The mediating role of accounting information systems in small and medium enterprise strategies and organizational performance in Iraq

Table of Contents

Difficulties of SMEs

It is not easy for some SMEs to adopt the rapid development of information technology, as the modest use of AIS has become insufficient to meet the information needs necessary for the decision-making process. Therefore, SMEs face many problems in their growth performance (Kareem et al., 2019a). These problems contribute to a lack of understanding of AIS effectiveness through adopting new technology and the key strategy factors to enhance performance (Al-Okaily, 2024). SMEs continue to face global challenges, and SMEs’ decline rate is relatively high (Gamage et al., 2020). Historical data reveals that three of every five SME businesses faced the risk of failure in the first few months of operation (Al Baghlani, 2018). In Basra city, the managers and owners of SMEs often hesitate to adopt new technology, and one factor may be fear of the unknown (Kareem et al., 2021a, 2021b, 2022). Religion, social status, education, personality, and experience that influence human behavior and culture are other reasons (Smolka, 2000).

The availability of reliable data on SMEs is generally lacking (Harash et al., 2014a, 2014b; Kareem et al., 2021a, 2021b). In 2021, a United Nations Development Program (UNDP) report regarding Iraq stated that SMEs that lack a clear vision and strategic direction are more likely to face challenges that could ultimately result in closure. The report found that the highest closure rate was in Nineveh Governorate at 62%, followed by Basra at 35%, and then Baghdad at 34%. Nearly one-third (29%) of the causes behind the shutdown of SMEs could be attributed to financial losses. Most SMEs lack bank accounts, with just around 1.5% of Basra-based SMEs maintaining accounts, often because they perceive no necessity to open accounts (UNDP, 2021).

Based on the UNDP Report, SMEs in Iraq face several challenges, such as not comprehending financing systems and conducting transactions with banks and financial institutions. Insufficient financial resources make it difficult for SMEs to purchase sophisticated AIS software or employ specialized accounting staff. Challenges exist in meeting basic requirements for technical, managerial, and accounting expertise. For SMEs with limited experience affecting business efficiency, additional training or consulting services are necessary to understand and use an AIS system effectively. Insufficiency in specialized support services in administration, accounting, and technical consulting and fear of integrating AIS with existing systems or processes that may require new employees, especially if SMEs have old software or manual accounting, are issues. Strong security measures, such as encryption, access controls, and regular data backups to protect financial information, require technical support. Furthermore, the absence of mobile cash payment services necessitates visiting a bank to complete their financial transactions (Flayyih et al., 2019; Harash, 2015, 2017; Harash et al., 2014a, 2014b; Kareem et al., 2019a, 2019b, 2021a, 2021b, 2022; Martin et al., 2022). Studies like those of Martin et al., (2022), Kareem et al. (2021a, 2021b), and the International Organization for Migration (2020, 2023) show that many businesses failed and financial resources are not flowing at the desired capacity due to poor strategy and use of technology such as AIS in business transactions with banks and customers. Martin et al., (2022) and the International Organization for Migration (2020) examined 310 SMEs in depth to see and break them down by sector using each firm based on its specialization registered with the Ministry of Commerce. See Fig. 1.

The strategic context of SME investment

The strategic investment context for SMEs is crucial for their growth and success. SMEs often face resource constraints and must carefully allocate funds to achieve their business goals. This strategic context involves evaluating various aspects (Kim and Ha, 2023; Julien and Ramangalahy, 2003; Levy and Powell, 2005; Giovanni et al., 2012), such as finance source, administrative innovation, organizational culture development, capabilities levels of SMEs, information source, development of business managers, and technological innovation. SMEs can harness strategic advantages by effectively fostering interactions within their strategic approach to sustain the quality of work and achieve a competitive advantage (Sherani et al., 2022; Muna et al., 2022). Thus, SMEs must make the necessary investments to ensure they have the necessary tools and resources to align external and internal perspectives, leading to accomplishing strategic objectives. Many SMEs nowadays consider investing in various strategic directions that include information technology and the ability to add value. The restricted adoption of strategies by SME owners and managers may not yield favorable returns, often due to the lack of time available for adequately evaluating strategic opportunities (Kumar et al., 2023). The market position plays a central role in steering changes within SMEs. The key factor determining success or hindrance is executing strategies primarily guided by customer needs (Monroy-Gomez et al., 2022).

