E-Commerce and E-Business/E-Commerce in Developing Countries

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How important is e-commerce to SMEs in developing countries? How big is the SME e-business market?

For SMEs in developing countries e-commerce poses the advantages of reduced information search costs and transactions costs (i.e., improving efficiency of operations-reducing time for payment, credit processing, and the like). Surveys show that information on the following is most valuable to SMEs: customers and markets, product design, process technology, and financing source and terms. The Internet and other ICTs facilitate access to this information.43 In addition, the Internet allows automatic packaging and distribution of information (including customized information) to specific target groups.

However, there is doubt regarding whether there is enough information on the Web that is relevant and valuable for the average SME in a developing country that would make investment in Internet access feasible. Underlying this is the fact that most SMEs in developing countries cater to local markets and therefore rely heavily on local content and information. For this reason, there is a need to substantially increase the amount and quality of local content (including local language content) on the Internet to make it useful especially to low-income entrepreneurs.44

Box. 9. ICT-4-BUS: Helping SMEs Conquer the E-Business Challenge45

The Information and Communication Technology Innovation Program for E-business and SME Development, otherwise known as the ICT-4-BUS, is an initiative by the Multilateral Investment Fund and the Information Technology for Development Division of the Inter-American Development Bank (IDB) to enhance the competitiveness, productivity and efficiency of micro-entrepreneurs and SMEs in Latin America and the Caribbean through the provision of increased access to ICT solutions. This is in line with the regional and worldwide effort to achieve a viable “information society.” Programs and projects under this initiative include the dissemination of region-wide best practices, computer literacy and training programs, and coordination efforts to facilitate critical access to credit and financing for the successful implementation of e-business solutions. The initiative serves as a strategic tool and a vehicle for maximizing the strong SME e-business market potential in Latin America manifested in the $23.51 billion e-business revenues reached among Latin American SMEs.46

eMarketer estimates that SME e-business revenues will increase: from $6.53 billion to $28.53 billion in Eastern Europe, Africa and the Middle East combined; $127.25 billion in 2003 to $502.69 billion by 2005 in the Asia-Pacific region; $23.51 billion in 2003 to $89.81 billion by 2005 in Latin America; from $340.41 billion in 2003 to $971.47 billion by 2005 in Western Europe; and from $384.36 billion in 2003 to $1.18 trillion by 2005 in Northern America.

How is e-commerce useful to developing country entrepreneurs?

There are at least five ways by which the Internet and e-commerce are useful for developing country entrepreneurs:

1. It facilitates the access of artisans47 and SMEs to world markets.

2. It facilitates the promotion and development of tourism of developing countries in a global scale.

3. It facilitates the marketing of agricultural and tropical products in the global market.

4. It provides avenues for firms in poorer countries to enter into B2B and B2G supply chains.

5. It assists service-providing enterprises in developing countries by allowing them to operate more efficiently and directly provide specific services to customers globally.

Box 10. IFAT: Empowering the Agricultural Sector through B2C E-Commerce

The International Federation for Alternative Trade (IFAT) is a collective effort to empower the agricultural sector of developing countries. It is composed of 100 organizations (including 70 organizations in developing countries) in 42 countries. Members of the organization collectively market about $200-400 million annually in handicrafts and agricultural products from lower income countries. In addition, IFAT provides assistance to developing country producers in terms of logistical support, quality control, packing and export.

Box 11. Offshore Data Processing Centers: E-commerce at Work in the Service Sector

Offshore data processing centers, which provide data transcription and “back office” functions to service enterprises such as insurance companies, airlines, credit card companies and banks, among others, are prevalent in developing countries and even in lowwage developed countries. In fact, customer support call centers of dot-coms and other ICT/e-commerce companies are considered one of the fastest growing components of offshore services in these countries. India and the Philippines pride themselves in being the major locations of offshore data entry and computer programming in Asia, with India having established a sophisticated software development capability with highly skilled personnel to support it.48

Developing country SMEs in the services sector have expanded their market with the increased ability to transact directly with overseas or international customers and to advertise their services. This is especially true for small operators of tourism-related services. Tourism boards lend assistance in compiling lists of service providers by category in their Web sites.

