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    THE STATE AND DEVELOPMENT OF E-COMMERCE IN SERBIA

    Borislav Jošanov

    Novi Sad Business School Vladimira Perića Valtera 4, 21000 Novi Sad , Serbia

    tel. +381214854035

    fax +381216350367

    e-mail: borjos@uns.ns.ac.yu

    Marijana Vidas-Bubanja

    Belgrade Business School

    Kraljice Marije 73

    11120 Beograd

    tel. +381113042-300

    fakx +381/11/2424069

    marijana.bubanja@bbs.edu.yu

    Emilija Vuksanović

    Faculty of economics, University of Kragujevac

    Djure Pucara Starog 3, 34000 Kragujevac, Serbia

    tel. +381 34 360 614

    fax +381 34 303 516

    evuksanovic@kg.ac.yu

    Ejub Kajan

    High school of applied studies Filipa Filipovica 20, 17000 Vranje, Serbia

    tel. +381117421859

    fax +381117421859

    eja@bankerinter.net

    Bob Travica

    Asper School of Business, University of Manitoba

    Winnipeg, MB R3T 5V4, Canada

    tel. 204-474-9637

    fax 204-474-7545

    btravica@ms.umanitoba.ca

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    THE STATE AND DEVELOPMENT OF E-COMMERCE IN SERBIA

    ABSTRACT

    The authors of this paper constructed and published multidimensional model for the evaluation of e-commerce diffusion in any country. According to this model qualitative research of conditions for e-commerce penetration in Serbia was conducted. Serbia is located on an important geographical location in Southeast Europe. After Yugoslavia’s falling apart and a

    decade of stagnation, Serbia came to a road of economic changes and it became an economy in transition it was pronounced the leading reformer in 2005 by The World Bank. Our main finding is that the process of diffusing e-commerce in Serbia is still on the waiting list, but different states are found for different layers of this multidimensional model. Some good experiences found in Serbia’s e-commerce practice are mainly from the B2C e-commerce, while

    a strategy of B2B e-commerce could be a catalyst for pulling together the facilitating conditions and engaging Serbia in global electronic economy.

INTRODUCTION

This study is the result of the wide research which investigated the conditions for diffusion of e-

    commerce in Serbia. For developing countries like Serbia, e-commerce can be noticed as a compelling strategy and a paramount opportunity for economic development. The ongoing globalization process has the strong driving force in a ―revolution in information technology‖

    which has led to the emergence of a ―global informational capitalism‖ (Castells, 2000). Each

    developing country which tends to be a part of the global capitalist economy has to be a part of international electronic networks. Our question which we appointed before our research was: how Serbia responds to these opportunities and challenges?

    Serbia is one of the most important crossroads of Europe, featuring important roads and railways (USAID, 2007). Flows of row materials from the east and south used to cross Serbian territory on their way to the industrialized European countries, and the finished goods used to follow the opposite direction. The economic turmoil in the 1990s has seriously challenged its capability of integrating into the global digital economy. Significant transitory moves in last seven years brought Serbia to the position of the leading reformer in 2005, according to the investigation of The World Bank (2005). This paper will try to analyze the conditions for diffusing e-commerce in Serbia today.

MAIN FACTS ABOUT SERBIA

    Serbia is an old European country and a new member of world community, still waiting for the final definition of the borders and the integration into international community. Main characteristics of Serbia are given in Table 1. Separation processes left strong scarf on economy and social values in Serbia.

Thinking about conditions for diffusion of e-commerce in Serbia, the authors of this study

    conducted an integral investigation based on a previously defined multidimensional model

    (Travica et al, 2006). After more than a decade of stagnation Serbia is on the road of economic

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    and political changes. It is located on an important geographical location, on the crossroads between north and south, and east and west of the Europe. That is the reason why Serbia is one of the significant crossroads of Europe, featuring important international roads and railways. This characteristic raises the importance of Serbia in the period of economic restructuring of Europe, triggered by the fall of the Berlin Wall in 1989. Flows of raw materials from the east and south would naturally cross Serbian territory on their way to the industrialized west and north Europe, and the finished goods would follow in the opposite direction. While enjoying this potential role of a geographic chain link, Serbia slid into a political and economic turmoil in the 1990s, which has seriously challenged its capability of integrating into the global electronic economy (Dinkić, 1995). NATO attacks in 1999, which destroyed bridges, main factories and a lot of transport infrastructure, made the situation even much worse. On the other hand, Serbia makes significant transitory efforts. The World Bank has rated Serbia as the ―leading reformer in 2005.‖ These reasons motivated our study.

