uses a   | Uses a   |           |
|                         | PC       | PC at    | PC, but  | (1,000s)  |
|                         |          | Work     | not at   |           |
|                         | (        |          | Work     |           |
|                         | Percent) | (        |          |           |
|                         |          | Percent) | (        |           |
|                         |          |          | Percent) |           |
+-------------------------+----------+----------+----------+-----------+
| **Managerial&           | **76.8** | **66.4** | **10.4** | *         |
| Professional            |          |          |          | *34,622** |
| Specialty**             |          |          |          |           |
+-------------------------+----------+----------+----------+-----------+
| Less than 25 employees  | 68.9     | 56.2     | 12.7     | 5,507     |
+-------------------------+----------+----------+----------+-----------+
| 25 to 99 employees      | 73.1     | 60.9     | 12.2     | 4,059     |
+-------------------------+----------+----------+----------+-----------+
| 100 and over employees  | 79.1     | 69.5     | 9.6      | 25,056    |
+-------------------------+----------+----------+----------+-----------+
| **Technical, Sales, &   | **64.8** | **50.1** | **14.7** | *         |
| Admin. Support**        |          |          |          | *39,196** |
+-------------------------+----------+----------+----------+-----------+
| Less than 25 employees  | 61.7     | 45.5     | 16.2     | 8,767     |
+-------------------------+----------+----------+----------+-----------+
| 25 to 99 employees      | 65.3     | 51.4     | 13.9     | 4,533     |
+-------------------------+----------+----------+----------+-----------+
| 100 and over employees  | 65.7     | 51.4     | 14.3     | 25,895    |
+-------------------------+----------+----------+----------+-----------+
| **Service Occupations** | **37.8** | **16.2** | **21.6** | *         |
|                         |          |          |          | *18,385** |
+-------------------------+----------+----------+----------+-----------+
| Less than 25 employees  | 35.3     | 11.5     | 23.8     | 5,264     |
+-------------------------+----------+----------+----------+-----------+
| 25 to 99 employees      | 40.7     | 15.5     | 25.2     | 2,484     |
+-------------------------+----------+----------+----------+-----------+
| 100 and over employees  | 38.4     | 18.6     | 19.8     | 10,638    |
+-------------------------+----------+----------+----------+-----------+
| **Farming, Forestry, &  | **28.2** | **9.7**  | **18.5** | **3,136** |
| Fishing**               |          |          |          |           |
+-------------------------+----------+----------+----------+-----------+
| Less than 25 employees  | 31.2     | 10.1     | 21.1     | 1,966     |
+-------------------------+----------+----------+----------+-----------+
| 25 to 99 employees      | 21.4     | 5.1      | 16.3     | 447       |
+-------------------------+----------+----------+----------+-----------+
| 100 and over employees  | 24.4     | 11.3     | 13.1     | 722       |
+-------------------------+----------+----------+----------+-----------+
| **Precision Production, | **36.7** | **23.2** | **13.5** | *         |
| Craft, & Repair**       |          |          |          | *12,743** |
+-------------------------+----------+----------+----------+-----------+
| Less than 25 employees  | 27.8     | 13.8     | 14.0     | 3,394     |
+-------------------------+----------+----------+----------+-----------+
| 25 to 99 employees      | 31.1     | 17.4     | 13.7     | 1,978     |
+-------------------------+----------+----------+----------+-----------+
| 100 and over employees  | 42.4     | 29.1     | 13.3     | 7,371     |
+-------------------------+----------+----------+----------+-----------+
| **Operators,            | **27.7** | **14.9** | **12.8** | **8,058** |
| Fabricators, &          |          |          |          |           |
| Laborers**              |          |          |          |           |
+-------------------------+----------+----------+----------+-----------+
| Less than 25 employees  | 25.4     | 10.8     | 14.6     | 1,170     |
+-------------------------+----------+----------+----------+-----------+
| 25 to 99 employees      | 18.5     | 9.3      | 9.2      | 1,249     |
+-------------------------+----------+----------+----------+-----------+
| 100 and over employees  | 30.2     | 17.0     | 13.2     | 5,638     |
+-------------------------+----------+----------+----------+-----------+
| **Transportation &      | **30.2** | **15.4** | **14.8** | **5,393** |
| Material Moving**       |          |          |          |           |
+-------------------------+----------+----------+----------+-----------+
| Less than 25 employees  | 22.2     | 10.7     | 11.5     | 1,159     |
+-------------------------+----------+----------+----------+-----------+
| 25 to 99 employees      | 28.4     | 12.8     | 15.6     | 854       |
+-------------------------+----------+----------+----------+-----------+
| 100 and over employees  | 33.3     | 17.6     | 15.7     | 3,380     |
+-------------------------+----------+----------+----------+-----------+
| **Handlers, Equipment   | **33.1** | **13.9** | **19.2** | **5,863** |
| Cleaners, Helpers, &    |          |          |          |           |
| Laborers**              |          |          |          |           |
+-------------------------+----------+----------+----------+-----------+
| Less than 25 employees  | 30.2     | 11.4     | 18.8     | 1,466     |
+-------------------------+----------+----------+----------+-----------+
| 25 to 99 employees      | 26.8     | 8.3      | 18.5     | 772       |
+-------------------------+----------+----------+----------+-----------+
| 100 and over employees  | 35.6     | 16.1     | 19.5     | 3,625     |
+-------------------------+----------+----------+----------+-----------+
| Source: Bureau of the   |          |          |          |           |
| Census, U. S.           |          |          |          |           |
| Department of Commerce, |          |          |          |           |
| Survey of Income and    |          |          |          |           |
| Program Participation,  |          |          |          |           |
| research data file      |          |          |          |           |
| (August-November 1999,  |          |          |          |           |
| Wave 11)                |          |          |          |           |
+-------------------------+----------+----------+----------+-----------+

