Small Business Export Growth in Emerging Markets: A Study of PayPal Data, Summaries of Material Science and Technology

Download Small Business Export Growth in Emerging Markets: A Study of PayPal Data and more Summaries Material Science and Technology in PDF only on Docsity! P. 1 Inclusive Globalization: Small Businesses, Digital Entrepreneurship and Trade in Emerging Markets P. 5 This research study analyzes export data of small businesses using PayPal in Argentina, Colombia, India, Kenya, Vietnam and South Africa, from 2013-2017, and finds evidence that online merchants in emerging markets are realizing the benefits of globalization and trade. • Export value: Exports by small business- es on the PayPal platform grew by more than 17 times in Kenya, 9 times in Vietnam, 6.2 times in Colombia, 5.9 times in South Africa, 3.4 times in India, and 2.2 times in Argentina. • Trade partners: The total number of trade corridors connecting these six mar- kets to the rest of the world has increased from 608 in 2013 to 841 in 2017, averaging an annual growth rate of 9.5 percent. • Survivability: The overall one-year sur- vival rate of PayPal small businesses that exported from these six emerging markets is 97 percent, which far exceeds the world average of 43 percent. • Dynamism: On average, new businesses accounted for 46 percent of export growth on the PayPal platform, which is a sign of a high degree of ease for small businesses to enter and participate in cross-border digi- tal commerce. • Growth: On average, incumbents ac- counted for 54 percent of overall export growth on the PayPal platform, which shows the ability of existing merchants to grow and expand. Policy recommendations on facilitating the contribution of SMEs in cross-border trade in the internet economy fall into two categories: 1) doubling down on enabling conditions, e.g., ICT, physical and logistical infrastructure; 2) lowering export barriers for SMEs, e.g., expanding de minimis thresholds (DMTs) and implementing Digital Single Window Systems (SWS). P. 6 SMEs are the backbone of the global economy and the primary provider of employment in emerging markets. Enabling SMEs to participate in cross-border trade closely aligns with the long-term inclusive and sustainable growth agenda of emerging economies. Econom- ic diversification by way of small business enablement will empower people in emerging markets to reap the benefits of a more inclusive, digital, globalized economy. P. 7 Emerging Markets 4.7% Advanced Economies 1.96% the Euro Area 1.52% G7 1.82% The average annual growth rate of GDP, from 2013-2017 Introduction Emerging markets have experienced im- pressive economic growth in recent years. From 2013-2017, the annual growth rate of GDP in emerging markets and developing economies has averaged 4.7 percent, out- pacing that of advanced economies (1.96 percent), the Euro area (1.52 percent) and G7 (1.82 percent).1 Their growth has been closely tied with globalization and trade. Indeed, the engine of globalization has shifted from industrial to emerging coun- tries.2 This trend has the potential to per- sist as emerging markets continue to liber- alize and allow cross-border movement of goods, services, capital and people to fuel productivity growth. Critics of globalization in emerging economies are weary, however, that the sole winners in these markets are large enterprises that can take on the cap- ital costs, establish regional contracts and comply with regulatory requirements as- sociated with selling internationally.3 This paper uses PayPal data to demonstrate that small businesses in emerging econo- mies are also realizing the benefits of glo- balization and trade. The advent of the internet and the revo- lution in information and communication technologies (ICT) have led to the “death of distance,” redefining the way individuals, firms, and governments assess and pursue economic opportunities in this intercon- nected world.4 Cross-border trade is no longer solely the domain of large enterpris- es. The use of the internet and a whole host of online service providers has fundamen- tally changed the economics of doing busi- ness across borders, drastically reducing the costs of international transactions and lowering entry barriers for small businesses to launch and reach consumers and mar- kets on a global scale. A study by Martens and Turlea of digital commerce in the EU found that digitization cuts the distance effect of physical flows by two-thirds.5 The smallest startups in emerging markets are now born as digital micro-multinationals, ultimately enabling more to participate in the globalized economy. P. 10 • Population (2017): World Bank • GDP per capita (USD; market exchange rate) and Real GDP growth % (historical average, 2013-2017): EIU • Exports (2017 est.) (billions) and Country rank, by total merchandise exports (USD): CIA8 • Trade openness (sum of imports and exports as % of GDP) in 2013 and 2017: UNCTAD9 • Mobile cell phone subscription per 100 inhabitants in 2013 and 2016: ITU10 • Percentage of Individuals using the Internet in 2013 and 2016: ITU • Country value in the UNCTAD B2C E-commerce Index (0-100): The UNCTAD index measures on a scale from 0 (worst) to 100 (best) an economy’s readiness and capacity to support online trade, and reflects the processes involved in an online shopping B2C transaction, including internet use, account penetration, and postal reliability. • Country value in the ITU ICT Development Index (0-10): This composite index measures on a scale from 0 (worst) to 10 (best) developments in information and communication technology