    Table 1: Characteristics of Serbia

    Area 88,361 square kilometers

    Population 9,800,000 (July 2007 est., 7,800,000 excl. Kosovo)

    Belgrade (the capital, 1.6 million), Novi Sad

    (500,000), Niš (250,000), Kragujevac, (175,000)

    Larger cities and Subotica (120,000)

    GDP $44.83 billion; $4,400 per capita (excl. Kosovo)

    57.9% services, 25.5% manufacturing, 16.6%

    GDP Composition agriculture

    Inflation Rate 18% (2005)

    Unemployment 31.6% incl. Kosovo (Kosovo 50%)

    Rate

    More than 200,000 with undergraduate and higher

    Brain Drain education

    2,685,000 (2004) mobile 5,229,000 (2005, excl.

    Telephones Kosovo)

    This research has one restriction: as the part of Serbia called Kosovo is under the international governance lead by the United Nations and it is now completely autonomous, it is excluded from this research.

    Serbia used to be the largest federal unit in a country called Yugoslavia (meaning: the country of Southern Slavs), which stretched from Greece to Austria and Italy. Although situated in Eastern Europe, Yugoslavia was never part of the Eastern Block. Contrary to it, Yugoslavia boasted a hybrid economic system in which major firms were government-run, while private small and medium size enterprises operated across industriesfrom agriculture, to transportation, tourism,

    and to software/hardware production. The political system, however, mirrored the model of the Eastern single-party monopoly, while boasting larger individual freedoms. Yugoslavia’s social system was also unique in its capability of balancing enormous differences concerning the economic power of its federal units and the cultural traditions of its many ethnic and religious groups. At a high benchmark level, Yugoslavia was scoring high annual rates of economic growth and played a role of bridging the political east and west, and north and south. Peculiar as

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    it was, Yugoslavian system had long been in operation due to a combination of internal and external political factors, up until winds of change hit Yugoslavia and Europe in the late 1980s. In the changed international environment of the 1990s, Yugoslavia disintegrated along the borders of its federal units and locations of different ethnic groups, through processes of secession with violent aspects. Serbia fell into a period of hardship, as our analysis will repeatedly point out. The hallmark of the 1990s period was governance that lacked economic and political wisdom needed for adaptation to the changed environment. Serbia plunged into international isolation, economic embargo, and an overall decline. The final blow came in 1999, when the Clinton administration moved NATO’s air force into a campaign against Serbia, which decimated the already unraveled economy. Serbia entered the new millennium with its economy being half the size of that in 1990 (The World Factbook, 2007).

    Hundreds of thousands of refugees from war-thorn parts of the former Yugoslavia and from Kosovo ended up in Serbia. In these days, after all efforts for their return, we found information, according to UNHCR, that in Serbia are 100,651 refuges from Croatia, 46,951 refuges from Bosnia and Herzegovina and almost 246,391 internally displaced people from Kosovo, what makes the largest population of refuges and IDP in Europe today (The World Factbook, 2007).

    A political turnover in 2000 finally put a bar to the reign of entropy. Serbia joined the line up of the developing countries presenting economies in transition, and began searching for its place in the new world. We believe that the combination of geographical importance and the unleashed economic changes qualifies Serbia’s e-commerce situation as an important topic with potential

    contributions to theory and practice in the areas of international information systems, e-commerce/business, and management. The present study has investigated the conditions for diffusion of e-commerce in Serbia. Serbia sits on a geographical location that is important for international trade. After a decade of stagnation and seclusion, indications of change show up in the economy and other areas in Serbia (Travica et al, 2007). For developing countries, e-commerce presents a compelling strategy and a paramount opportunity for economic development. The other argument could be found by relating the ongoing process of globalization to a ―revolution in information technology‖ that has led to the emergence of a

    ―global/informational capitalism.‖ To be part of the global capitalist economy, a developing country, as any other, has to be capable of acting in international electronic networks.

