E-commerce and Trade Connectivity for SMEs
E-commerce can allow SMEs to tap new markets
By Michael Wan, Bradford Loh and Brian Tan
With the global economy still in recovery mode, it’s more important than ever before to help SMEs in our region expand efficiently, discover new markets, and diversify their customer base.
Our previous articles highlighted how e-commerce can do just that, allowing homemakers, students, and even full-time employees to discover their entrepreneurial spirit by providing them access to new and alternative sources of income while supporting their livelihoods in the process (more info here and here).
In this article, we take our analysis one step further.
We showcase how e-commerce enables existing SMEs to tap new markets and reach customers beyond their home province. By joining digital platforms, entrepreneurs are now able to expand their “trade connections” within their country, vastly expanding their total addressable market size in the process.
This key insight comes from our survey of more than 40,000 e-commerce sellers in ASEAN, which we conducted in 2019. We asked them different questions ranging from demographics, business performance, and also the locations of their customers from before and after joining e-commerce.
Our research shows that only 36% of sellers sold outside their own region before going online. For example, the majority of entrepreneurs would be akin to a seller in Kalimantan Indonesia selling only to a customer base within Kalimantan.
Post-e-commerce, the market potential of many of these sellers improved markedly.
After going online, we now find that 67% of entrepreneurs sell outside their own region, a sharp 30 percentage point jump. For example, the same seller in Kalimantan would now be able to sell their wares to Jakarta, Java, Sumatra and beyond.
Even sellers who were already selling to customers outside of their own region experienced a boost through joining e-commerce platforms.
Put differently, they were able to increase their intensity of “intra-regional trade” just by going online.
Our research shows that out of the sellers who were already tapping into markets outside of their own region before adopting e-commerce, more than 30% increased the number of regions they sold to after going online.
In economic parlance, we call the former trade growth at the extensive margin, while the latter is at the intensive margin.
E-commerce expands domestic trade by reducing “distance” between buyers and sellers
Our findings are in line with results from the academic literature, which shows that e-commerce can expand domestic trade through at least 3 different channels.
- E-commerce can reduce search costs, thereby allowing for more efficient price discovery and product matching between potential buyers and sellers (see here and here).
- E-commerce can also help reduce fixed and variable transaction costs associated with trading between multiple intermediaries. For instance, due to high shipping and logistics costs, consumers in rural areas may be underserved by their local offline merchants. Having an online storefront reduces the need for businesses to set up local distributional networks to serve their customers. This allows firms to reach consumers in cities that may have not been possible to serve otherwise (see here).
- E-commerce can also help to lower both the financial and social capital requirements of starting a business. This encourages experimentation and innovation among existing and aspiring entrepreneurs in a relatively low-risk environment. For example, Dai and Zhang (2015) found that the spread of e-commerce has lowered capital entry barriers and reduced the need for social networks, thereby opening up space for many potential entrepreneurs.
Indeed, our survey respondents echoed these findings from the academic literature. For instance, they mentioned the ability to expand their businesses and lower the cost of doing business as some of the more important motivations for choosing to start selling online. Additionally, having a large customer base, resulting in high traffic volumes, was the top criteria when deciding which e-commerce platform they should sell on.
Conclusion
Overall, our research shows that e-commerce can help to vastly increase the market potential of entrepreneurs by expanding their customer base.
Despite all the growth in e-commerce that we have seen thus far, we are still in the very early stages, with online penetration rates still well below what we see in places like China and the US.
As such, there are still countless more SMEs that could stand to benefit from the economic potential of e-commerce.
This is especially pertinent in regions such as Southeast Asia, where many beautiful crafts and products are still waiting to be discovered.