over time, including ICT access, use, and skills development. • Country value in the WEF11 Networked Readiness Index (1 -7): This index mea- sures on a scale from 1 (worst) to 7 (best), the performance of economies in lever- aging information and communications technologies to boost competitiveness, innovation, and well-being. Data sources for “Country Profile” To provide more context to each of the six markets, a “country profile” is put together using data from the World Bank, the Econ- omist Intelligence Unit (EIU), the Central Intelligence Agency (CIA), United Nations Conference on Trade and Development (UNCTAD), International Telecommunica- tion Union (ITU) and the World Economic Forum (WEF). P. 11 Kenya exports grew 17 times South Africa exports grew 5.9 times India exports grew 3.4 times Vietnam exports grew 9 times Argentina exports grew 2.2 times Colombia exports grew 6.2 times Export growth between 2013 and 2017, by SMEs using PayPal Exports In terms of exports, the following has been observed across these six markets. 1. Significant growth in export value • Between 2013-2017, exports by small businesses on the PayPal platform grew by more than 17 times in Kenya, 9 times in Vietnam, 6.2 times in Colombia, 5.9 times in South Africa, 3.4 times in India, and 2.2 times in Argentina. This rate of growth is even more noteworthy in the context of economic challenges in sev- eral of these emerging markets during the 2013-2017 period. • Strong and consistent year-over- year growth is observed in online ex- port data on the PayPal platform, in contrast with the declines, fluctuations and lower growth rates seen in offline trade data in these emerging markets. • Exceptionally strong export growth from SMEs in Vietnam and Kenya to developed economies can be observed on the PayPal platform. For exam- ple, exports from Vietnam to Cana- da by SMEs using PayPal, by payment amount, increased by more than 22 times between 2013-2017, averaging 5.6 Findings Technology enables digital entrepreneurship and SME participation in cross-border trade in emerging markets. P. 12 Increase in the total number of trade corridors 20172013 841 608 times per year. Exports from SMEs us- ing PayPal in Kenya to U.S., by payment amount, grew by more than 19 times from 2013-2017, averaging 4.8 times per year. 2. Significant increase in the diversity of trade partners: • The total number of trade corridors connecting these six markets to the rest of the world has increased from 608 in 2013 to 841 in 2017, averaging an annual growth rate of 9.5 percent. P. 15 Implications Based on our findings and research, there are four implications that cut across emerging markets: Goods and services can now be digitally or- dered, platform-enabled and digitally de- livered. Small businesses can easily reach customers and scale their presence in in- ternational markets around the world. This is integral to the continued development of emerging markets, where infrastructure constraints have historically been signifi- cant and logistical costs high. Small businesses are the backbone of com- munities and economies around the world, and they make outsized contributions in terms of employment, job creation and economic activities, especially in emerg- ing markets. World Bank statistics show that small businesses in developing econ- omies contribute more than 60 percent of gross domestic product (GDP).14 A study by the International Finance Corporation (IFC) shows that SMEs represent, on aver- age, about 66 percent of permanent, full- time employment in developing countries, which understates SME contribution be- 1. Broadening SME Participation in the Global Supply Chain of Goods and Services 2. Elevating Consumer Choice and Benefits to an Unprecedented Level Consumers in more countries can now enjoy goods of greater variety from emerging markets that have historically been less accessible.17 Digital marketplaces such as Etsy enable a global audience to enjoy niche products handcrafted by artisans that were previously unavailable or even unknowable. Also, digital commerce platforms make price and product information available, reducing search costs and facilitating purchase for consumers around the world. cause data on informal businesses is ex- cluded.15 The level of SME involvement in direct ex- ports varies significantly across developing economies, with the highest level record- ed in Developing Europe, where SMEs ac- counted for 28 percent of overall sales, fol- lowed by 16 percent in the Middle East and 8.7 percent in Developing Asia.16 With digi- tal technology, more SMEs can participate in cross-border trade and scale their mar- ket presence in the global internet econo- my at lower cost and with greater ease. P. 16 3. Building Inclusive Individual Economies via SME Enablement Boosting digital technology-enabled SME exports can also broaden an economy’s production base and diversify its sources of income and economic growth, which in- creases an individual economy’s strength and competitiveness, and closely aligns with the inclusive and sustainable growth agenda of many emerging markets. For example, the uncertainty and volatility of commodity prices have proven the impor- tance and urgency of economic diversifica- tion. Argentina and Colombia would benefit from reducing reliance on the commodities industry as the main source of income and economic growth. Some other economies may be shifting away from agriculture to a wider range of sectors and markets, such as Kenya and India. Given the emergence of regional and global value chains (GVCs) enabled by digital