Talking Trade blog
Digital trade supports economic development
Published 24 March 2022
Digitalization, defined as the mass adoption of digital services by consumers, enterprises, and governments, is accelerating in the Asia-Pacific region. Digital technologies continue to transform business processes and day-to-day life, changing how we make purchases, communicate, interact with government, and more. Emerging technologies like Artificial Intelligence (AI), the Internet of Things (IoT), and big data stand to further transform global economies, boosting efficiency and growth. However, harnessing these benefits depends on several factors, including widespread access to digital technologies and the proper regulatory and policy environments.
Correctly leveraged, digital technologies contribute to growth and development, providing benefits to societies as a whole. But much of the current conversation around the accelerating growth of the digital economy focuses on big business, big tech, and big data, the argument being that large companies have captured all the economic benefits from this growth at the expense of small business and inclusive development. [Discussions of these issues have featured in earlier ATC papers published as a part of this series on Digital Trade sponsored by the Hinrich Foundation.]
Through boosting efficiency and enabling innovation, digital technologies stand to benefit nearly every sector of society. It is not only big business that benefits from this digital transformation. Micro, Small, and Medium Enterprises (MSMEs) find substantial benefits from participating in the digital economy. As MSMEs constitute the vast majority of firms and a significant portion of total Gross Domestic Product (GDP) in the Asia-Pacific region, encouraging vibrant, competitive, and digitally empowered MSMEs is key to continued economic growth and development.
But the digital economy is viewed with skepticism from some, who argue that MSMEs struggle to keep up with the likes of digital platforms that twist competitive forces in their favour, leverage big data, and engage in anti-competitive behavior. This perspective underestimates the benefits of participation in the digital economy for MSMEs and misunderstands the vital link between small business and development. Consequently, governments and International Organizations (IOs) may offer up sub-optimal regulatory and policy solutions, which fail to stimulate the real drivers of MSME growth.
There is a strong link between uptake of digital technologies and economic growth. This connection has been demonstrated through several empirical studies, with the evidence showing that digitalization can significantly increase labour productivity and total factor productivity. This boosts countries’ aggregate outputs, otherwise known as GDP. The importance of the uptake of digital technologies is further demonstrated by evidence showing that sectors with a high level of digitalization have the highest productivity growth.
Though interrelated, growth and development are distinct concepts. Though economic growth is a necessary input for development, governments must construct the correct regulatory and policy environments to ensure the benefits of growth are reflected in development gains. Notably, digitalization in the Asia-Pacific region has an inverse relationship with countries’ Gini Coefficient, a measure of economic inequality. This means that as uptake of digital tools increases, economic inequality falls, implying that digitalization plays a key role in achieving development gains across the region.
While digital tools can certainly unlock economic growth and development, it is not without risk to MSMEs. To these firms, the digital economy presents many opportunities, such as an expanded customer pool, efficiency gains, access to banking services and credit, and more. But with expanded markets comes new competition, which is a key concern raised by some International Organizations (IOs) when considering the role of digitalization and development.
Digital platforms can contribute to achieving several social goals through leveraging knowledge-sharing, boosting access to resources and expertise, as well as boosting employment and financial inclusion. However, participation in the digital economy is not without risks. Without the appropriate legal, regulatory, and policy frameworks in place, digital platforms may operate in ways at odds with development.
Perceiving the digital sphere as winner-takes-all leads to an incorrect assessment of the market forces shaping the digital economy and suboptimal policy responses. In particular, the suggestion that developing countries should enact technology transfer, data localization, and internet filtering requirements, or force the breakup of large e-commerce firms, ignores both the benefits of these platforms to development and the potential consequences of pushing platforms out of small markets. Instead, governments should focus on creating an enabling environment for MSMEs to pursue digitalization, enacting regulation that encourages firms to leverage digital tools for growth and development.
For MSMEs, there are several key reasons participating in digital platforms can beneficial. Firstly, digital platforms increase visibility for participating MSMEs, as large platforms are accessed by large numbers of customers. Participation in digital platforms contributes to lowering operational costs, as economies of scale and their marketing abilities reduce the burden of logistics, payment methods, and marketing on individual firms participating in the platform. For example, a small firm may struggle to navigate customs rules when engaging in cross-border trade, adding risk and increasing costs.
E-commerce platforms with sufficient scale and expertise can easily navigate the complexities of cross-border trade, reducing costs for participating MSMEs. This has enabled the emergence a growing number of ‘micro-multinationals’ in the Asia-Pacific region, wherein small business engages in cross-border e-commerce.
A further benefit in participating in platforms for MSMEs is access to their analytics capabilities and optimization programs. Using data analytics to collect information about customer preferences, MSMEs can leverage the platform’s data to optimize offerings to customers.
Digital platforms, like any other business, are profit-seeking. But this does not mean that this profit-seeking behavior functions to stifle MSME growth or development. Instead, the opposite is true. Platforms tend to push capacity-building efforts to enable MSMEs to participate in their platforms, unlocking new growth opportunities. For example, Meta, Amazon, Gojek, and Flipkart offer training, advisory services, and more to MSMEs to boost capacities to participate in their platforms. From this arrangement, the companies benefit from an increased number of suppliers, and MSMEs unlock new growth opportunities, increasing access customer pools and addressing key barriers to growth.
A further benefit of participating in digital platforms is that MSMEs can avoid needing to build their own websites and manage their own logistics and warehousing. Instead, participating in platforms massively simplifies the process for businesses without relying on their own resources and digital skills, both of which are often lacking.
While digitalization’s contribution to growth and development is clear, governments must take care to establish the infrastructure, as well as the regulations and policies, necessary to leverage digital transformation into society-wide benefits.
For businesses and individuals to leverage digitalization into growth and development, governments in the Asia-Pacific region must establish the appropriate legal, regulatory, and policy frameworks. In doing so, governments can unlock the benefits of the digital economy, namely efficiency and productivity gains, as well as improving access to markets and enabling communication.
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