In addition, for SMEs in developing countries the Internet is a quick, easy, reliable and inexpensive means for acquiring online technical support and software tools and applications, lodging technical inquiries, requesting repairs, and ordering replacement parts or new tooling.49

The Internet is also instrumental in enabling SMEs in developing countries to join discussion groups with their peers across the globe who are engaged in the same business, and thereby share information, experiences and even solutions to specific technical problems. This is valuable especially to entrepreneurs who are geographically isolated from peers in the same business.50

What is the extent of ICT usage among SMEs in developing countries?

Currently the Internet is most commonly used by SME firms in developing countries for communication and research; the Internet is least used for e-commerce. E-mail is considered an important means of communication. However, the extent of use is limited by the SMEs’ recognition of the importance of face-to-face interaction with their buyers and suppliers. The level of confidence of using e-mail for communication with both suppliers and buyers increases only after an initial face-to-face interaction. E-mail, therefore, becomes a means for maintaining a business relationship. It is typically the first step in e-commerce, as it allows a firm to access information and maintain communications with its suppliers and buyers. This can then lead to more advanced e-commerce activities.

One of the key barriers to e-commerce development in the developing world is secure payment gateways. Even in Egypt, with a well-developed international tourism market, local SMEs are largely unable to take secure payments online. Payment gateway providers are still not operating in the developing world, and local banks are more likely to develop customised solutions rather than open source plug ins for web sites.

ICT usage patterns among SMEs in developing countries show a progression from the use of the Internet for communication (primarily e-mail) to use of the Internet for research and information search, to the development of Web sites with static information about a firm’s goods or services, and finally to use of the Internet for e-commerce.

Box 12. E-Mail and the Internet in Developing Countries

To date, e-mail is the predominant and most important use of the Internet in developing countries. In Bangladesh, 82% of Internet use is attributed to e-mail, vis-à-vis 5% in the United States. The Web accounts for about 70% of Internet use in the U.S.51 This is due to the relatively high Internet access costs in most developing countries. However, the Internet is considered an inexpensive, although imperfect, alternative to the telephone or facsimile machine-i.e., it is inexpensive due to the higher speed of information transmission, and imperfect because it does not provide two-way communication in real time unlike the telephone.52

Many firms use the Internet to communicate with suppliers and customers only as a channel for maintaining business relationships. Once firms develop a certain level of confidence on the benefits of e-mail in the conduct of business transactions and the potential of creating sales from its use, they usually consider the option of developing their own Web site.

Studies commissioned by The Asia Foundation on the extent of ICT use among SMEs in the Philippines, Thailand and Indonesia, show common use patterns, such as:

1. wide use of the Internet for e-mail because of the recognized cost and efficiency benefits;

2. use of Web sites more for promotion than for online sales or e-commerce, indicating that SMEs in these countries are still in the early stages of e-commerce;

3. common use of the Internet for basic research; and

4. inclination to engage more in offline transactions than in e-commerce because of security concerns.

SMEs go through different stages in adopting e-commerce. They start with creating a Web site primarily to advertise and promote the company and its products and services. When these firms begin generating traffic, inquiries and, eventually, sales through their Web sites, they are likely to engage in e-commerce.

Box 13. Women and Global Web-Based Marketing: The Case of the Guyanese Weavers’ Cooperative

The Guyanese Weavers’ Cooperative is an organization founded by 300 women from the Wapishana and Macushi tribes in Guyana, northern South America. The cooperative revived the ancient art of hammock weaving using 19th century accounts and illustrations of the hammocks made by European travelers and the cultivation of cotton on small family plots and hand-weaving. The organization then hired someone to create a Web site, which was instrumental in bringing their wares online. Not long after, in the mid-1990s, the group of weavers (the Rupununi Weavers Society) was able to sell hammocks to Queen Elizabeth, Prince Philip, the Smithsonian Institute, and the British Museum. Since 1998, they have sold about 20 hammocks through the Internet at $1,000 per piece. This case also shows that SMEs have great potential to compete in markets for high-end, bespoke products despite the low sales volume.

In addition, many Web sites providing market and technical information, agronomic advice and risk management tools for SMEs (to coffee and tea farmers in developing countries, for example) have emerged.53

What are the obstacles, problems and issues faced by SMEs in their use of ICT in business or in engaging in e-commerce?