LITERATURE REVIEW & METHODOLOGY

    The study of e-commerce in developing countries is interesting for the researchers in the recent years (Palvia et al., 2002; Kamel, 2006; Wolcott et al., 2001). By definition, the theme of e-commerce sits at the intersection of IS research and business/management research. With this anchoring, researchers have been giving different emphases to particular issues, such as culture, regulatory environments, strategies, diffusion models, industry analysis, outsourcing, supply chains, electronic marketplaces, organizational designs, business process change, adoption and success factors, digital divide, and security. Country-focused studies are frequent and usually take the form of case study of a country as a whole or of individual companies in particular nation-state environments.

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    Cultural issues are a popular choice. Among these, the topic of trust looms throughout every national context (Kamel, 2006; Cronin, 2000). For example, the authors of research in China (Efendioglu & Yip, 2005) specifically propose that a virtual storefront has to be supported by a local distribution center, which would cater to Chinese culture and overcome a lack of ―transactional trust.‖ The problem of trust in on line merchants is also evident in Southern Korea

    and Latin America (Lee, 1999; Plant, 2000; Travica, 2002). For instance, Costa Rican customers prefer to shop directly from known merchants and thus reduce uncertainty regarding quality of products. Differing kinds and levels of trust are accompanied by particular cultural norms that have come into the relationship with e-commerce. For example, Costa Rica nurtures cultural norms that are responsible for turning a blind eye on violations of satellite regulations by businesses (Travica, 2002) ibid. On the other side of the globe, Russia and Ukraine, the strongest economies in the former Soviet Union, share a host of cultural traits that may constrain e-commerce, including personal networking with the business community, a preference of cash payments, underdeveloped records management (receipts not issued, limited accounting practices), lack of English language skills, a looser approach to time management, and a rigid hierarchal management hostile to information sharing and employee empowerment (Jennex & Amoroso, 2006).

    Research on the diffusion of e-commerce in the region interesting to our study is in its initial stage. An early study of 11 countries including Bulgaria, Hungary, Romania, and Slovenia found that the Web sites in English were mostly informational rather than advertising or transaction oriented (Travica & Olson, 1998). Also, ambiguous relationships between sites and the background businesses were detected in Romania, while instances of mixing political expressions with business information were found in Hungary and Slovenia. Furthermore, an important study of Papazafeiropoulou (2004) contains conditions for e-commerce diffusion in some countries in southeast Europe (SEE). The author found government intervention to be a factor for a successful diffusion. This intervention is premised on expected social benefits from greater use of IT, improvements of employees' skills, and increased competition in the telecommunications market that could stimulate new investments and innovative products and services. Country-wise, the study has found that Bulgaria has qualified technical personnel, while it lacks public subsidy needed for commerce entrepreneurs. The Former Yugoslav Republic of Macedonia has many portals and content providers, while suffering from a bad telecommunication infrastructure. In Romania, the IT and telecommunications industries are strong and competitive, while there exist a low penetration of the telephone network and delays in rural development. Albania exhibits a paradox of high annual rates of Internet growth countered by limited Internet access by companies and individuals (Papazafeiropoulou, 2004).

    Vidas-Bubanja and colleagues (2002) have provided a study of e-commerce in Serbia, in which they found that about 2,000 firms used the Web sites only for informational purposes. They also reported on interesting examples of e-commerce enterprises in Serbia, including a large portal, a virtual mall, and a content provider specialized in metallurgy. The authors noted the government’s efforts in supporting e-commerce, such as establishing strategic partnerships with

    foreign IT vendors. Maruzzelli (2004) also investigated similar issues in a study sponsored by a private sector arm of the World Bank Group. The study found that, in 2003, Serbia was in an early phase of Internet adoption, with high growth rates. The infrastructure for distributing Internet access was under development, and methods for e-payment were in infancy, and dialup

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    access was dominant as a profitable operation of the government-owned ISP. Maruzzelli also described major players in the telecommunications and e-commerce sectors, and cites the monopolistic role of Telekom Serbia as a limiting factor. Two important researches come from Travica and colleagues in 2006 and 2007, based on the same model that is used in this research, and they are expanded and refreshed by the same group of authors.

