Boosting small businesses through E-Commerce and integration into value chains

Small businesses are the backbone of the global economy, accounting for about 50 percent of employment and 90 percent of businesses. Helping micro, small and medium enterprises (MSMEs) grow is a central ingredient in poverty reduction. E-commerce and integration with value chains can be especially effective in enabling MSMEs to compete and grow  , which can lead to improved incomes and employment.

Participation in value chains connects MSMEs to suppliers, processors, buyers, and other actors, opening up access to valuable market information, linking to sources of financing, improving product quality, and enabling products to be tailored to meet specific or changing demands.

As noted by the World Development Report 2020 Trading for Development, MSME participation in e-commerce and other digital platforms – such as service delivery in food services, accommodation, and other sectors – can make it easier to sell goods and services, lower costs of entry to markets and costs of doing business, and boost MSME productivity and profits.

The transformative potential of e-commerce is illustrated by the example of Taobao in China (see World Bank research by Xubei Luo and Chiyu Niu, 2019). E-commerce led to expanded MSME sales in standardized, labor-intensive products such as clothing and shoes, as well as in more niche products, by  allowing ‘entrepreneurs to connect with consumers remotely through improved website design, establish a brand, and tailor products to specific demands’ and to increase in online retail sales in rural China between 2014 and 2017 from RMB 180 billion to 1.24 trillion.

Jumia is an e-commerce leader in Africa, operating in markets such as Egypt, Nigeria, Kenya, Morocco, and South Africa. Jumia both sells goods and offers a marketplace for third party sellers. Jumia has opened up access for small-scale producers as well as for large firms, for example Twiga Foods in Kenya signed a partnership agreement with Jumia to enable customers to buy fresh produce from smallholder farmers on Jumia’s platform. However Jumia, as with other e-commerce actors, faces significant challenges in many African markets as reflected by a relatively high rate of cancellations, failed deliveries, and returns. 

The growth of e-commerce and other digital platforms in lower income countries such as those in Africa where my team is focused, faces a number of challenges. These include restricted internet and cellular access, relatively high costs of data usage, low (although improving in many countries) levels of access to safe and low-cost digital payments, and the lack of a rigorous address system in many locations. Deficient legal and regulatory frameworks for digital transactions, use of data, and rights of consumers, also hold back the potential benefits from development of e-commerce and value chains, while poor road conditions hinder e-commerce reach and participation of MSMEs in rural areas.

Hybrid models offer a potential interim solution while the enabling pillars of a digital economy are put in place. For example, sector-specialized platforms started to flourish, including in industries where asymmetries of information are large. In addition, orders can be placed online with payment made in cash ‘on delivery’, and where networks of pick-up stations are used instead of delivery to non-specific addresses. Informal online commerce, for example using WhatsApp or Instagram to reach buyers through social networks, is also widely used by microenterprises for marketing, receiving orders, and lowering transaction costs, in particular by women.

An IFC study found that women in Africa especially benefit from e-commerce, by accessing new markets and through greater flexibility . The report finds that women are more likely to join an e-commerce platform such as Jumia to grow an existing business (as opposed to starting a new one), and also need additional support to grow their business to full potential.

In recent months I have travelled to Angola, Burundi, Lesotho, DRC, and Mozambique to support the preparation of new World Bank projects that will boost MSME growth through e-commerce and other digital platforms, and through integration with value chains.

We have initiated projects that harness the transformational potential of value chains in Mozambique and Malawi, and that open up market access for women and youth entrepreneurs in DRC.

A new $300m project to open up access to finance, value chains, digital technologies and to entrepreneur support services in DRC has now been approved, as well as a new project to integrate MSMEs with value chains and to support trade facilitation and MSME climate resilience in Lesotho.