Digital entrepreneurs have the potential to connect to global markets like never before. Whether selling physical goods on internet platforms, or providing digital goods and services that can be downloaded and streamed, an entirely new ecosystem of innovative micro and small businesses has emerged in the developing world.
The World Bank Group hosted some of the pioneers in this space for a full-day conference on Harnessing Digital Trade for Competitiveness and Development on May 19. Here, we heard entrepreneurial success stories—an online platform for jewelry in Kenya, a provider of software solutions in Nepal, an online platform for livestock trade in Serbia—and dove into the constraints and challenges of running a digital business in an emerging economy.
The scope of these challenges made these success stories, and the broader potential they represent, even more inspiring. From internet connectivity to logistics, from financial payments to trade regulations, from bankruptcy laws to entrepreneurial and consumer digital literacy-- clearly, more needs to be done to fully harness the potential of digital trade for competitiveness and development and to foster an enabling environment to digital trade.
While some of the barriers to digital trade are related to core development prerogatives—such as improving the Doing Business environment, furthering trade facilitation, or improving access to finance—there are also constraints that are specific to digital trade.
These “digital deltas” are constraints that are particularly important to online trade in developing countries, relative to exporting or entrepreneurship in general. Interventions in these areas could make a big difference for such trade – hence, the “digital delta.” For example, the performance of logistics is broadly relevant,—but in the digital delta, this branches into more narrowly defined areas, such as the logistics of delivering large numbers of small parcels to specific residential addresses. There’s the broad issue of financial reform and banking regulations—but in the digital delta, the focus might be on a small business’ ability to access or build upon electronic payment systems.
To explore this idea a little further, we’ve listed a few of our main takeaways from the conference. The first section identifies issues related to more prominent areas of the development agenda, and the second offers some thoughts on those more specific to the digital delta.
Issues discussed regarding the Enabling Environment include:
- Payment. Getting paid for products and services offered online is challenging for producers without access to traditional bank accounts or laptops. Online payment systems, such as PayPal or Alipay, are not available in many countries. In Kenya, jewelry artisans that sell through the online store, Soko, are paid through the widely popular mPesa mobile money platform. But mPesa is still not fully integrated into the national and international banking system, meaning they may not be able to access that money in certain situations.
- Logistics. In developed countries, entrepreneurs that sell on platforms like eBay, Alibaba and Etsy can rely on large express delivery companies to deliver packages. In many developing countries, potential customers do not even have a mailing address. Thus, fully building out the postal system—or something to replace it—can help digital entrepreneurship. Innovative solutions involve delivery by bicycle and motorcycle to locations mapped by GPS and cellphones.
- Capital. Digital entrepreneurs access international markets faster than traditional ones, which implies that they can scale very quickly. However, in order to scale, entrepreneurs need working capital. While this constraint is not unique to digital traders, financial constraints are particularly acute for startups. Banking sectors have not developed financial products that cater to young firms that require rapid growth capital and lack collateral, including physical assets. Venture capital markets are only emerging in many developing countries, and angel networks are mostly nonexistent. Without access to capital, firms cannot fully leverage the opportunities that access to international markets has opened up to them.
- Information asymmetries. Investors need information. How can they find out the financial position of a small firm in a developing country? Or their track record? In the context of high-growth emerging economies, the risk-and-return profile of startups means that they are less attractive as an investment asset than alternative investment opportunities in mature economies, even if those only offer low growth rates.
- Financial services regulations in many countries can inhibit the development of online payment systems. For example, in Nepal, the talent exists to write and sell apps. But many of these developers cannot register and upload their apps to platforms like Google’s Play Store, which requires an internationally recognized credit card to register—even if your app is free. There are only around 200 such credit cards in Nepal. To overcome this, YoungInnovations CEO, Bibhusan Bista, has offered his own card to employees and friends and uploaded 20 apps to the Play Store.
- Monopolies in the telecommunications industry can push up the cost of internet access by stifling competition, and this is something the World Bank Group is well aware of. In its funding of undersea internet backbone cable around Africa, the Bank Group has insisted on multiple interconnections to facilitate competition.
- In international trade, restrictive de minimis rules (requiring the payment of duties even on very small shipments) can impose burdensome requirements on small traders, and the lack of market access for international express delivery providers can cripple on-time delivery.
- The types of funding platforms which could provide digital entrepreneurs with crowd-sourced or other funding from developed countries can be shut down by securities regulations in developed countries, which require registration with securities regulators every time equity is being publicly offered.
- More subtly, the digital business environment requires an open attitude toward risk. Successful digital entrepreneurs often acquire valuable experience by repeated failure in various attempted startups. The attitudes enabling failure as a pathway to success are partly cultural. However, the design of bankruptcy laws may make a difference. If old enterprises cannot be wound up quickly, or entrepreneurs passing through bankruptcy are legally handicapped in starting new businesses, digital commerce is impacted more than other forms.