According to recent surveys conducted in select Southeast Asian countries, the perceived external barriers to e-commerce include the unfavorable economic environment, the high cost of ICT, and security concerns. The internal barriers are poor internal communications infrastructure within SME firms, lack of ICT awareness and knowledge as well as inadequacy of ICT-capable and literate managers and workers, insufficient financial resources, and the perceived lack of relevance or value-added of ICTs to their business.

In general, the main issues of concern that act as barriers to the increased uptake of information technology and e-commerce are the following:

• Lack of awareness and understanding of the value of e-commerce. Most SMEs in developing countries have not taken up e-commerce or use the Internet because they fail to see the value of e-commerce to their businesses. Many think e-commerce is suited only to big companies and that it is an additional cost that will not bring any major returns on investment.
• Lack of ICT knowledge and skills. People play a vital role in the development of e-commerce. However, technology literacy is still very limited in most developing countries. There is a shortage of skilled workers among SMEs, a key issue in moving forward with using information technology in business. There are also doubts about whether SMEs can indeed take advantage of the benefits of accessing the global market through the Internet, given their limited capabilities in design, distribution, marketing, and post-sale support. While the Internet can be useful in accessing international design expertise, SMEs are not confident that they can command a premium on the prices for their goods unless they offer product innovations. They can, however, capitalize on returns on the basis that they are the low cost providers.

Furthermore, more often than not, the premium in design has already been captured-for example, in the textile products industry-by the branded fashion houses. SMEs doubt whether Web presence will facilitate their own brand recognition on a global scale.54

• Financial costs. Cost is a crucial issue. The initial investment for the adoption of a new technology is proportionately heavier for small than for large firms. The high cost of computers and Internet access is a barrier to the uptake of e-commerce. Faced with budgetary constraints, SMEs consider the additional costs of ICT spending as too big an investment without immediate returns.

Many SMEs find marketing on the Internet expensive. Having a Web site is not equivalent to having a well-visited Web site. One reason is that there may be no critical mass of users. Another reason is the challenge of anonymity for SMEs. Because of the presence of numerous entrepreneurs in the Internet, it seems that brand recognition matters in order to be competitive. Moreover, it is not enough that a Web site is informative and user-friendly; it should also be updated frequently. Search engines must direct queries to the Web site, and news about the site must be broadly disseminated. Significantly, the experience of many OECD countries attests to the fact that the best e-marketing strategies are not better substitutes for the conventional form of media.55 One solution may be to encourage several SMEs to aggregate their information on a common Web site, which in turn would have the responsibility of building recognition/branding by hyperlinking or updating, for example.

• Infrastructure. The national network/physical infrastructure of many developing countries is characterized by relatively low teledensity, a major barrier to e-commerce. There are also relatively few main phone lines for business use among SMEs.
• Security. Ensuring security of payments and privacy of online transactions is key to the widespread acceptance and adoption of e-commerce. While the appropriate policies are in place to facilitate e-commerce, lack of trust is still a barrier to using the Internet to make online transactions. Moreover, credit card usage in many developing countries is still relatively low.56

Also, consumers are reluctant to use the Internet for conducting transactions with SMEs due to the uncertainty of the SMEs’ return policy and use of data.

• Other privacy- and security-related issues.57 While security is commonly used as the catch-all word for many different reasons why individuals and firms do not engage in extensive e-commerce and use of Internet-based technologies, there are other related reasons and unresolved issues, such as tax evasion, privacy and anonymity, fraud adjudication, and legal liability on credit cards. In many countries, cash is preferred not only for security reasons but also because of a desire for anonymity on the part of those engaged in tax evasion or those who simply do not want others to know where they are spending their money. Others worry that there is lack of legal protection against fraud (i.e., there is no provision for adjudicating fraud and there may be no legal limit on liability, say, for a lost or stolen credit card). It is necessary to distinguish these concerns from the general security concerns (i.e., transaction privacy, protection and security) since they may not be addressed by the employment of an effective encryption method (or other security measure).

Is e-commerce helpful to the women sector? How has it helped in empowering women?

In general, the Internet and e-commerce have empowered sectors previously discriminated against. The Guyanese experience can attest to this.

