Impact of E-Commerce to SME in Developing Countries

Small & Medium Enterprise (SME)

There is growing recognition of the role of SME in the global and regional economic recovery.

Astonishingly, there is no standard definition of SME, since different countries adopt different criteria as the basis which covers a wide range of definition and measures.

Reference is usually made to quantitative and qualitative elements such as number of employees, total net assets, sales and investment level.

However, the most commonly used criteria is the number of employment, which again, varies in minimum and maximum cut limit (the most common is 1-250 employees).

Official Definition of SME According to CountryCountry Official Definition Source

Brazil 250 IBGE-Census 1994

Brunei 100 APEC Survey

Colombia 200 Inter-American Development Bank – SME Observatory

Ghana 200 Regional Program on Enterprise Development

Hong Kong 100 APEC Survey

Indonesia 100 OECD Paper

Philippines 200 APEC Survey

Korea, Rep 300 APEC Survey

Singapore 100 APEC Survey

South Africa 100 World Bank Report

Role of SME

In the third world countries SMEs are dominant, not only generating the bulk of national economies but also reduce unemployment problems.

Many of the small firms operate in vertically integrated sectors, producing intermediate goods for large firms, which ultimately for export. – e.g. South Korea

In other countries like Taiwan, there is horizontal integration, goods are purchased from SME in final form marketed by a central firm.

SME in large countries produce largely for domestic market – India & China

Singapore, Hong Kong and Taiwan mostly focused on global market – due to small domestic market and can compete globally.

Technology Pattern of E-Commerce - Email

The need to communicate with foreign buyers encouraged SMEs to start using email.

Initially, interaction is done face-to-face between supplier and buyer which end up with small purchases for samples, and later orders via email as it is cheaper.

Email is also an effective channel for maintaining after-sales relationship between SMEs and buyers. Instructions and maintenance procedures and new product offerings can be send using email to trigger additional orders.

On the other hand, email also enable buyers to get several quotations from suppliers and select the most competitive offer.

Plain economics of price and time

Price of sending a 5 page signed document from Brunei to Aberdeen

Channel Cost (B$) Time

Air Mail 1.10 2 weeks

Express Mail 1.90 1 week

Fax 4.00 (0.80 per page) 5 minutes

Internet e-mail 0.05 2 minutes

Technology Pattern of E-Commerce - Websites

Companies which use email for commercial transaction, often eventually end up developing a website.

This proves beneficial in establishing links with prospective buyers.

Suppliers of high value, low volume products have been successful using this technology.

Jewelry suppliers in Bali supply small retailers and individuals in other countries and rely on transfers for payment and international courier for delivery. (According to survey by Castle Asia – 2002)

Opportunity

With eCommerce growth in developing countries one obvious sector to benefit is the IT industry - both hardware and software.

Some of the common problems for SMEs in the global market are lack of market knowledge, poor communication, cumbersome procedures, delays and uncertainties in supply, poor quality and excessive stocks.

ECommerce helped solve some of these through better knowledge management, communication and automated supply procedures leading to higher profits and enhanced competitiveness, besides also being able to improve their own organisational structures and cultures through re-engineering process needed to make them ready and compatible for e-commerce.

Opportunity

E-commerce can cut down delivery and transportation costs. Studies show that these costs take up large portion of total production cost.

SMEs have the advantage of small and relatively cheaper production bases to cater to individual needs with Personalised direct marketing.

Great opportunity to get involve in B2G transaction as governments begin to realise and utilise the efficiency, cost saving and transparency that the Internet can bring.

Opportunity

ECommerce has the potential for providing world-wide presence for SMEs as the market entry barriers are lowered enabling suppliers to address market segments that were previously uneconomical and unreachable (remote and overseas).

Integrated Virtual Shop provides SMEs the opportunity to sell together and gain from a common platform - much like what a mall does, only much cheaper and certainly more accessible, providing an opportunity that in fact would not exist in the brick and mortar world for small businesses.

Threat

There are still significant disparities in the level of Internet penetration across regions, which can have profound implications for an individual country's ability to participate in the global electronic market place.

Scepticism and dilemma among policy-makers and donors of the importance of these technologies where investment on it means investing less to other development priorities such as water, sanitation, health, education and etc.

Threat

Policy environment is not conducive enough. Problems exist with anti-competitive conduct. Abuses of dominance and monopoly. Problem with legislation concerning licensing,

concession, and tax.

Conclusion

E-Commerce helps SMEs to escape economic marginalization due to geographic, financial, technological or educational handicaps.

SMEs involvement in e-commerce need to be encouraged as this will help them to widen their market and able to compete globally.

Developing country governments will need to address internet accessibility issue in the context of their own development plans and programmes.

Government need to be a role model and policy needs to be formulated with the participation from private sectors.

The security issues need to be sorted out internationally.