# Conclusion

In investing in and using the tools of the new economy, firm size
matters. Smaller firms tend to invest less on a proportional basis on
capital equipment, in general, and on computers and communications,
specifically. Smaller firms are also less likely to buy and sell over
the Internet, to have interactive websites, and to engage in other types
of electronic business processes. Employees of smaller firms are also
less likely to use a computer at work

However, general observations of this type overstate the degree of
variation that actually exists---differences that are reduced when
industry and occupation are accounted for. Further, the existence of
differences, in and of themselves, are not necessarily indicative of the
existence of problems or barriers in the spread of information
technology into small and medium-sized firms.

[^1]: The authors would like to thank Charles Funk and John Seabold of
    the Bureau of the Census, Company Statistics Division for their
    assistance with this section.

[^2]: If, however, smaller firms spend a higher proportion of their
    total equipment expenditures on computers and communications
    equipment, this would tend to lessen the differences observed among
    the various size groups, relative to the differences in total
    equipment expenditure. Similarly, if smaller firms make less than
    proportional expenditures on these categories, the variations would
    be exacerbated relative to the total.

[^3]: Bureau of the Census, U.S. Department of Commerce, *Annual Capital
    Expenditures Survey: 1998*, April 2000. Revisions to the 1998 ACES
    were published with the release of the 1999 ACES in May 2001.
    However, these revisions were not carried through to the detail
    levels used in this report, therefore the unrevised data are used
    unless specifically noted otherwise.

[^4]: This accounting of software expenditures greatly underestimates
    the actual software investment that occurred because prior to 1999,
    companies did not generally treat software investment as a capital
    expenditure. To illustrate the extent of the understatement, in
    1998, the Bureau of Economic Analysis estimated that private fixed
    investment in software was \$140 billion as compared to their
    estimate of \$84.2 billion for investment in computers and
    peripherals (http://www/bea.doc.gov/bea/dn/nipaweb). This example
    also points out that the ACES data differ substantially from other
    estimates of capital investment. For example for the National Income
    and Product Accounts, BEA estimates that Equipment and Software
    investment totaled \$818.9 in 1998, while ACES estimates that figure
    at \$606.2 (revised, new equipment expenditures by companies both
    with and without employees). This considerable difference arises
    because BEA estimates are derived from the production-side, while
    ACES is from the consumption-side, using company respondents. In
    addition, there are many types of equipment expenditures that
    companies expense rather than capitalize.

[^5]: When ACES data are collected, respondents are asked to distribute
    their capital expenditures by industry. Therefore a single company
    can submit expenditure data for several industries. The expenditures
    by industry sector in the published results reflect this
    distribution. The employment data, however, are only available on a
    company basis. When the Census Bureau created the special tabulation
    of unpublished data used for this report, all capital expenditures
    and employment were assigned to the primary industry of the company.
    Because of this adjustment, the industry totals in this report may
    differ from the published results. In addition to differences
    stemming from this adjustment, it should be noted that the ACES
    sample was not designed to provide reliable estimates at these
    unpublished levels and may contain high sampling error. These data
    are also subject to the same sources of error as exist in the
    published data. These include nonsampling errors, such as errors of
    coverage, measurement, missing data, and classification. However,
    the Census Bureau makes every effort to minimize these errors.