The number of SMEs in Iraq has significantly declined due to the problematic circumstances Iraq has gone through. In addition, a clear strategy for developing the small and medium enterprises sector is absent. Therefore, SMEs’ strategy must focus on essential factors inside and outside their enterprises (Andersen et al., 2018; National Development Plan 2018–2022, 2018; International Organization for Migration, 2023). See Fig. 2.

Literature review

Undoubtedly, weak strategies hinder the expansion of SME activity in Iraq. The issues that SMEs face are interconnected in nature. Strategies should address internal and external factors and unique proficiencies, abilities, and resources that produce advantages that rivals find difficult to mimic or replicate (Al Baghlani, 2018; Flayyih et al., 2019; Kareem et al., 2021a, 2021b). However, adopting a new strategy that includes transfer to new AIS software is not easy for managers and owners of SMEs, as this transfer generates fear and hesitation due to the lack of experience of managers and owners. Indeed, several studies related to SMEs in Basra have noted that SME strategies and the use of AIS were not implemented well (Al Baghlani, 2018; Harash et al., 2014a; Kareem et al., 2019a, 2021a, 2021b, 2022). Ismail (2009), Ismail and King (2005), Kareem et al. (2019b, 2021a, 2021b), and Soudani (2012) found that firms often develop poor strategies related to the use of an AIS. Therefore, attention to factors such as finance, production, human resource management, and research and development could help managers and owners of SMEs to attain long-term marketplace survival.

Applying strategy and using an AIS needs more attention to drive these firms to higher performance. Several scholars have investigated this issue in various contexts. For example, Pratono (2016) investigated strategic orientation and information technology in Indonesia and found that initiatives encouraging SMEs to adopt information technology should consider an SME’s capability to utilize that technology. Abudaqa et al. (2022), Eiriz and Barbosa (2022), and Purbawati et al. (2023) found a positive and significant relationship between strategy and firm performance in the United Arab Emirates, Portugal, and Indonesia, respectively. Rodríguez-Espíndola et al. (2022) stated that external factors impacted technology implementation for improving sustainable performance using 165 SMEs in Mexico and that sustainable-oriented innovation positively influenced performance. Hutahayan (2020) found that a management accounting information system mediated the relationship between innovation strategy and financial performance in East Java, Indonesia. Jungho Yang (2017) showed that successfully implementing strategic information systems planning positively impacted organizational performance in Korea. Yunis et al. (2018) investigated the role of information and communication technologies in enhancing organizational performance and found that the successful use of information and communication technologies was positively related to organizational performance in Lebanon. Chang and Chuang (2011) demonstrated that business strategy was positively associated with firm performance. Park and Byun (2022) found that the effects depended on the type of strategy applied in Korea. Terziovski (2010) found that SME strategy was negatively associated with firm performance in terms of innovation and culture in Australia. Agbejule (2005) found with low environmental uncertainty levels the management accounting systems will have a negative effect on performance. Also, Hao and Song (2016) found that information technology was a mediator between technology-driven strategy and performance.

