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technology adoption, and the value chain framework illustrates why action by an individual firm is inadequate for that firm to realize the benefits of an NII.

The final section of the paper discusses opportunities for national policy to alleviate the problem of SME's participation in the NII. The paper concludes that a coordinated collaboration among private, university, and government resources offers the best way to assist U.S. SMEs in making the transition to electronic commerce and the benefits of the NII.

Background

SMEs and the Economy

Small manufacturing enterprises (SMEs) are responsible for an estimated 28 to 40 percent of the employment in the manufacturing sector.1 Moreover, there is evidence that SMEs are more effective at job creation2 and job replacement,3 more innovative in the development of products and process improvements,4 and more flexible and thus more competitive in terms of the ability to produce small quantities. All these factors may explain the shift to a smaller average plant size.5 The claims to new job creation are open to question—SMEs also exhibit high failure rates, and thus new jobs may not be long-lived.6 However, others point out that small firms will continue to add jobs because much growth will take place in industries in which small businesses have relative advantages.7

There is no question that SMEs are a crucial element in the nation's manufacturing base. If one believes, as many do, that manufacturing must continue to be a foundation for U.S. economic competitiveness,8 then SMEs will continue to be a crucial part of this competitiveness.9 The role for small firms appears to be increasing; there is evidence of a trend toward more of the total production coming from smaller manufacturers.10 However, the United States is lagging behind Europe and Japan, where small firms account for 45 to 60 percent of manufacturing employment.11

SMEs and the NII

Neither the global competitiveness of U.S. industry nor the future role of SMEs is assured. The NII vision of preserving the tradition of free market competition both among manufacturing suppliers and among international companies is consistent with what Porter12 suggests are the conditions for global competitiveness: demanding customers who can choose from an intensely competitive local network of suppliers.

The NII and DII are expected to enable this competition and the development of dual use processes and designs. Large manufacturers (including Department of Defense purchasers and contractors) can make their specifications available online, eliminating distribution delays and increasing the scope of distribution. In one vision currently being articulated by the U.S. Department of Defense (DOD), the NII and DII enable the creation of an Integrated Data Environment (IDE) in which information itself (e.g., designs, production methods) becomes a commodity and is traded. With information available on both specifications and designs, firms can work only on those opportunities for which they are most capable, reducing the risk and costs of bidding on marginal opportunities.

For SMEs to participate, they must have access to the NII and they must be able to use computer technology to integrate their business and technical functions. They must understand and use electronic commerce technologies (ECTs). Currently, small businesses are not utilizing computers to the degree necessary to fully participate. A recent survey commissioned by IBM indicated that while 82 percent of small businesses (not just manufacturers) had desktop computers, only 37 percent had local or wide area networks.13 In a stage model of information technology maturity,14 almost two-thirds of these respondents would fall into the first, most elementary, stage of maturity.

SMEs are becoming aware of the need to adopt some form of electronic communications. With increasing frequency, prime contractors and large firms have demanded that their suppliers have electronic



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