technology, emerging markets are in a position to export tasks and services, broaden the base of produc- tion, and make growth more inclusive in new and important ways. Moreover, women play a significant role in small businesses. Women-owned busi- nesses make up nearly 32-39 percent of micro SMEs, 30-36 percent of small firms and 17-21 percent of medium-sized com- panies.18 In emerging markets, women are also more likely to operate smaller firms in the informal sector than their male coun- terparts.19 Technology-enabled SME trade is an exciting opportunity for women en- trepreneurs, as technology itself does not carry gender bias and may even help lev- el the playing field and make economic growth more inclusive. Economic diversification by way of small business enablement may well be part of the solutions needed to make these indi- vidual economies more resilient, and reap the benefits of a more inclusive, digital, globalized economy. 4. Making Trade More Inclusive Digital technology has made global trade more inclusive as historically untradeable services become exportable by SMEs in emerging markets, which diversifies their export portfolio and brings them further into the fold of the global economy. Since the turn of the millennium, there has been a significant departure from historical pat- terns of north-south trade (trade between developed and emerging economies). In terms of the composition of exports, emerging markets have been shifting away from primary commodities and re- source-based products, which have histor- ically been exported to trade for more skill- and technology-intensive manufactures P. 17 from developed economies in the global North.20 One reason behind these import- ant and complex trends is the emergence and spread of global value chains (GVCs). GVCs typically involve multiple countries in different stages of the production pro- cesses and networks, resulting in fragmen- tation of production, outsourcing and off- shoring—hyper-specialized exporting that is traditionally associated with primary producers.21 Most of the top 10 buyer markets for goods and services exported by SMEs from the six emerging markets in this PayPal study are developed economies in the global North, and a majority of trade is concentrated in north-south flows. The U.S. is by far the most popular buyer market, followed by Great Britain, Australia and Canada. More data is needed to draw definitive conclu- sions, but what can be observed from the dataset in this study is early signs of increase in service exports from SMEs in emerging markets to customers in devel- oped economies. The top four defined ex- port categories with the highest year-over- year growth rate by total payments amount are all services: computer software record, computer network/information services, advertising services and professional ser- vices. This may reflect the practices of outsourcing and offshoring of production processes in ways that are common in the framework of GVCs. For example, comput- er network/information services exported by SMEs in the six studied markets could be the kind of hyper-specialized export- ing used as inputs for a larger production network in developed economies. In fact, computer network/information services have been one of the fastest growing SME export categories on the PayPal platform, by total payments amount, across all six markets every year from 2013-2017. This is an interesting trend to observe in the future, as only a limited set of services, such as travel and financial services, have been historically traded across borders. As digital technology enables historically un- tradeable services, such as advertising, ed- ucation and healthcare, to be exported by P. 20 2013 158.35 145.332016 Mobile cell phone subscription per 100 inhabitants 2013 29 262017 Trade openness (sum of imports and exports as percent of GDP) 2013 59.9 70.972016 Percentage of individuals using the internet Country value in the ITU ICT Development Index 6.2 0 10 Country value in the WEF Networked Readiness Index 3.8 1 worst 7 best Country value in the UNCTAD B2C E-commerce Index 51.9 0 worst 100 best ARGENTINA Country profile by numbers Population (2017): 44,271,041 GDP per capita (USD; market exchange rate): 14,391 Real GDP growth percent (historical average, 2013-2017): 0.7 Exports (2017 est.) (billions): $59.69 Country rank, by total merchandise exports (USD): 47 out of 225 P. 21 Economy at a glance Argentina has enjoyed higher GDP per cap- ita compared to many of its neighbors in Latin America, despite challenges of po- litical and macroeconomic instability.24 It has been a relatively closed economy, with its trade-to-GDP ratio averaging about 40 percent during the 2005-2012 period, which is about half the average for emerg- ing market economies.25 In Argentina, bank credit to the private sector is only 17 per- cent of GDP, compared to 118.3 percent in other upper-middle income countries.26 Small businesses account for at least half of GDP in Argentina, yet the credit they receive represents only 3 percent of GDP.27 Cross-border trade stagnated under the Kirchner administration as an extensive network of administrative controls were put in place, in the form of trade barriers, foreign exchange restrictions and cur- rency controls, which undermined com- petitiveness and growth.28 Although part of the MERCOSUR trade bloc, Argentina has lagged behind other regional peers in trade liberalization, such as the members of the Pacific Alliance—Chile, Mexico, Co- lombia and Peru.29 Two-thirds of Argenti- na’s overall export portfolio is commodi- ties, led by soybean