E-Commerce by Micro and Small Enterprises in Developing Countries

Introduction

Although it is widely accepted that small and medium enterprises “play a major role in the economies of developing countries” (Oderdra-Straub, 2003, p. 2) and although UNCTAD (2004, p. XX) report points out that small companies “have been found to have the greatest potential for productivity gains through e-business”, the latter report explains that the main beneficiary of e-commerce in the developing world are large enterprises. This view is supported by UNCTAD (2005, p. XVII) report that shows that the “proportion of enterprises selling online decreases with size” as well as by recent articles by Sharma (2006, pp. 627-630) and Toland (2006, pp. 309-311). For small companies “in many cases Internet use is limited to the owner or managers” (UNCTAD, 2004, p. XX), and their “main use of the Internet is for email; there is relatively little business-to-consumer e-commerce.” (Toland, 2006, p. 310). Even in rare occasions when micro and small companies in developing countries do have their websites this tends to be for presentation purposes only and it is indeed very unusual to see that they directly sell their products or services online.

Obstacles to E-Commerce

What are the main obstacles for successful implementation of B2C e-commerce by micro and small enterprises in developing countries? Some of the reasons mentioned in literature (Sharma, 2006, pp. 627-628; Toland, 2006, p. 310; Humphrey, Mansell, Paré & Schmitz, 2003, p. 34) are:

• high cost of technical infrastructure,
• poor transport infrastructure,
• unreliable postal service,
• unstable power supplies,
• inadequate payment systems and
• lack of technical knowledge.

However, the term “developing countries” is very wide as they range from middle income countries in most of Latin America, East Europe and parts of Asia to low income and heavily indebted poor countries, mostly in Africa. Oderdra-Straub (2003, pp. 1-2) echoes the famous view of Bill Gates (Verhovek, 2000) and explains that most of the poorest countries are not ready to benefit from almost any form of e-commerce and that these opportunities apply only to “more advanced developing countries” or “emerging economies”. It would be difficult not to agree with this point as the power, telecommunications, banking and transport systems in the poorest countries are below necessary thresholds, while in the middle income countries, as defined by their income per capita by the World Bank (2006a), these systems are much better developed and cause less obstacles to e-commerce.

An Urban Phenomenon

Another geographic limitation is related to location within the country. Toland (2006, p. 312) argues that in the developing countries “business-to-consumer e-commerce growth will be largely an urban phenomenon, and rural areas will participate at much lower rates”. While the rural areas may have less developed supporting infrastructure, the importance of this limitation is diminished by the fact that, according to the World Bank (2006b, p. 166), in most middle income countries and in particular in Latin America and Eastern Europe over 80% of the population lives in cities.

Nevertheless, even in urban areas of more advanced developing countries there are barriers to adoption of B2C e-commerce by micro and small enterprises. Let us look further and try to identify them.

Technical and Financial Resources

Many authors (Sharma, 2006, pp. 626-628; Toland, 2006, pp. 310-311; Egea & Menéndez, 2006, p. 532) agree that one of the main problems is the high cost of technical infrastructure. Resources required for

• server hardware,
• development or purchase of software applications,
• connectivity and
• hiring or training of staff

are beyond the financial capabilities of most micro and small enterprises in developing countries. Furthermore, they cannot borrow the money at reasonable rates as their access to growth capital “is not only limited but often prohibitively costly” (World Bank, 2006c, p. 2). The cost of leased lines to the Internet in many developing countries is very high, in particular for connections to international backbones. Nicol (2003, p. 37) shows that while the cost of basic and broadband access to the Internet is comparable with the developed countries, having an international leased line is several times more expensive as these prices are “kept artificially high in unliberalised markets” (Nicol, 2003, p. 37). Tigre & O’Connor (2002, p. 17) point to “natural monopolies” and explain that many countries have recently privatized their telecommunication services, yet in order to achieve desired privatization price they have guaranteed monopoly position to private sector buyers.

While it is unlikely that the cost of leased lines is going to be significantly reduced in the near future, we have to ask ourselves how important is this for micro and small enterprises? Even a quick Internet search can reveal a number of other available options. For instance, setting a B2C e-commerce website with a well known provider in the developed world, like Yahoo or Network Solutions, is possible at the fraction of the above described costs.

