Abstract:
The development of the SME sector is a challenging process which records a high
failure rate. Many scholars have highlighted that SMEs are not equipped with
sufficient knowledge and information to make rational decisions compared to large
firms. Therefore, they suffer the hazard of opportunism and lead to generate
Transaction Cost (TC), which discourages firms’ Business Performance. Since ICT is
able to assist in finding solutions to safeguard their transactions to improve business
performance, this study explores the prospects of utilizing ICT on TC and the business
performance of SMEs in Sri Lanka. The conceptual research model contained the
independent variable, ICT strength and the dependent variable, the business
performance of SMEs, while using TC as a mediator for developing and testing
hypotheses using quantitative method. A sample of 400 manufacturing SMEs was
selected from 81,531 SMEs in Sri Lanka by applying the Inverse Square Root Method.
Pre-tested structural questions were used for data collection. Partial Least Square -
Structural Equation Modelling (PLS-SEM) was used to analyze the data using
SmartPLS V3. The dimension of ICT strength has a significant negative impact on
TC-related determinants and assumptions, except for transaction frequency. These
dimensions have had a negative impact on the TC and yet made a significant positive
impact on the business performance. Uncertainty, asset specificity, bounded
rationality, and opportunism negatively have impacted the business performance of
SMEs, while transaction frequency was affected positively. TC did not significantly
impact on business performance of SMEs. ICT strength substantially reduces the TC,
and TC as a mediating variable makes neither a significant effect directly on the
business performance nor on the relationship between ICT Strength and SME business
performance. The study strongly recommends that SMEs reinforce their ICT
strengths, especially mobile technology, with applications which can assist in
minimizing the impact of TC and its related factors. The study obtained a large
explanatory ability by examining all the dimensions of ICT strength, TC, and business
performance that have not been studied yet. The experiment on mediating effect of
TC and related factors also made a unique contribution. Research establishes a new
theoretical foundation for Transaction Cost Economics (TCE) by introducing ICT
strength as a new governing structure of TC.
