6. Case Examples
eBay: Ramping up trade growth among smaller enterprises
Most international trade occurs through large companies. These firms have lengthy, sophisticated supply chains and can handle the fixed costs associated with global distribution networks. Small- and medium-sized enterprises (SMEs) – important in domestic economies as a source of jobs and growth – traditionally do little exporting. But the Internet helps SMEs participate in global business, and using preliminary data from eBay experiments and pilots, it has been estimated that lowering supply-chain barriers for these companies could increase e-commerce cross-border trade by as much as 60%-80%.
SMEs make up a significant part of every country’s economy. In 2011, 58% of gross value added in the 27 European Union countries came from SMEs.55 In OECD countries, SMEs account for approximately 99% of enterprises and two-thirds of employment.56 Innovative SMEs fuel employment and economic growth. Nearly all net job creation in the US between 1997 and 2005 came from firms less than 5 years old.57 Additionally, SMEs –Internet-based SMEs in particular – create a broader supply since they are able to serve niche markets independent of their location.
In the past, few SMEs engaged in exporting. A study of French firms (excluding Internet-based companies) found that 65% of the largest companies export while only 3% of the smallest do. But the Internet has shifted the dynamic by providing SMEs with easier access to international markets. Of the firms doing business on eBay, for instance – many of which are micro-small businesses with fewer than five employees – 97% of those with more than US$ 10,000 in annual sales sell their goods internationally.58
Although the Internet facilitates cross-border trade, supply chain barriers still interfere
The Internet reduces some traditional barriers to trade, such as the need for a middleman. As traditional barriers are lowered, however, logistics and supply chain barriers become more important. Shipping costs, for example, directly affect both buyer and seller and are now a major consideration.
Some of these trade barriers, such as tariffs, depend on policy decisions. Others, such as the availability of international shipping services (see figure), do not.
These barriers should not be considered separately, because it is the combination that is daunting for an SME. Few SMEs can easily understand the customs and documentation requirements, tariff schedules, and regulations of every country they might sell to. Few know much about local shipping services in individual countries. If merchants decide to sell internationally, therefore, they will typically limit their sales to the countries whose regulations are easiest to navigate and whose shipping services are most reliable. Or else they may try to transfer the risk and complexity to the buyer. Buyers, however, may not be able to track their packages through customs, and they may not know how much the items will ultimately cost. If any of these factors occur, the buyer may have a poor experience – another disincentive to the seller.
Calculations based on eBay data suggest that lowering these barriers could trigger a 60% to 80% increase in cross-border SME sales
Supply chain barriers raise the cost of trade and lengthen the time required to complete a transaction. But their biggest impact is on trade volume, as merchants limit the countries where they sell and buyers are discouraged from ordering from other countries. Removing the barriers would likely boost trade substantially, as preliminary results from various short-term, highly targeted eBay pilot programmes show. Under these pilot programmes, eBay worked with some of its pre-selected small business users to make the small business listings visible to a global customer base (whereas the listings had previously been visible only to a domestic audience). It then undertook to eliminate the barriers for international buyers and sellers by providing transparency on fully landed costs and delivery dates, by facilitating communication between people who might speak different languages, and by handling shipping. These sellers entering the international sphere will face sales increase from international markets, as suggested by preliminary results of the pilot programmes. Using these preliminary results, estimates suggest59 that addressing barriers such as these can result in expanded cross-border activity by small business sellers by 60% to 80% (see figure),equivalent to a US$ 4.8 to US$ 6.4 billion60 gain in trade. If this behaviour held for the entire global e-commerce market, international trade from the Internet might unlock ~US$ 95 billion.61
Barriers to trade are a key factor in companies’ supply chain decisions, and so help determine a country’s overall competitiveness
Countries are in constant competition for investment, and companies look for comparative advantages between countries in making choices. So judgments about trade barriers are always relative, and whatever benefit a country has in one trade dimension, it might lose in another. Additionally, trade barriers can limit the economic potential and market development of a region by completely shutting off investment or integration with global trade networks.
The scale of the market opportunities is of great importance. However, when evaluating new market opportunities, the ease of serving the market and the relative complexity of the barriers to cross-border commerce are also important considerations. In fact, when faced with various markets representing similar economic opportunities, the ease of serving the market, including the challenges related to customs, duties, tariffs and other regulatory factors can be determinative in terms of market entry and other investment decisions.
To provide the necessary level of service to users both in the new market country and cross-border trading partners in existing countries, eBay is required to evaluate the mix of hurdles and barriers to cross-border commerce and determine if a commercially justifiable level of investment can address the concerns in a manner that will enable successful businesses to provide a positive user experience. For example, one market may involve very expensive, unreliable or technologically unsophisticated shipping services, while another might include a tariff regime that includes both high rates and also highly complex compliance procedures. Government efforts to reduce the types of barriers that are especially disruptive to cross-border small business commerce increases the likelihood that technology-based small business commerce platforms will help foster greater small business trade and growth.
Source: eBay, Bain analysis.