[^6]: The other equipment category identified as IT equipment,
    capitalized software purchased separately, is not discussed further
    in this report because it provides only very limited coverage of
    actual software expenditures (See footnote 2).

[^7]: ACES does include investment data for companies without employees,
    but since the focus here in on investment by size of firm as
    measured by number of employees, the analysis is limited to data
    gathered on firms with employees.

[^8]: This section relies on data reported from surveys of SME's from
    many sources; the "SME definition" used by those who conducted the
    survey will accompany cited statistics.

    Any analysis of existing data on SMEs faces the challenge posed by
    the lack of a single, commonly accepted statistical definition.
    Often SMEs are defined in terms of employment size. In this case,
    however, differences in industry structure factor into whether a
    certain employment size category is really "small" relative to other
    firms in the industry. For example a 100 employee auto parts
    manufacturer would indeed be small relative to other auto parts
    manufacturers, while a florist with 100 employees would be a large
    firm compared to the average florist. SMEs are also sometimes
    defined in terms of annual revenues.

    Another factor is that as firms get very small (measured by both
    employment and revenue size), it becomes statistically difficult to
    determine whether the business activity underway is sufficient to
    warrant definition as a firm. For example, an engineer with a full
    time job might have a "business" doing home inspections in his free
    time. Analyses of SMEs, often, although not always, exclude very
    small firms, such as firms with zero employees, because of this
    difficulty.

[^9]: Marianne P. Bitler, Alicia M. Robb, and John D. Wolken,
    \"Financial Services Used by Small Businesses: Evidence from the
    1998 Survey of Small Business Finance,\" April 2001
    (http://www.federalreserve.gov/pubs/oss/ oss3/nssbftoc.htm).

[^10]: Dun & Bradstreet, "20^th^ Annual Small Business Survey Summary
    Report," August 14, 2001 (www.dnb.com/smallbusiness).

[^11]: The number of private establishments in 2000 is from Bureau of
    Labor Statistics, Covered Employment and Wages Series
    (http://www.bls.gov/cew/home.htm#data).

[^12]: Specific estimates from private sources and company-specific
    examples are included in this report to be illustrative of
    developing trends and their inclusion does not signify Department of
    Commerce validation or approval of any particular private sector
    estimate or example. Disparities among private estimates can result
    from differences in definitions, methods, data, model and sampling
    error, and product coverage. Variations also reflect the research
    needs of customers. While data used for estimates and forecasts are
    based on a combination of surveys and interviews, the survey
    questions and answers are typically not made public, sample sizes
    vary considerably across surveys, and little information is
    available about respondents.

[^13]: The Census Bureau also found that among plants with Internet
    access the smaller the plant, the larger the share of employees with
    Internet access. (U.S. Bureau of the Census, "E-Stats Manufacturing
    1999 and Mid-2000," Table 7, June 8, 2001
    (http://www.census.gov/estats)) Similarly, Dunn & Bradstreet found
    that 53 percent of small firms (fewer than 25 employees) provided
    Internet access to all of their employees. (Dun & Bradstreet,
    "20^th^ Annual Small Business Survey Summary Report," August 14,
    2001 (www.dnb.com/smallbusiness).)

[^14]: This is a plant level survey and is not comparable with firm or
    company level data; a give firm may own multiple plants.

    The Census Bureau's results are mirrored by an earlier survey of
    manufacturing *firms* done by KPMG Consulting for the Manufacturing
    Extension Partnership. This survey found that 89 percent of
    manufacturing firms (1-499 employees) had Internet access in 2000
    and that Internet penetration increased with firm size. (KPMG
    Consulting & U.S. Department of Commerce, Manufacturing Extension
    Partnership, "Study of U.S. Small Manufacturing eBusiness Needs,"
    Washington, D.C., June 2000.)

[^15]: IDC, \"Small Businesses Are Tightening Their Belts on Technology
    Spending but Not Too Tightly,\" Press Release, June 11, 2001
    (www.idc.com:8080/Hardware/press/PR/ES/GES061101pr.stm).