meal (16.9 percent of total exports) and followed by corn (7.39 percent of total exports).30 The duration of this study, from 2013-2017, coincided with when global commodity prices and Argen- tine exports were on a downward trend.31 Faced with steep interest rates and a cur- rency crisis, Argentina recently received a bailout package from the IMF totaling USD 57.1 billion through 2021. P. 22 Growth rate comparison (2013-2017) On the PayPal platform Despite instability and trade-related challenges, total goods and services exported by small businesses using PayPal in Argentina, measured by total payment volume, grew 2.2 times from 2013-2017. Such growth is impressive when compared with the decline or slow growth experienced by their offline exporting counterparts: P. 25 0 Country value in the WEF Networked Readiness Index 4.1 1 worst 7 best Mobile cell phone subscription per 100 inhabitants 2013 106.24 120.622016 Trade openness (sum of imports and exports as percent of GDP) 2013 36 332017 Country value in the UNCTAD B2C E-commerce Index 44.6 0 worst 100 best Country value in the ITU ICT Development Index 5.0 100 Percentage of individuals using the internet 201351.7 58.14 2016 COLOMBIA Country profile by numbers Population (2017): 49,065,615 GDP per capita (USD; market exchange rate): 6,409 Real GDP growth percent (historical average, 2013-2017): 3.2 Exports (2017 est.) (billions): $34.30 Country rank, by total merchandise exports (USD): 58 out of 225 P. 26 Economy at a glance During the timeframe of this study, 2013- 2017, Colombia’s economy went from en- joying a position of stable and strong growth to grappling with oil price shocks. Oil pric- es plummeted by about 40 percent in the second half of 2014 and slowed econom- ic growth.32 Oil exports account for more than one half of Colombia’s total exports receipts. Oil-related revenues amount to 16 percent of total government revenue, so a drop in oil price would also have seri- ous implications on fiscal revenues.33 After five decades of armed conflict and rounds of negotiations from 2012-2016, the gov- ernment reached a peace accord with the main guerilla group (FARC), potentially creating increased stability in the country. The number of SMEs (MiPymes) in Co- lombia is an estimated 90,000 companies, which generate 40 percent of the country’s GDP and 80 percent of all jobs. They are focused in the industrial, retail and service industries. The percentage of MiPymes connected to the internet grew dramati- cally, rising from only 7 percent in 2010 to 60 percent at the close of 2013.34 According to the Colombian Chamber of Electronic Commerce (CCCE), e-commerce grew at an annual rate of 64 percent from 2015-2016, and accounted for 5.61 percent of the country’s GDP in 2017.35 It is also the only country in Latin America with a fully dedicated Ministry of E-Commerce. Fur- thermore, the Ministry of E-Commerce and the Ministry of Technology have creat- ed a non-profit E-Commerce Observatory that monitors and measures the growth of the sector.36 P. 27 Growth rate comparison (2013-2017) On the PayPal platform Total goods and services exported by small businesses using PayPal in Colombia, measured by total payment volume, grew 6.2 times from 2013-2017. The year-over-year growth is particularly remarkable when compared with the decline or slow growth experienced by their offline exporting counterparts. P. 30 Country value in the UNCTAD B2C E-commerce Index 34.0 0 worst 100 best Mobile cell phone subscrip- tion per 100 inhabitants 201369.32 85.17 2016 Country value in the ITU ICT Development Index 2.5 100 Country value in the WEF Networked Readiness Index 3.8 1 worst 7 best Percentage of individuals using the internet 2013 15.1 29.552016 Trade openness (sum of imports and exports as percent of GDP) 201356 43 2017 INDIA Country profile by numbers Population (2017): 1,339,180,127 GDP per capita (USD; market exchange rate): 1,942 Real GDP growth percent (historical average, 2013-2017): 5.8 Exports (2017 est.) (billions): $299.30 Country rank, by total merchandise exports (USD): 21 out of 225 P. 31 Economy at a glance India boasts the second largest population and the seventh largest economy in the world.37 Its average growth has accelerat- ed steadily across agriculture, industry and services over the past 50 years.38 Since the global financial crisis, economic growth has slowed but still averaged 7.4 percent GDP growth per year.39 Agriculture employs slightly less than half of the workforce, fol- lowed by small businesses, which employ 111 million and account for 32 percent of the economy.40 MSMEs manufacture more than 6,000 products and account for 40 percent of total exports from the country.41 Over the past decade, the growth of the in- ternet economy in India has given rise to a large number of entrepreneurs and en- abled SMEs to take their businesses online and global. Research conducted by Acap- ture in 2014 shows that MSMEs that use e-commerce platforms enjoy five times more export opportunities than tradition- al enterprises. The research, however, also showed a high concentration with the top five cross-border e-commerce businesses accounting for more than 90 percent of the market share.42 There are many gov- ernment flagship initiatives to boost the sector—such as “Digital India,” which fo- cuses on building digital infrastructure as a core utility—in order to transform India into a digitally empowered economy.43 P. 32 Growth rate comparison (2013-2017) (East Asia and Pacic) On the PayPal platform Total goods and services exported by small businesses using PayPal in India, measured