Women have gained a foothold in many e-commerce areas. In B2C e-commerce, most success stories of women-empowered enterprises have to do with marketing unique products to consumers with disposable income. The consumers are found largely in developed countries, implying that there is a need for sufficient infrastructure for the delivery of products for the business to prosper and establish credibility. For example, if an enterprise can venture into producing digital goods such as music or software that can be transmitted electronically or if such goods can be distributed and/or delivered locally, then this is the option that is more feasible and practicable.

Aside from the Guyanese experience, there are many more successful cases of e-commerce ventures that the women sector can emulate. Some concrete examples are: Tortasperu.com ( http://www.tortasperu.com.pe), a business involving the marketing cakes in Peru run by women in several Peruvian cities; Ethiogift ( http://www.ethiogift.com), involving Ethiopians buying sheep and other gifts over the Internet to deliver to their families in other parts of the country, thereby dispensing with the physical delivery of goods abroad; and the Rural Women’s Association of the Northern Province of South Africa, which uses the Web to advertise its chickens to rich clients in Pietersburg.58

While most of the examples involve B2C e-commerce, it must be noted that women are already engaged in wholesale distribution businesses in developing countries. Thus, they can begin to penetrate B2B or B2G markets.

Box 14. Women Empowerment in Bangladesh: The Case of the Grameen Village Phone Network

The Grameen Village Phone Network is a classic example of women’s empowerment in Bangladesh. Operators of the village phones are all poor women (who have been selected for their clean and strong credit record). These village phones are regularly visited by members of male-dominated villages. Notably, the women entrepreneurs (village operators) enjoy wider discretion in expending their profits from their phone services than with their household income.

What is the role of government in the development of e-commerce in developing countries?

While it is generally agreed that the private sector should take the lead role in the development and use of e-commerce, the government plays an instrumental role in encouraging e-commerce growth through concrete practicable measures such as:

1. Creating a favorable policy environment for e-commerce; and

2. Becoming a leading-edge user of e-commerce and its applications in its operations, and a provider to citizens of e-government services, to encourage its mass use.

What is a favorable policy environment for e-commerce?

Among the public policy issues in electronic commerce that governments should take heed of are:

• “bridging the digital divide” or promoting access to inexpensive and easy access to information networks;
• legal recognition of e-commerce transactions;
• consumer protection from fraud;
• protection of consumers’ right to privacy;
• legal protection against cracking (or unauthorized access to computer systems); and
• protection of intellectual property.

Measures to address these issues must be included in any country’s policy and legal framework for e-commerce. It is important that government adopt policies, laws and incentives that focus on promoting trust and confidence among e-commerce participants and developing a national framework that is compatible with international norms on e-commerce (covering for instance, contract enforcement, consumer protection, liability assignment, privacy protection, intellectual property rights, cross-border trade, and improvement of delivery infrastructure, among others59).

How can government use e-commerce60?

Government can use e-commerce in the following ways:

• E-procurement. Government agencies should be able to trade electronically with all suppliers using open standards-through ‘agency enablement’ programs, ‘supplier enablement’ programs, and e-procurement information systems.
• Customs clearance. With the computerization of customs processes and operations (i.e., electronic submission, processing and electronic payment; and automated systems for data entry to integrate customs tables, codes and pre-assessment), one can expect more predictable and more precise information on clearing time and delivery shipments, and increased legitimate revenues.
• Tax administration. This includes a system for electronic processing and transmission of tax return information, online issuances of tax clearances, permits, and licenses, and an electronic process registration of businesses and new taxpayers, among others.

More often than not, the e-commerce initiatives of government are a barometer indicating whether or not the infrastructure supports e-commerce use by private firms. This means that if government is unable to engage in e-procurement, secure records online, or have customs fees remitted electronically, then the private sector will also have difficulties in e-commerce uptake. Virtually, the benefits from e-commerce accrue to the government, as the experiences of some countries reflect.61

Are existing legal systems sufficient to protect those engaged in e-commerce?

Unfortunately, the existing legal systems in most developing countries are not sufficient to protect those engaged in e-commerce. For instance, with respect to contracts, existing laws were conceived at a time when the word “writing,” “document” and “signature” referred to things in paper form. On the other hand, in today’s electronic business transactions paper is not used for record-keeping or entering into contracts.

