Tech

Opportunities and Challenges for E-Commerce in Developing Countries

The first decade of the new millennium has transformed how businesses & consumers interact with each other. The advent of the internet & its increasing accessibility brought us e-commerce, which has witnessed strong growth in recent years. Amazon’s transition into a trillion-dollar company is evident of this.

Other e-commerce giants like Alibaba, AliExpress, and E-bay have also made strong inroads in the field of e-commerce. The advantages of e-commerce are quite apparent – it allows businesses to access markets without having to worry about time or distance.

According to a McKinsey report, Chinese e-commerce sales were expected to reach $1.5 trillion in 2019. Surprisingly, the global value of e-commerce sales was expected to be $3.46 trillion in 2019. It shows that it is the developing countries where e-commerce seems to provide numerous opportunities for exploitation & growth. Where there are opportunities, challenges also arise.

In India, despite being a significant market, the value of e-commerce sales is a meagre $84 billion. Likewise, Pakistan’s e-commerce market is yet to reach a market value of $1 billion. Bangladesh, another developing country, is worse off than counterparts in Africa. A World Bank report cites that South Asian countries have immense potential for growth in this field, but barriers inhibit them from realizing their true potential.

This article discusses the various opportunities & challenges brought about by e-commerce in developing countries.

Opportunities

Economic Growth

A study by McKinsey suggests that 1.4 billion are set to enter the global middle class by 2020. 85% of the 1.4 billion will be from the Asian Pacific region (South Asia, Southeast Asia are a part of this region). It shows that with rising income in this region, people will have more money to spend on other items. Therefore, it is a welcome opportunity for companies to exploit. Maintaining a physical presence in every country is not feasible for any organization. Hence, utilizing online platforms for selling their products & services is more practical. In short, investing in e-commerce is commercially viable in today’s time.

Trade

E-commerce has the potential to increase trade among countries, especially regional countries. In simple terms, businesses get to expand into overseas markets, while governments reap the benefits in terms of increased trading activity. Also, according to a study, e-commerce increases knowledge spill over from developed countries into developing countries, which has a significant impact on innovation and productivity of the developing countries.

It also saves developing countries considerable resources. Unlike developed countries, they do not need to research in technology upgradation. They can simply get the latest technology updates by purchasing or the developed countries might set it up in developing countries for their own purposes.

Job Creation

One reason that governments must create a conducive environment for e-commerce is job growth. There is no doubt that e-commerce will wipe out certain types of jobs. However, the number of jobs it will create is surely bigger than what it would wipe out. E-commerce creates jobs in various sectors including IT, logistics, & transport.

Inclusive Growth

From China’s experience, we can see that e-commerce has the ability to remove people from poverty. However, it must be kept in mind that e-commerce alone is not enough. There needs to exist a wide variety of other policies as well. Collectively, they play a vital role in household welfare improvement. In the Taobao Villages of China, household income of families which engage in e-commerce is 80 per cent more than those that do not. Likewise, people working within the e-commerce field in rural areas have similar or higher wages to those working in private sector in urban areas.

Challenges

Regulatory & Legal Environment

In many developing countries, the regulatory & legal environment is not conducive for economic growth. In many developing countries, there are no consumer protection laws. In such countries, instances of fraud are quite high. For example, in Nepal, Bangladesh and many African countries, there are no secure online payment systems. In such countries, credit card fraud is quite high. Therefore, consumers avoid e-commerce platforms.

Access to Finance

Many firms have massive potential for growth. But they are inhibited by limited financing options. This prevents them from investing in new technologies which can help them realize their true growth potential. A survey of various organizations in Africa revealed that they did not have the right skills or infrastructure to go digital because of monetary constraints. Access to loans is also limited in many African countries, meaning that even if organizations wish to go digital, they cannot do so.

Similarly, merely listing a product on a platform is not enough. Organizations need money to export their products to other markets. For example, if a Pakistani organization wishes to sell its products or services in India or a Southeast Asian country, it needs resources to do so. Financing for such organizations is hard to come by as banks, and other financing institutions are reluctant to invest such ventures.

Online Payment Systems

Mobile payment systems, along with other online payment systems, have played a significant role in the growth of e-commerce around the world. Apple Pay, PayPal, WeChat Pay and Alipay are popular methods of online payments. Unfortunately, in most developing countries, there is a lack of secure online payment systems.

Thus, it prevents consumers from buying products or services online. The same is true for countries like India, where consumers are still wary of the potential of fraud. The trust gap can only be bridged through strong consumer protection laws.

Surprisingly, a country like Kenya is way ahead when it comes to mobile payment systems. M-Pesa, a mobile payment platform, has proven to be revolutionary in Kenya. Initially, it was introduced to promote local development by reducing funding costs. However, the simplicity of the entire system has made it more of a mobile payment system than a tool of local development. Surprisingly, mobile payments account for 55% per cent of Kenya’s GDP.

Connectivity & IT Infrastructure

In developing countries, internet & associated IT infrastructure is another major challenge. Most developing countries have poor connectivity and IT infrastructure. In better-off countries, the poorer have low access to such facilities. Hence, people are not able to enjoy the fruits of e-commerce as much as they would like.

Transport & Logistics

There is no doubt that transport & logistics play a vital role in the promotion of e-commerce in a country. They are not only important for domestic e-commerce but also for international. In developing countries, the urban areas have a respectable transport & logistics system, but even that is marred by congestion. On the other hand, rural areas even lack the most basic transport & logistics system.

Similarly, there is a lack of quality parcel delivery services. In many developing countries, the government is responsible for the delivery of parcels through the post office. Private delivery services do not exist at all. In others, there is a monopoly of one or two delivery services again leading to a lack of quality services.

Interestingly, many services do not deliver outside urban centres, as there is no proper addressing system in rural areas. For instance, in Nepal, e-commerce is confined only to the Kathmandu Valley & a few urban centres. In short, only urban centres can access e-commerce services. In the case of cross border e-commerce, customs & tax-related issues constitute a significant problem.

Final Thoughts

The developing countries have immense potential for e-commerce. From an investor point of view, gaining the first-mover advantage in developing countries is bound to pay off richly. However, there are various challenges which need to be addressed. Unfortunately, the investor cannot address these challenges alone. The government also need to play their due role in promoting e-commerce and providing a conducive environment to investors & consumers alike.

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