by total payment volume, grew by 3.4 times from 2013-2017. The rates of year-over-year growth are robust, and especially so when compared with the decline or volatility experi- enced by their offline exporting counterparts. P. 35 Top destinations of goods and services sold by PayPal merchants in India: United states, United Kingdom, Australia and Canada. P. 36 Country value in the ITU ICT Development Index 2.8 10 0 0 Country value in the WEF Networked Readiness Index 3.8 1 worst 7 best Trade openness (sum of imports and exports as percent of GDP) 2013 54 382017 Mobile cell phone subscription per 100 inhabitants 201371.01 80.44 2016 Percentage of individuals using the internet 201313 26 2016 Country value in the UNCTAD B2C E-commerce Index 37.9 0 worst 100 best Kenya Country profile by numbers Population (2017): 49,699,862 GDP per capita (USD; market exchange rate): 1,508 Real GDP growth percent (historical average, 2013-2017): 5.5 Exports (2017 est.) (billions): $5.8 Country rank, by total merchandise exports (USD): 103 out of 255 P. 37 Economy at a glance Kenya is a commercial and cultural hub in East Africa and has averaged over 5 per- cent real GDP growth for the last decade.44 Agriculture is the backbone of the econo- my, contributing over 25 percent of GDP and 75 percent of labor force (on at least a part-time basis), as well as over 50 percent of revenue from exports.45 Kenya’s export portfolio is skewed towards agriculture and horticulture, led by tea and cut flowers, which represent 23 percent and 14 percent of total exports, respectively.46 Small businesses play a key role in Kenya’s economic development and job creation. Estimates vary, but according to govern- ment statistics, total employment of for- mal and informal micro, small and medium enterprises (MSMEs) stands at 14.9 million, which is about 30 percent of total firms, of which micro-sized businesses accounted for 81.1 percent.47 Altogether, MSMEs con- tribute to 33.8 percent of Kenya’s GDP.48 Kenya is home to M-Pesa, a mobile wal- let provider used by 46 percent of Ken- yans to make mobile payments quickly and easily.49 The strides Kenya has taken in promoting financial inclusion has made extending credit at more affordable rates to SMEs possible. According to the World Bank’s latest Enterprise Surveys, only 15 percent of firms in Kenya identified access to finance as a major constraint in 2013, compared to the Sub-Saharan African re- gional average of 41.5 percent. Moreover, 10 percent of small firms in Kenya export- ed directly, which is almost twice as high as the regional average of 5.2 percent.50 As internet penetration increases, mobile phones become cheaper and the price of connectivity comes down, digital commerce is set to grow. Currently, the percentage of consumers and small and medium-sized businesses engaging in cross-border digital commerce is estimated to be less than 5 percent of the total population.51 P. 40 Incumbent small businesses using PayPal 38% New entrants using PayPal 62% Contribution to growth in export value (2013-2017) Top destinations of goods and services sold by PayPal merchants in Kenya: United States, United Kingdom, Israel, Canada, Latvia, Cyprus, China and Australia. Analysis of export growth by PayPal small businesses in Kenya shows an interest- ing deviation from the pattern exhibit- ed by the other five emerging markets in the study. From 2013-2017, the intensive margin averages at 62 percent and the extensive margin averages at 38 percent, meaning existing small businesses—rath- er than newcomers—contributed more to the overall export growth observed on the PayPal platform. P. 41 0 Country value in the ITU ICT Development Index 4.0 10 Country value in the WEF Networked Readiness Index 3.9 1 worst 7 best Country value in the UNCTAD B2C E-commerce Index 43.1 0 worst 100 best Population (2017): 95,540,800 GDP per capita (USD; market exchange rate): 2,309 Real GDP growth percent (historical average, 2013-2017): 6.2 Exports (2017 est.) (billions): $214 Country rank, by total merchandise exports (USD): 28 out of 225 Mobile cell phone subscription per 100 inhabitants 2013135.23 127.53 2016Trade openness (sum of imports and exports as percent of GDP) 2013 163 2002017 Percentage of individuals using the internet 201338.5 46.5 2016 VIETNAM Country profile by numbers P. 42 Economy at a glance Vietnam has a dynamic economy with a history of strong inclusive growth, averag- ing 6.5 percent per year from 2000-2016.52 The economy has undergone a structural shift from agriculture-driven to manufac- turing- and services-focused, as Vietnam transitioned from a centrally-planned economy to a market-oriented system. Small and medium-sized businesses play an important role in the economy, ac- counting for 98 percent of all companies, 40 percent of GDP and 50 percent of em- ployment.53 About 10 percent of SMEs re- ceive at least 10 percent of their sales from direct exports.54 Vietnam is a highly open economy with a deep commitment to con- tinuing its global economic integration— its trade openness, defined as the sum of imports and exports as percentage of GDP, increased from 163 percent in 2013 to 200 percent in 2017.55 Total exports from Viet- nam have increased at an annualized rate of 15.1 percent from 2011-2016. Most re- cently, its exports are led by broadcasting equipment, which accounts for 16 percent of its total exports, followed by integrated circuits (7.2 percent) and telephones (4.8 percent).56 P. 45 2014 100% 80% 60% 40% 20% 0% 94% 2015 84% 77% 69% 2016 2017 Incumbent small businesses using PayPal 46% New entrants using