    The research problem of our study concerned the possibilities for developing EC in Serbia. The study is aimed at answering on this research question: What are the conditions for diffusion of EC in Serbia? The term ―conditions‖ refers to the dimensions in our research model discussed below. The term ―diffusion‖ refers to the indications of movement toward EC, which could be understood as initiation, action, change, processes, and institutionalization rather than in the narrow technical sense of diffusion of innovation. The term ―EC‖ implied the B2B and B2C segments. The study was driven by a research model of necessary conditions (―layers‖) for diffusion of EC, shown in Figure 1. To the original model described by Travica in 2002, two more layers are added: legislature (to reflect the fact that the European EC context is increasingly regulated) and education (to account for the growing importance of education for EC and management). Also, the original e-payment layer is broadened by e-banking, and the bottom layer is renamed into ―traffic infrastructure.‖

    Figure 1: Research model

    Our investigation was designed as an interpretive case study (Baskerville & Myers, 2004). We used interviewing, surveying, observation, document analysis, main national statistical researches, and Web site analysis for collecting data. Most of this data was content analyzed. When our attempts to collect data from intended samples failed, we drew inferences from limited samples, while relying on the individual expertise that each of us has in respective areas.

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TRANSPORT INFRASTRUCTURE

The most basic layer in our pyramidal model of EC refers to traffic infrastructureroads, air

    traffic facilities, railroads, and waterway (Travica, 2002) ibid, which provide support for delivery services required both in B2C and B2B EC. The land traffic infrastructure in Serbia is well-developed intercity road network that is comparable in terms of density and pavement type to that of the most advanced Central and East European countries. The total length of roads is 42,692 km, where 24,860 km are paved roads. Roads are provided for the main transportation route in Serbia. Since ancient times, the Morava river valley is the crossroads between the North and South, and East and West. The major road in Serbia is the cross-Europe highway E-75 that connects Norway with Greece and it is well-known as Corridor 10 (ECMT, 2005). Thru the same valley passes another important road: the international highway E-70 that starts in Spain and, via Romania, ends in Turkey. Also an important road connects Niš with Sofia, the capital of Bulgaria. This is a branch of Corridor 10 that links to Corridor 4 and it is important because, in a way, Corridor 4 competes with Corridor 10 as it bypasses Serbia (originates in Germany, and runs through Hungary, Romania, and Bulgaria to Greece and Turkey). Yet, another important road is E-763, the B-category route that links Serbia with Montenegro, which is now in reconstruction process.

    The layout of the roads and their inclusion in European Union’s strategic corridors create favorable conditions for the commercial traffic in Serbia. Some economic experts contend that the country can become a transportation hub. In addition, the degree of the development of inter-city network creates a potential for increasing the reach of delivery that e-commerce may require. However, the scenario of economic development capitalizing on transportation opportunities is far from being uncontested. One difficulty refers to a poor condition of the road network. The funding of road maintenance has decreased dramatically in the 1990s. Unsustainable tariff and financial policies and mismanagement of available funds have resulted in a significant de-capitalization of the transportation sector and in lagging behind the neighboring countries. Serbia spends only $570 per kilometer of road maintenance, which is 26 times less than what is spent in developed European countries.

    The railroad traffic infrastructure in Serbia involves over 3,808.5 kilometers of rails (one third being electrified). Backbone lines support the hub position: 40% or railroads are included in Corridor 10 and they fully connect Serbia with the neighbors and with three seas. A railroad also connects Belgrade with the largest seaport Bar in Montenegro. A 500 kilometer-long segment of a high-speed railway is in very slow under way.