[^16]: Dun & Bradstreet, "20^th^ Annual Small Business Survey Summary
    Report," August 14, 2001 (www.dnb.com/smallbusiness).

[^17]: Gregg Keizer, "More Cures for the Broadband Blues," Zdnet Small
    Business, May 21, 2001
    (http://www.zdnet.com/filters/printerfriendly/0,6061,2763730-81,00.html).

[^18]: Federal Communications Commission, "Federal Communications
    Commission Releases Data on High-Speed Services for Internet
    Access," Press Release, August 9, 2001 (www.fcc.gov/Bureaus/Common\
    \_Carrier/News_Releases/2001/nrcc0133.txt).

[^19]: Data on manufacturers were collected on a special supplement to
    the Annual Survey of Manufactures. The Census Bureau collected data
    on wholesale merchants, retail establishments, and services by
    adding questions to existing annual surveys. Total and e-commerce
    estimates from the various survey programs should not be added
    together because they are not collected on the same basis:
    Manufacturing is based on shipments, wholesale merchants and
    retailers are based on sales, and services are based on revenues.
    *E-Stats*, a Census Bureau publication can be found at
    www.census.gov/estats.

[^20]: Dun & Bradstreet, "20^th^ Annual Small Business Survey Summary
    Report," August 14, 2001 (www.dnb.com/smallbusiness).

[^21]: Dun & Bradstreet, "20^th^ Annual Small Business Survey Summary
    Report," August 14, 2001 (www.dnb.com/smallbusiness).

[^22]: National Association of Purchasing Managers/Forrester Research,
    "NAPM/Forrester Research Report on eBusiness October 2001," October
    16, 2001 (http://www.napm.org/ISMReport/Forrester/FROB102001.cfm).

[^23]: Hal Varian, Robert E. Litan, Andrew Elder, Jay Shutter, The
    Momentum Research Group, "The Net Impact Study," Preliminary Report,
    December 10, 2001 (www.netimpactstudy.com).

[^24]: The survey used in this section contains some limited information
    on Internet access. Because the questions related to Internet access
    offer no information on Internet access or use at work, these data
    are not reported here.

[^25]: See the U.S. Census Bureau at
    <http://ferret.bls.census.gov/cgi-bin/ferret>. For more information
    on the SIPP see http://www.sipp.census.gov/sipp/.

[^26]: The employment base derived from the SIPP (127.7 million) is
    substantially higher than the 102.8 million employees used as the
    base in the previous section that uses employment estimates derived
    from ACES. Aside from the fact that the SIPP data are for 1999 and
    the ACES data are for 1998, differences arise because the ACES data
    used in Section 1 was limited to companies with employees, while
    SIPP includes all persons with paid employment, including household
    workers and the self-employed that would not be measured by ACES.

[^27]: The SIPP includes information only on these three employer size
    breakouts. This is approximately the same percentage distribution as
    measured in the ACES data used earlier except that the two larger
    employer categories are combined.

[^28]: The term "personal computer" or PC is used in this section rather
    than a more generic term that would include devices such as Apple
    Corporation's computers, because this is how the question was posed
    in the SIPP. Because of this specification, other types of
    computers, such as mainframes and computers involved in operating
    other types of machinery are also excluded. Thus, there is a
    possibility that the SIPP results understate actual computer use.

[^29]: For the remainder of this section "computer use" should be read
    as "regular computer use."

[^30]: The trends observed in Table 5 are supported by logistic
    regression analysis of computer use as a function of firm size. Size
    is significantly and monotonically related to "regular computer use
    at work" and "regular use from any location," although the
    coefficients of the size variables are smaller in the "from any
    location" estimations than they are in the "at work" estimations.
    However, when individuals who use computers at work are dropped from
    the estimation, the size of the firm size coefficients falls by an
    order of magnitude but remain significant at the 0.05 level.

[^31]: The differences between regular computer use at work by
    individuals working for employers with less that 25 employees and
    those working for employers with between 25 and 99 employees are not
    significantly different in Nondurables and FIRE. Other anomalies
    include individuals working in health care services industries the
    middle size category (25-99 employees) are significantly less likely
    to regularly use a computer at work, than health care employees of
    smaller employers and retail employees working for mid-size firms
    are more likely to use a computer at work than employees working for
    the largest employers.