PayPal 54% Survival rates Contribution to growth in export value (2013-2017) Growth analysis shows existing merchants and newcomers contributed by almost the same amount to growth of total exports on the PayPal platform. Between 2013-2017, the intensive margin averages at 46 per- cent and the extensive margin averages at 54 percent. In other words, newcomers account for slightly more of the growth of exports observed on the PayPal platform in Vietnam. The overall one-year survival rate of small businesses using PayPal in Vietnam is 94 per- cent, which far exceeds the world average of 43 percent. The survival rates in subsequent years have remained higher than the world average. P. 46 Top destinations of goods and services sold by PayPal merchants in Vietnam: Unit- ed States, Canada, Australia, United Kingdom, Germany and Israel. P. 47 Country value in the ITU ICT Development Index 4.7 0 10 Trade openness (sum of imports and exports as percent of GDP) 201364 58 2017 Percentage of individuals using the internet 201346.5 54 2016 Mobile cell phone subscription per 100 inhabitants 2013 142.96 147.132016 Country value in the UNCTAD B2C E-commerce Index 50.3 0 worst 100 best 4.2 1 worst 7 best Country value in the WEF Networked Readiness Index SOUTH AFRICA Country profile by numbers Population (2017): 56,717,156 GDP per capita (USD; market exchange rate): 6,166 Real GDP growth percent (historical average, 2013-2017): 1.5 Exports (2017 est.) (billions): $78.25 Country rank, by total merchandise exports (USD): 40 out of 225 P. 50 Overall offline exports Offline PayPal mirror basket SMEs Using PayPal 9 41 6 97 118 134 140 138 Number of markets reached by SMEs using PayPal Change in number of trade partners between 2013-2017 Moreover, the number of export destinations reached by small businesses using PayPal in South Africa increased from 97 in 2013 to 138 in 2017, a 42 percent increase. The growth in the number of destination markets reached by small businesses using PayPal is even more significant when compared with offline counterparts. P. 51 Contribution to growth in export value (2013-2017) Incumbent small businesses using PayPal 44% New entrants using PayPal 56% Top destinations of goods and services sold by PayPal merchants in South Africa: United States, United Kingdom, Australia, Canada and Germany. Growth analysis shows on balance, ex- isting merchants and newcomers made similar contributions to total exports on the PayPal platform. Between 2013-2017, the intensive margin averages at 44 per- cent and the extensive margin averages at 56 percent. However, it is worth noting that the shares of contribution reversed in 2016. In other words, the intensive margin was higher than extensive margin in the first half of the studied timeframe. Existing merchants accounted for more of the to- tal export growth from 2013-2015, and new merchants accounted for more of the total export growth from 2015-2017. POLICY RECOMMENDATIONS eae sce aoe Iwo P. 55 • Implementing Digital Single Window Systems (SWS): Digital SWS can reduce the complexity and costs of administrative requirements associated with cross-bor- der trade that disproportionately burden small businesses by providing “a system that receives trade-related information and disseminates it all to relevant govern- mental authorities, thus systematically co- ordinating controls throughout trade pro- cesses.”68 Furthermore, making the digital SWS interoperable between countries, and harmonizing processes such as risk man- agement, data exchange and electronic payment, will further reduce the barriers for SMEs to join the global value chains.69 • Liberalizing services trade: OECD esti- mates show that the trade cost equivalent of services trade barriers largely exceeds the average tariff on traded goods. More- over, an average level of services trade re- strictiveness translates into an additional 7 percent in trade costs for small firms, compared with large enterprises.70 To reap the gains of and to realize the growth po- tential from SME participation in services trade, governments of emerging markets could leverage membership in regional or- ganizations, such as Association of South- east Asian Nations (ASEAN), to harmonize regulations and break down restrictions on broad-based services trade.71 • Breaking down informational barriers: One explanation for the high rates of churn among exporters in developing countries is the lack of reliable information. Without accurate market intelligence, it is hard to assess prospects of profitability and make decisions accordingly.72 Mechanisms such as support centers, online platforms, or demand and supply collaborative networks could be designed to address the market failure of information asymmetry, such that SMEs in emerging markets are able to access and benefit from information on the nature of demand, potential markets, competitors and their products’ compet- itive position, the regulatory framework, and availability of private and public finan- cial resources and support programs, etc.73 P. 56 Moreover, efforts to improve data collection and harmonize definitions, by both the public and private sectors, will enable more robust research analysis, which can in turn support the development of more effective policies. Currently, research analyses are limited by data challenges, one of which associated with this study is the lack of generally agreed upon definitions of “SME” and “digital economy.” For example, under the Micro and Small Enterprises Act of 2002 in Kenya, the parameters of small enterprises are 1) between USD 5,000 and USD 50,000 in annual