Creating a registered company abroad helps firms in developing countries to overcome common challenges, a new ITC report says.
Small firms in developing countries that want to take part in e-commerce could reach new markets if they could more easily set up online stores, transport goods and receive payments. But they are typically excluded from online payment services such as PayPal and Stripe, unable to access major marketplaces like Amazon, and forced to deal with value-added taxes and customs duties.
Setting up an international branch can remove many of these challenges, according to a new International Trade Centre (ITC) report called Building Bridges to New e-Commerce Markets: A blueprint for small and medium-sized enterprises . It’s the first publication to guide entrepreneurs through this process using clear steps and tips from businesspeople who have followed this route.
Advanced economies have developed highly competitive and innovative e-commerce services, making it easy for small enterprises to sell online. But entrepreneurs in developing countries are blocked from accessing many of these services because of their origin.
The ITC report shows these entrepreneurs how to set up, and possibly share, an international office in Europe or the United States so they can participate in e-commerce.
How foreign firms can go local
A firm that creates a registered company in a foreign jurisdiction becomes, in effect, local. In other words, many of the challenges of being a foreign company simply disappear.
‘This can be a route for small enterprises from developing countries to enter new markets,’ said Pamela Coke-Hamilton, ITC’s new Executive Director. ‘But it may mean more than gaining access to site listings and payment solutions – it can also open up the potential to work with other service vendors such as marketing agencies, logistics enterprises and tax advisers.’
It’s not a route for all small firms, however. Setting up and administering an international branch comes with a hefty price tag, and the costs may outweigh the advantages. As a rule of thumb, the report says, a business with export sales below €100,000 should explore other options – such as developing an international presence through partners or collaborating with other companies.
‘Clusters of enterprises could work together to share promotional activities and other resources,’ Ms. Coke-Hamilton noted. ‘Combining these collectively managed entities with an export structure opens market entry. An added benefit of this route is that the costs to set up and manage an international business structure would be shared.’
Five key questions
The new report advises small entrepreneurs to answer five questions before deciding how to set up their e-commerce business. The first question is whether an international branch is the right way to go. Assuming it is, the question then becomes where to set up, determining the best legal form, how to select the best distribution channels and payment methods.
Developing-country enterprises seeking an international presence in e-commerce should explore foreign markets and work with local partners when possible. They should also collaborate with other businesses at home, which means shared costs, pooled knowledge and greater negotiating power.
It’s especially important to set up in or near the biggest target market, the report says. For many African entrepreneurs, the best choice might be the United States. In Europe, Estonia presents a ‘very attractive option to set up a digital identity company structure and access innovative payment solutions’.
USAID funded the report through a grant.