Serbia’s waterways also have an international characterfour of its five longest rivers flow over

    the country’s borders. In contrast to the state of air traffic infrastructure, Serbia’s waterways may

    be exhibiting stronger signs of vitality. There area several significant waterways that support both domestic and international traffic. Here belong the rivers Danube, Sava, Morava, Tisa, and Tamiš. All but the Morava flow over Serbia’s borders. The Danube River is crucial since it flows through ten European countries over 2,850 km and it presents a significant economic potential (World Bank, 2005). It runs through ten European countries, making a transportation corridor in itself. This Corridor 7 connects west and east Europe, and the North Sea with the Black Sea. A realization of the traffic scenario, however, is challenged by a poorer condition of the road

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    network and losses in the road and railroad traffic due to mismanagement and destruction in the 1990s. The stretch of the Danube through Serbia amounts for about 20% of its length. Three bigger ports are in Serbia: Novi Sad, Belgrade, and Smederevo. Port Novi Sad is important as the entry point for the pan-European traffic. The Belgrade port is significant not only as a Danube port but also as a crossroads, for that is where the Danube and the Sava meet, and Corridor 7 (the Danube) and Corridor’s 10 intersect (indeed, two parts of this corridorthe main trunk and

    north wing; see Figure 2). Some observers posit that the Danube can present a particular economic advantage for the country. Serbian economy also uses the seaports in Montenegro, Bulgaria and Romania.

    Another challenge refers to the state of the air traffic infrastructure. For example, the Belgrade Airport lost its international prominence it enjoyed before the 1990s, and the ensuing drop in income downgraded the maintenance and asset renewal capabilities of this and other airports. NATO’s bombing raids in 1999 additionally deteriorated the situation. The air traffic

    infrastructure in Serbia contains 36 airports (paved or unpaved) and a few heliports. Main airports are in Belgrade (now Nikola Tesla Airport) and Niš (both international). The resent

    investments in Nikola Tesla Airport promoted this airport as a future hub for Southeast Europe. Another important fact is that this airport is chosen to be the gateway for all flights which are connecting Europe and Cuba.

DELIVERY CHALLENGES

    The term delivery can be defined as moving the goods from the seller to the buyer. It includes the services of transportation, warehousing, freight forwarding, logistics (planning the shipment routes and timing, shipment tracking), and other steps in the order fulfillment process. It includes the transportation infrastructure for physical movement of the goods as well as on telecommunications for order placing and shipment management. Fulfilling an order is the final step in a supply chain for a particular commodity. The delivery layer is necessary for shifting commerce into the electronic context.

    E-commerce is not just about putting up a Webs storefront or establishing EDI or extranet links between institutional sellers and buyers. If a seller participating in e-commerce markets does not provide delivery on its own, such a seller needs to have stable relationships with providers of delivery services. These relationships could be realized via long-term contracts between sellers and delivery firms. Alternatively, short-term deals suit the purpose, provided that delivery firms operate in the geographical regions in which sellers and buyers reside. The price of jumping into e-commerce without including delivery services into business models can be high.

    In Serbia, the main provider of land delivery services is Serbian Post (Public Enterprise of PTT Communications ―Srbija;‖ ―PTT‖ stands for ―Post, Telegraph, and Telephone‖) (PTT Serbia,

    2007). This is a government-owned monopoly with major stakes in a number of subsidiary companies, covering landline and mobile telephony, banking, and Internet services (see the

    sections on telecommunications and software industry). Serbian Post provides door-to-door delivery of semi-finished goods between manufacturers and from manufactures to retailers, warehousing, handling of returned shipments, and international delivery in cooperation with DHL. In a process of diversifying its portfolio, Serbian Post has partnered with Neckermann, a

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    German retail firm with a long tradition of catalog sale. Serbian Post delivers products ordered through the catalog, and supports the manual payment procedures.

    Railroad traffic adds to the delivery capability of the country. The national railroad company plays part in cargo delivery that is at a modest level. The sole domestic player in this industry is the government owned enterprise Serbian Railways, which owns 158 of active stock and 4800 cargo wagons. In 2000, about 4,000 rail lines were operated, which marked a moderate level of railroad traffic in comparison to the neighbor countries. However, the actual cargo traffic was not at par with these countries, placed Serbia in 2001 next to the lowest ranked Bosnia and Herzegovina.