turnover, and 2) employment of 10-49 people.74 However, in Vietnam, SMEs are defined as enterprises with capital investment of less than 100 mil- lion VND (~USD 4,285), with less than 300 employees in total.75 Data on online and offline activities of SMEs are not always collected, and if collected, not often comparable due to variations in definitions. In addition, standardized industry and product classifications for internet platforms and associated services do not exist either. There are, therefore, data compilation and mea- surement challenges for digital commerce and their inclusion in national accounts. The OECD surveyed countries on national accounts compilation practices regarding the digital economy in 2016, and the IMF extended the survey to some non-OECD countries in 2017. Only a third of the 40 countries that responded to the surveys collect data on online pur- chases, and only five countries collect separate data on cross-border e-commerce trans- actions. Research on the impact of technology on cross-border trade would benefit greatly from more available, higher-quality, standardized and harmonized data.76 Conclusion SMEs are key engines of growth in emerging markets and, more broadly, the global economy. This study offers some evidence that by democratizing and leveraging digital technology, small businesses in emerging economies are able to reach customers in more markets, survive and thrive, and par- ticipate in cross-border trade. As emerging markets look to the next stage of growth and development, economic diversification by way of SME export enablement may well unlock the potential of a more inclusive, digital and globalized economy. P. 57 References This report was primarily authored by Ivy K. Lau. Economic research support was provided by Kornel Mahl- stein of Sidley Austin. 1 Calculated using data downloaded from International Monetary Fund: “IMF DataMapper,” Interna- tional Monetary Fund, accessed January 4, 2019, https://www.imf.org/external/datamapper/NGDP_RPCH@ WEO/ADVEC/WEOWORLD/OEMDC 2 “Outperformers: High-Growth Emerging Economies and the Companies That Propel Them,” McK- insey Global Institute, September 2018, 90, https://www.mckinsey.com/~/media/mckinsey/featured%20 insights/innovation/outperformers%20high%20growth%20emerging%20economies%20and%20the%20 companies%20that%20propel%20them/mgi-outperformers-full-report-sep-2018.ashx 3 Joyce Osland, “The Pros and Cons of Globalization,” Journal of Management Inquiry 12, June 2003, 137-154. 4 Cairncross, Frances. “The Death of Distance.” RSA Journal 149, no. 5502 (2002): 40-42. http://www. jstor.org/stable/41380436. 5 Bertin Martens and Geomina Turlea, “The Drivers and Impediments for Online Cross-Border Trade in Goods in the EU,” Institute for Prospective Technological Studies, Digital Economy working paper num- ber 2012/1, July 2012. 6 “Global Flows in a Digital Age: How Trade, Finance, People, and Data Connect the World Economy,” McKinsey Global Institute, April 2014, 44, https://www.mckinsey.com/~/media/McKinsey/Featured%20 Insights/Globalization/Global%20flows%20in%20a%20digital%20age/Global_flows_in_a_digital_age_Full_re- port%20March_2015.ashx. 7 The following categories are excluded to create the “PayPal mirror basket”: 01, 02, 03, 04, 05, 06, 07, 10, 16, 23, 26, 27, 28, 29, (30), (31), 36, 38 47,71-76,78-81, 84, 86, 88, 89, 93, 98, 99. 8 “The World Factbook Country Comparison: Exports,” Central Intelligence Agency, 2017, https:// www.cia.gov/library/publications/the-world-factbook/rankorder/2078rank.html#sf. 9 “UNCTAD B2C E-Commerce Index 2017: UNCTAD Technical Notes on ICT for Development,” United Nations Conference on Trade and Development, October 2017, https://unctad.org/en/Publication- sLibrary/tn_unctad_ict4d09_en.pdf. 10 “The ICT Development Index (IDI): Conceptual Framework and Methodology,” International Tele- communications Union, accessed January 4, 2019, https://www.itu.int/en/ITU-D/Statistics/Pages/publica- tions/mis2017/methodology.aspx. 11 “Networked Readiness Index 2016,” World Economic Forum, 2016, https://widgets.weforum.org/ gitr2016/. 12 Marion Jansen, “Aid for Trade and SME Competitiveness” (Presentation, Aid for Trade and SME Competitiveness from International Trade Centre and World Trade Organization, September 10, 2014), https://www.wto.org/english/tratop_e/devel_e/a4t_e/wkshop_oct14_e/jansen_e.pdf. 13 “A Trade Data Revolution Is Uncovering Hidden Patterns in Global Export Markets,” The World Bank, September 5, 2018, https://www.worldbank.org/en/news/feature/2018/09/05/a-trade-data-revolu- tion-is-uncovering-hidden-patterns-in-global-export-markets. 14 Darlington Dhanah, “Small Businesses and Job Creation in South Africa” (Master mini-diss., Uni- versity of Capetown – GSB, December 2016), https://open.uct.ac.za/bitstream/handle/11427/27441/the- sis_com_2017_dhanah_darlington.pdf?sequence=1. 15 “IFC Jobs Study,” International Finance Corporation, January 2013, https://www.ifc.org/wps/wcm/ connect/0fe6e2804e2c0a8f8d3bad7a9dd66321/IFC_FULL+JOB+STUDY+REPORT_JAN2013_FINAL.pdf?- MOD=AJPERES. P. 60 52 “Vietnam: 2018 Article IV Consultation-Press Release and Staff Report,” International Monetary Fund, July 10, 2018, https://www.imf.org/en/Publications/CR/Issues/2018/07/10/Vietnam-2018-Article-IV- Consultation-Press-Release-and-Staff-Report-46064. 