This article originaly appeared on OECD's Development Matters blog written by Hanne Melin.
Irrespective of where in the world we look, we find micro and small businesses leveraging an online platform business strategy to engage in commerce on a global scale. That’s been the finding of the eBay Public Policy Lab and a team of economists at Sidley Austin LLP who have worked together since 2011 studying the trade patterns of enterprises using the eBay marketplace.
The economic opportunities cannot be overestimated.
Indeed, trade participation is linked to increased productivity and greater probability of firm survival. This, in turn, contributes to more prosperous communities. Nevertheless, micro and small firms remain underrepresented in world trade, despite them dominating most countries’ enterprise population. Moreover, developing countries’ role in world trade is still understated, not to mention the small firms in those countries.
What explains this state of affairs is the high costs of trade. World trade has been more or less closed to micro enterprises and firms situated in more remote locations due to the costs that come with engaging in commerce activity over distance. These costs result from transportation and logistics, regulatory and administrative red tape, different legal systems, communication and marketing, uneven access to information, difficulties in matching supply and demand, trust creation, and enforcement.
However, the online platform model for commerce significantly reduces the negative effect that distance has on trade. We have estimated that a 10% increase in the distance between two trading partners reduces traditional international trade by 18%, whereas international transactions over the eBay marketplace drop only by 3%. The World Economic Forum describes the online commerce platform as “reducing many non-tariff barriers to trade, most importantly information,” which has had a strong positive impact on many small businesses by opening up new export avenues. Similarly, the World Trade Organization suggests that the gains are particularly high for small businesses that leverage the online commerce platform because of how it “enhance[s] buyer information and trust.”
Consider a snapshot of this new dynamic. Comparing behavior across nine emerging and nine advanced economies, we find first that almost all small firms using eBay trade internationally, and those are largely micro-sized enterprises. This contrasts sharply to traditional trade; for example, across OECD countries, where fewer than 10% of firms are exporters and only around 5% of micro enterprises export. Second, it is clear that firms irrespective of location use the commerce platform as a springboard to customers worldwide. A simple average across the 18 countries in our study reveal that they served customers in 27 different countries in 2014, on average, and the large majority reached four or more continents. This too is in sharp contrast to traditional trade. The World Bank estimates that the average number of countries reached by exporting firms in Belgium, Bulgaria, Estonia, Portugal and Spain is around four. The OECD reports that, in a majority of OECD economies, 50% or more of exporting enterprises trade with only one country. At the same time, the firms that export to more than 10 countries also dominate trade. We found that across the 18 countries we studied, between 38% and 98% of the firms reached 10 or more countries.
Source: eBay, “Small Online Business Growth Report: Towards an Inclusive Global Economy”, January 2016, http://www.ebaymainstreet.com/sites/default/files/ebay_global-report_vf_no-countries_0.pdf
Our data covers “Commercial Sellers”, those are sellers with more than USD 10,000 in annual sales on the eBay Marketplace.
This finding suggests that advancing more broad-based economic growth means transforming world trade into an economic activity inclusive of the smallest enterprises and firms from less economically advanced areas. As such, it also presents a tool for strengthening women as economic actors.
How? The Global Entrepreneurship Monitor (GEM) reports that the number of women running their own business is growing globally. Female entrepreneurship rates are increasing, and gender gaps are closing. The World Bank notes that about 34% of firms worldwide have a woman participating in the ownership, and in developing countries about eight to 10 million formal micro, small and medium enterprises (MSMEs) have at least one female owner.
However, female-owned enterprises generally perform less well than male-owned enterprises. They are found to exhibit lower productivity, be less profitable, generate lower sales and to some extent show lower survival probabilities. This matters. Especially in poorer communities with high competition for low-level jobs, women are more likely than men to start a business out of necessity because they lack options for sustainable livelihoods as GEM finds.
The platform-based commerce model could offer a tool for a large number of such women entrepreneurs to strengthen their business opportunities. First, the retail sector is especially important for female entrepreneurs, including in developing countries. The online platform has revolutionized commerce by enabling retailers to serve customers across huge distances without investing in physical, local facilities. Second, female entrepreneurs are particularly prevalent in smaller firms and firms located in smaller towns and cities, and the platform model for commerce has proven capable of supporting enterprise formation and small businesses outside of traditional economic hubs. Third, according to GEM findings, female entrepreneurs display relatively low international ambitions, which could explain why women-owned businesses often remain small. Platform-based exporting is today the only proven way that a meaningful number of small businesses can, at low cost, diversify their business through an international customer base. It is about economic development, driven by the entrepreneur and made possible through:
- internet connectivity at low cost without gatekeepers
- access to global and online platform-based marketplaces and payments services
- availability of logistics and postal networks, globally and seamlessly connected at the parcel-level
- public policy and legal instruments supportive of direct MSME-to-consumer global commerce.
The eBay Public Policy Lab uses the term the Global Empowerment Network (GEN) to capture these four “empowerment enablers” as a system. Though far from perfectly in place, the GEN already is showing its capacity to open up world trade to more and different actors. For example, Jyoti Bansal started Sanskriti India after cleverly sensing untapped international demand for vintage Indian fabrics and saris. Over the last six years, her business has grown from a staff of about two people to a team of 25, and today serves customers in more than 50 countries. Margarita Dolby learned about barrels through a family member. From there, she built a business of manufacturing and exporting barrels from Mexico to the United States and Australia in particular, allowing her to employ 17 people locally. While searching for a new job, Sahar Emami of France realised that adding an online business-to-consumer component to her father’s wholesale business could be a successful venture. Today, this component of Eye World Boutique makes about 80% of total turnover with 94% of its merchandise being exported. Clearly, the platform-based retail business offers opportunities for women around the world to supplement their household income like Jyoti did, be their own bosses like Margarita did and take themselves out of unemployment like Sahar did.
Looking ahead, measures to allow more firms to leverage the GEN for trade would include:
- expanding access to the internet
- ensuring the availability of online, cross-border payments solutions
- increasing customs import duty exemption thresholds
- eliminating duties on cross-border returns
- treating postal systems as MSME trade facilitators
- promoting balanced internet intermediary policies
- opening up customs facilitation programs, such as Trusted Traders/Authorised Economic Operators, to platform-enabled MSMEs
- introducing interoperable Digital Single Windows
- exploring flexible international regulatory co-operation solutions.
Ultimately, the platform-based business strategy is a bottom-up approach to economic empowerment. This includes the economic empowerment of women. As such, it offers a scalable solution to low trade participation by small firms, firms in developing economies and female entrepreneurs.