Online Credit Card Payments

Toland (2006, pp. 310-311), Mann (2000, pp. 7-8) and Sharma (2006, p. 628) point out that one of the barriers is the lack of ability to process credit card payments. However, credit card processing can also be provided by a number of international companies, often as part of e-commerce web hosting packages. Of greater importance is the fact, explained by the same authors, that the credit cards have a very low penetration in developing countries and the customers are not used to online purchasing. Toland (2006, p. 311) explains that “in order for e-commerce to take off the number of users needs to reach a critical mass”. It is easy to agree that the precondition for more significant participation in e-commerce by companies in developing countries is to have a growing number of customers capable of making online credit card payments, and that at this stage the potential for profit, at least in local markets, is limited.

Foreign Markets

There are, of course, foreign markets, and indeed a study by Clarke & Wallsten (2004, p. 17) determines a causal correlation between adoption of Internet technologies and export, however Egea & Menéndez (2006, p. 532) argue that opening to foreign markets cause a different set of problems, including “linguistic and specific skills to deal with foreign customers and partners” and “perceived market risk or distribution and logistics complexities”. It is necessary to add that not everything can be successfully exported and, obviously, local markets are of particular importance to small retailers who sell imported products.

Other Obstacles

Among other mentioned reasons are lack of trained staff (Sharma 2006, pp. 627-628, Toland, 2006, p. 310, Mansell, 2001, p. 286, Lefebvre & Lefebvre, 2002, p. 321) and managerial awareness (UNCTAD,  2004, p. XX), but how specific is it for developing countries? Or can we agree with UNCTAD (2004, p. 30) that in developing countries small companies are disadvantaged because “shipping and handling costs decrease with the volume of the transaction”? Is the lack of trust in online payments (World Bank, 2006c, pp. 11, 66, Humphrey, Mansell, Paré & Schmitz, 2003, p. 34, Tigre & O’Connor, 2002, p.33, Sharma, 2006, p. 628) an important factor? Yes, these arguments are certainly valid, but the same barriers exist in the developed world and they are not specific to developing countries.

Where does this lead us? So far we have identified only the low credit card usage as an obstacle to e-commerce in the middle income countries, as all other ones are either relevant only to the poorest countries or also present in the developed world. To proceed, we have to look at earnings potential of micro and small enterprises in the developing countries and their profit expectations from e-commerce.

Earnings Potential

If we compare definitions of micro enterprises in the European Union (European Commission, 2006) and in Brazil (Finance Ministry of Brazil, 2006), where “entrepreneurship is often seen as a way to escape unemployment” (Hekl & Waack, 2001, p. 2), we can see that the micro enterprises in the developed world and in the developing countries have annual revenues with a different order of magnitude.

In a more general discussion on adoption of information technologies and Internet among small companies in developing countries, UNCTAD (2004, p. XX) points out that studies show that the key to willingness to adopt these technologies and go online is the profitability and not necessarily only cost. This certainly applies to B2C e-commerce as well. The available options for implementation of technological infrastructure and payment processing are relatively inexpensive, however the potential return on investment is perceived as low and the risk as high.

Summary

Companies in the developing world that are participating in e-commerce are mostly large enterprises, while micro and small enterprises are not using online sales in any significant numbers.

Main obstacles to e-commerce in the poorest countries have been identified, however, they are less relevant to middle income countries, in particular in urban areas. Higher cost of technical infrastructure and restricted access to growth capital in these countries also do not have to represent major barriers to e-commerce for small shops.

Low penetration of credit cards in the general population in the developing countries, together with their lower income in comparison to the developed world, are important factors limiting potential domestic buyers. As exports are not always feasible, micro and small enterprises have relatively limited online market.

Low expectation of profitability has been identified as the main reason why micro and small enterprises in developing countries tend not to use online sales. They have scarce resources and uncertain potential for earnings through e-commerce. Therefore, in most cases they are not willing to invest any financial resources until there is a recognized customer base and potential for profit.