Another important and common legal issue faced by many developing countries is uncertainty regarding whether the courts will accept electronic contracts or documents and/or electronic signatures as evidence. One view is that the issue of admissibility of electronically generated evidence will not be resolved unless a law specifically referring to it is passed. This gap in existing legal systems has caused the emergence of at least two divergent views: one bordering on the conservative interpretation of the word “document” as to exclude non-paper-based ones; and the other involving a liberal construction, which allows electronic counterparts of documents.

In the ASEAN region, only three countries-Singapore (Singapore Electronic Transactions Act), Malaysia (Cyberlaws), and the Philippines (Philippine E-commerce Act)-have a legal framework for e-commerce. These frameworks provide for the legal recognition of electronic documents and signatures and penalize common crimes and offenses committed in cyberspace.

What other relevant policy issues should be addressed?

Other policy issues concern basic prerequisites of infrastructure for successful e-commerce, as follows:

1. Telecoms pricing and performance

One of the aims of telecommunications policy and legislation should be to ensure that the public has access to basic telecommunications services at a reasonable cost. The goal should ultimately be universal accessor widespread access to reliable information and communication services at a reasonable cost and its availability at a reasonable distance.

To enhance the quality of telecommunications services, policies should encourage:

• open access, which refers to the absence of non-competitive practices by network providers;
• open architecture, which pertains to the design of a system that facilitates interconnection among different systems and services currently and as they develop over time; and
• flexible access, which pertains to interconnected and interoperable networks of telecommunications, broadcasting, and electronic publishing, where the format will be digital and the bandwidth will be adjusted according to the demands of the user and the character of communications.62

2. Quality and speed of distribution logistics (i.e., roads and bridges)

Roads and bridges, especially in developing countries, still form part of the e-commerce infrastructure. Very few goods are delivered over the information infrastructure or the Internet (the exceptions are music and software). Most of the goods purchased over the Internet are still delivered the conventional way (i.e., physical delivery). Hence, poor roads and bridges, inefficient transport systems, coupled with the high cost of international parcel services and bureaucratic customs clearance processes, are major obstacles in the uptake of e-commerce in developing countries.63 Government should therefore create a policy environment that will:

• encourage investments in the national physical and transport infrastructure; and
• provide for electronic customs clearance processing to streamline the bureaucracy and allow for more transparent, predictable and efficient customs operations.

Both of these will contribute to the reduction of distribution and logistics costs.

How can government intervene in the promotion and development of e-commerce among SMEs?

The following are the more relevant areas for government intervention with respect to SME uptake of e-commerce:64

E-SME Development. The market ultimately drives e-commerce development, but it is the private sector that fuels it. Government can provide incentives to encourage widespread e-commerce use by SMEs. An “e-SME development program” in which various sectors can provide technical assistance to SMEs to promote e-commerce uptake, can also be developed. Banks, financial lending and training institutions, and corporations should be encouraged to develop “SME desks” that will address the specific needs of SMEs. In particular, steps should be taken to:

• provide incentives to individuals to become entrepreneurs by lowering borrowing rates;
• provide incentives to SMEs that intend to use e-commerce in their business operations;
• broaden credit extension facilities to SMEs in order for them to use ICT and e-commerce; and
• offer discounts on business solution software packages and software licenses.

Moreover, big businesses and corporations should be encouraged to transfer technology to SMEs by offering them free training in ICT and e-commerce.

Awareness Campaign. Evidence suggests that SMEs have insufficient knowledge of information technology and e-commerce. Many SMEs have identified their lack of knowledge of technology as one of the main barriers to using e-commerce. Government and private sector partnerships can engage in a campaign to disseminate information to SMEs about e-commerce policies, best practices, success stories, and opportunities and obstacles relating to the use of ICTs and e-commerce. These awareness campaigns could include free training courses and workshops on e-commerce, security and privacy, awards programs, and information centers to assist SMEs. Ultimately, this information campaign should come in the form of an overall e-commerce development strategy for the economy, focusing on its various innovative applications for SMEs.

E-Government. Government should be the lead-user of e-commerce if various business and private-sector related activities are to be prompted to move online. In effect, government becomes a positive influence. E-government can take the form of various online transactions such as company registration, taxation, applications for a variety of employee- and business-related requirements, and the like.