    Other players have more limited capabilities. For example, some whole sellers and retailers offer transportation and warehousing services, and smaller private firms and independent truckers offer transportation. FedEx and UPS are present, expanding the global delivery offerings. There are other players in the delivery industry, although their capabilities are limited. Specifically, some whole sellers and retailers offer their own transportation and warehousing services. In addition, about 20 smaller firms offer some delivery services, and there are dozens of independent truckers. Serbia is behind the neighboring countries in terms of the number of trucks, and nearly 40% of these vehicles have recently been unable to meet the technical standards of European Union (UNECE 2003; USAID, 2007). An overall poorer state of vehicles in Serbia combines with the unsatisfactory road conditions to create a significant risk factor. Waterways delivery of goods is environmentally safer and can be more cost efficient than delivery via other routes. Since it is also capable of carrying larger shipments, delivery via water yields significant economies of scale. Delivery via waterways in Serbia has a great potential that is still not materialized in right manner.

    The most significant river is the Danube, which flows through ten European countries and provides good conditions for sailing in its south/east portion, Serbia including. Conditions for intensifying the international traffic on Serbia’s portion of the Danube have recently been surfacing. One of the landmarks in this process was reached in October 2005 with the opening of a new bridge in Novi Sad, a key Danube port in Serbia. The new bridge replaced a pontoon bridge that blocked the international traffic for six and a half years, serving as a substitute for a six-lane bridge destroyed by NATO’s missiles. Since the city of Novi Sad sits on a branch of Corridor 10 (a highway and railroad), the enabling of sailing through Novi Sad implies that the second connection between Corridor 10 and Corridor 7 (the Danube itself) is achieved (the first connection is in Belgrade).

    The Danube port Smederevo is poised to support the traffic needed for a gigantic complex of metallurgy factories recently acquired by U.S Steel. Their steel products are shipped downstream the Danube to the Black Sea ports in Romania and Bulgaria. As opposed to the growing traffic on the Danube, the process of reviving what used to be high frequency traffic on the river Sava has been slower. Countries that descended from the former Yugoslavia labor on upgrading the status of this river into an international waterway. Serbian economy also uses the seaport Bar, which lies on the Adriatic Sea in Montenegro. This port is operated under special regulations that allow for a free movement of capital, goods and labor, and duty and tax exemptions.

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Delivery of goods via air routes is carried by the national airline Jat Airways (formerly JAT

    Yugoslav Air Transport). This company is also the main carrier of passenger traffic. A high ranking airline company in Europe in the 1980s, Jat Airways suffered significant resource and market losses due to the breakup of the former Yugoslavia in 1991 and international trade sanctions imposed on Serbia soon after. The company was grounded abroad and it lost the financial capability to regularly maintain its fleet. The airline is attempting to bounce back, while operating an aging fleet of about 20 mid-range passenger planes.

    The airline transportation also features several operators of passenger traffic (the charter company Aviogenex, which owns four mid-range planes) and a few independent operators of small passenger planes. Still, true competition comes to JAT Airways only from international airlines that have taken control of key international routes. In this situation, however, JAT Airways preserves an ownership structure that does not oppose inertia; the same applies to Serbian airports. Also, JAT Airways refrains from participating in international alliances of airline companies, and continues to be focused on passenger traffic. These facts are in a stark contrast to changing characteristics of air transportation industry in the world. For example, Bulgaria allowed split-offs from the main national air company, then privatized part of it, and provided conditions for private carriers to enter the business.

TELECOMMUNICATIONS FACILITIES

By January 2007, 433 million hosts were connected to the Internetalmost three hundred times

    the number of ten years ago (ISC, 2007). The number of Internet hosts has been adopted as a measure of the Internet penetration of a country and the degree of national connectivity and it is defined by ITU as the number of computers directly connected to Internet. This number is assigned to country code, so the data shown in Fig. 3 is related to Serbia and Montenegro (country code YU), because there is no data available yet for a new country code (RS). Also note that if there is no country code identification in case of generic TLDs (org, com, etc.), such hosts are assigned to US.

    Figure 2: The number of Internet users across SEE countries (by 2006)

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