53 Dezan Shira et al., “Facilitating SME Growth in Vietnam,” Vietnam Briefing, October 27, 2017, https://www.vietnam-briefing.com/news/facilitating-sme-growth-vietnam.html/; “SME Vietnam Net- work to Connect and Support SMEs,” Viet Nam News, October 22, 2017, https://vietnamnews.vn/econo- my/416041/sme-vietnam-network-to-connect-and-support-smes.html#rhKT3MVgrgvwqPQi.97; “Over- view Report: Challenges of small and medium enterprises in Vietnam in meeting the requirements of the Trans-Pacific Partnership Agreement (TPP) on Environment and Corporate Social Responsibility,” Associ- ation of Southeast Asian Nations, accessed January 4, 2019, https://www.asean-csr-network.org/c/images/ small_grants_fund/Round_3/Annex_D1.Research-report_CECR.pdf. 54 “Enterprise Surveys: Vietnam (2015),” World Bank Group, accessed January 4, 2019, http://www. enterprisesurveys.org/data/exploreeconomies/2015/vietnam#trade--size. 55 “General Profile: Viet Nam,” United Nations Conference on Trade and Development, accessed Jan- uary 4, 2019, http://unctadstat.unctad.org/CountryProfile/GeneralProfile/en-GB/704/index.html. 56 “Vietnam,” The Observatory of Economic Complexity, accessed January 4, 2019, https://atlas.me- dia.mit.edu/en/profile/country/vnm/. 57 “The World Bank in South Africa,” The World Bank, October 31, 2018, https://www.worldbank.org/ en/country/southafrica/overview. 58 “South Africa,” The Observatory of Economic Complexity, accessed January 4, 2019, https://atlas. media.mit.edu/en/profile/country/zaf/. 59 “The Small, Medium and Micro Enterprises of South Africa,” Bureau for Economic Research, Re- search Note 2015, no. 1, January 2016, http://www.seda.org.za/publications/publications/the%20small,%20 medium%20and%20micro%20enterprise%20sector%20of%20south%20africa%20commissioned%20by%20 seda.pdf. 60 “The Alarming Truth About the Number of Small Businesses in South Africa,” BusinessTech, July 25, 2018, https://businesstech.co.za/news/business/260797/the-alarming-truth-about-the-number-of- small-businesses-in-south-africa/; Jana Marais, “SA ‘Completely Out of Step’ With Global SME Growth Trends,” Business Day, July 25, 2018, https://www.businesslive.co.za/bd/business-and-economy/2018-07-25-sa-completely-out-of-step-with- global-sme-growth-trends/. 61 Newley Purnell, “Two Years Ago, India Lacked Fast, Cheap Internet—One Billionaire Changed All That,” The Wall Street Journal, September 5, 2018, https://www.wsj.com/articles/two-years-ago-india- lacked-fast-cheap-internetone-billionaire-changed-all-that-1536159916. 62 “Meeting of the OECD Council at Ministerial Level: Enhancing the Contributions of SMEs in a Global and Digitalised Economy,” Organisation for Economic Co-operation and Development, August 2017, https://www.oecd.org/mcm/documents/C-MIN-2017-8-EN.pdf. 63 “Enterprise Surveys: Kenya (2013),” World Bank Group, accessed January 4, 2019, http://www.enter- prisesurveys.org/data/exploreeconomies/2013/kenya. 64 “New Approaches to SME and Entrepreneurship Financing: Broadening the Range of Instruments,” Organisation for Economic Co-operation and Development, February 2015, https://www.oecd.org/cfe/smes/ New-Approaches-SME-full-report.pdf. 65 “Small and Medium Enterprises (SMEs) Finance,” The World Bank, accessed January 4, 2019, https://www.worldbank.org/en/topic/smefinance. 66 “Enterprise Surveys: Kenya (2013),” World Bank Group, accessed January 4, 2019, http://www.enter- prisesurveys.org/data/exploreeconomies/2013/kenya#finance--size. P. 61 67 Olim Latipov, Christine McDaniel, and Simon Schropp, “The De Minimis Threshold in International Trade: The Costs of Being Too Low,” The World Economy, vol. 41, issue 1, October 24, 2017, https://onlineli- brary.wiley.com/doi/full/10.1111/twec.12577?cookieSet=1. 68 “Doing Business 2017: Equal Opportunity for All,” The World Bank, 14th edition, 2017, http://docu- ments.worldbank.org/curated/en/172361477516970361/pdf/109551-REVISED-PUBLIC.pdf. 69 “Study on Single Window Systems’ International Interoperability: Key Issues for Its Implemen- tation,” Asia-Pacific Economic Cooperation, August 2018, https://www.apec.org/Publications/2018/08/ Study-on-Single-Window-Systems-International-Interoperability. 70 “OECD Services Trade Restrictiveness Index,” Organisation for Economic Co-operation and Devel- opment, March 2018, http://www.oecd.org/tad/policynotes/oecd-services-trade-restrictiveness-index-poli- cy-note.pdf. 71 “Vietnam 2035: Toward Prosperity, Creativity, Equity, and Democracy,” The World Bank, 2016, 155, https://openknowledge.worldbank.org/handle/10986/23724?locale-attribute=fr. 72 “A Trade Data Revolution Is Uncovering Hidden Patterns in Global Export Markets,” The World Bank, September 5, 2018, https://www.worldbank.org/en/news/feature/2018/09/05/a-trade-data-revolu- tion-is-uncovering-hidden-patterns-in-global-export-markets. 73 Uri Dadush et al., “What Companies Want from the World Trading System,” World Economic Fo- rum, September 2015, http://www3.weforum.org/docs/WEF_GAC_Trade_II_2015.pdf. 74 Victor Otieno, “Kenyan SMEs Need More Than ‘Doing Business’ Ranking,” Business Daily, Decem- ber 21, 2017, https://www.businessdailyafrica.com/analysis/Kenyan-SMEs-need-more-than--Doing-Busi- ness--ranking-/539548-4238042-122yfrc/index.html. 75 “Overview Report: Challenges of Small and Medium Enterprises in Vietnam in Meeting the Re- quirements of the Trans-Pacific Partnership Agreement (TPP) on Environment and Corporate Social Responsibility,” Association of Southeast Asian Nations, accessed January 4, 2019, https://www.ase- an-csr-network.org/c/images/small_grants_fund/Round_3/Annex_D1.Research-report_CECR.pdf https:// www.vietnam-briefing.com/news/facilitating-sme-growth-vietnam.html/. 76 “Policy Papers: Measuring the Digital Economy,” International Monetary Fund, April 5, 2018, https://www.imf.org/en/Publications/Policy-Papers/Issues/2018/04/03/022818-measuring-the-digi- tal-economy.