Network Infrastructure and Localization of Content. A developed national information infrastructure is a necessary, though not a sufficient, condition for e-commerce uptake of SMEs. Without reliable and inexpensive telecommunications and other information services, SMEs will not be able to go online. An important strategy in this regard is the construction of “telecenters” or electronic community centers that would serve as a community-shared access and connectivity platform especially in the rural areas (e.g., an electronic agri-information center which provides market information to farmers in rural areas). These telecenters can also be a venue for capacity building, skills enhancement, training, communications and content development.65 Government can also adopt agglomerative approaches to Internet use to reduce costs (e.g., export aggregators, such as B2B or B2C portals/exchanges for SMEs, which will facilitate trading with fellow SMEs and with other companies in the international market).

Strengthening Consumer Protection. Among the more common trust-related issues that SMEs take note of in considering whether to engage in e-commerce are: where and how payment takes place (whether real or virtual); when settlement takes place (before, during or after the transaction); who settles; whether the transaction is B2B or B2C; and whether settlement can be traced. Generally, however, among e-commerce users in developing countries, including SMEs, there is very low willingness to provide sensitive financial information over the Internet.66 On the other hand, consumers have reservations about transacting with SMEs through the Internet due to the lack of a clear policy on returns and use of data. To address this concern, government can encourage companies/ SMEs to make their privacy policy explicit in their Web sites.

A more comprehensive measure that government can undertake to ensure security in e-commerce transactions is the establishment of a Certification Authority, which verifies seller and buyer identities, examines transactions and security procedures, and issues digital certificates to those who are able to meet the set security standards. A good example of this government effort is Singapore’s Certification Authority, Netrust. This suggestion does not to discount the importance of private-driven security solutions such as Web sites like Hypermart, which host and build storefronts for SMEs while providing them a common system for secure payments.68

Box. 15. Data Protection and Transaction Security

Transaction security pertains to three important components and related issues, namely:

• Transaction Privacy, which means that transactions must be held private and intact, with unauthorized users unable to understand the message content;
• Transaction Confidentiality, implying that traces of transactions must be dislodged from the public network and that absolutely no intermediary is permitted to hold copies of the transaction unless authorized to do so; and
• Transaction Integrity, which pertains to the importance of protecting transactions from unlawful interference-i.e., transactions must be kept unaltered and unmodified. In an open network like the Internet, it seems difficult to ensure these. There are, however, technological solutions that seek to address these security concerns. These solutions usually come in the form of authorization schemes, i.e., programs that make sure that only authorized users can gain access to information resources such as user accounts, files, and databases. Typical examples of authorization schemes are: password protection, encrypted smart cards, biometrics (e.g., fingerprinting, iris-scanning), and firewalls.67 A firewall is a system of cryptographic methods supported by perimeter guards to ensure the safe arrival and storage of information and its protection from internal and external threats. The most common data and transaction and data security scheme is encryption, which involves a set of secret codes that defends sensitive information crossing over online public channels. It makes information indecipherable except to those with a decryption/decoding key.

Government can also provide guidelines for SMEs in the development of a system of collaborative ratings, which these entrepreneurs can display on their Web sites not only to inform but also to assure their consumers of security. For instance, in electronic exchanges, customers should be able to rate suppliers in terms of quality of product or service and speed of delivery, among others. To minimize fraud, certain safeguards should be built into the rating system like imposing the requirement of presenting evidence of purchase before one’s rating can count, with ratings of regular customers having more weight. Trends in ratings and comments should be made readily available to all users. SMEs should also be encouraged through appropriate government incentive schemes to participate in internationally accredited Web-based online rating schemes.69

Government can also design and establish a legal and judiciary framework that provides for minimum standards of and requirements for transparency, impartiality and timeliness. While in many developing countries this may be a very ambitious goal, in the medium term SMEs may use self-regulated codes of conduct covering, for example, return policy, data protection, and acceptable forms of content, that are applicable within associations, cooperatives or their respective groups of peers and e-entrepreneurs.70 It is important to have not only a rating system but also an enforcement regime that people trust.

Human Resources Development. The government can initiate pilot projects and programs for capability-building, training and e-commerce support services, such as Web design. In Kenya, for instance, the youth from Nairobi’s slums are being trained in Web design skills.

In general, government initiatives should be in line with current efforts in the foregoing areas of concern. Coordination with development cooperation agencies is important to avoid any duplication of initiatives and efforts.