Because of limited management vision, the absence of political and economic stability, and the lack of support from government agencies, SMEs often do not successfully implement AIS (Kareem et al., 2021a, 2021b; Kdeear and Abdel Halim, 2021). Many managers and owners believe they can manage their businesses and achieve better profits even with intense competition, so they often do not apply suitable strategies that could lead to long-term survival. Consequently, some SMEs perform poorly and often fail (Kareem et al., 2019a). However, as Pushpakumari and Watanabe (2009) have noted, there is no unanimity on an appropriate strategy. Therefore, SMEs might have one or multiple strategies, such as business unit level and functional level business strategies. Along these lines, the current study focuses on a strategy combining production, financing, and functional work in terms of human resources and research and development to enhance organizational performance through AIS. The lack of studies conducted in this area has led to the need to examine organizational performance in an SME environment by applying strategy because outcomes could differ from country to country. Table 1 shows a summary of the articles used in the current study.

Table 1 Main articles used in this study.

Conceptual theoretical framework

The resource-based view (RBV) framework can open up more than one approach in adopting multiple perspectives for strategies and any technology such as AIS. Brush and Artz (1999) and Lockett and Thompson (2001) examined the contingent value of certain resources and capabilities by focusing on a firm’s overall performance. Unfortunately, these studies did not consider contingencies related to the value of these resources within the context of a specific strategy. As Lutfi et al. (2020) noted, firms using AIS effectively exhibit better performance than firms limited in using AIS. Therefore, the impact of technology depends on the extent of use of the AIS in SME activities. Consequently, SMEs must use the AIS to adopt and use this system unlimitedly to achieve success over competing companies.

Accordingly, this research will benefit from RBV theory and use AIS as a technology resource that can be exploited to enhance performance. The research was conducted using the RBV framework. RBV refers to a firm’s resources as “all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc., controlled by a firm that enable it to conceive of and implement strategies that improve its efficiency and effectiveness” (Barney, 1991). RBV can be widely interpreted as covering any firm’s physical resources. As such, an AIS is a resource and can clarify internal resources and capacities, influencing performance. RBV supports SME strategy development because their resource package sets firms apart, which is a step toward solving present and future problems. Some conditions could allow a firm to achieve and sustain a favorable competitive position over time. However, the role of internal and external resources is an essential vision for SMEs (Porter, 1991).

SMEs’ strategy

Several scholars have studied business strategy and SME performance. Pushpakumari and Watanabe (2009) found a significant positive correlation between business strategy and SME performance regarding profits and sales. Pratono (2016) found that greater strategic orientation positively impacts and brings greater firm performance. Accordingly, the following hypothesis is posited:

Hypothesis (H1). SMEs’ strategy will have a positive and significant relationship with organizational performance.

In this study, SME strategy refers to the application of diverse strategies in accordance with the use of AIS to drive a business to achieve its assigned objectives. For example, Latifah et al. (2020) found that firm strategy has a significant positive relationship with AIS. Hutahayan (2020) found that innovation strategy positively affects the accounting information system. Accordingly, the following hypothesis is posited:

Hypothesis (H2). SMEs’ strategy will have a positive and significant relationship with the use of AIS.

The use of an AIS

AIS is a resource to manage all daily financial and nonfinancial transactions. Previous studies examined the relationship of an AIS with performance. For example, Kareem et al. (2021a, 2021b) found that AIS positively impacted organizational performance. Others found the same (Mim, 2016). Ismail and King (2005) and Ismail (2009) found that high AIS alignment of requirements with AIS capacity achieved better organizational performance than low AIS alignment.

Following these studies, the following hypothesis is posited:

Hypothesis (H3). The use of AIS will positively and significantly affect organizational performance.

AIS has been assessed for mediation in many aspects, but limited studies showed its relationship with the organizational performance perspective. For example, Latifah et al. (2020) and Hutahayan (2020) found that AIS positively mediated the association between business strategy and MSMEs’ performance. In addition, Nassani et al. (2023) also found AIS to be a mediator between digital technology and strategic performance.

Following these studies, the following hypothesis is posited,

Hypothesis (H4). AIS mediates the relationship between SME strategy and organizational performance.

Figure 3 shows the proposed relationship between SME strategy, AIS, and organizational performance based on the above discussion. Table 1 shows the main articles used in this study and includes the factors, the country studied, the methodology, the results, and the limitations.