Digitalisation, small firms and value chains

This week UNCTAD released their flagship Information Economy Report 2017. With growing global digital connectivity and technologically-driven global markets, it is appropriate that it focuses on ‘Digitalization, Trade and Development’.

The report provides extensive outline of the latest thinking on issues including future automation technologies, online work and a consideration of what jobs and skills are important in this changing economy. See full report here

IER cover

Information economy report 2017

I was involved in contributing a background paper for this report on the digitalisation of small enterprises in developing countries and the impacts on trade which supports Chapter 3. I think it is one of the first analysis that attempts to provide a sectoral perspective on this topic, linking between digitalisation and small firms through analysis of ‘value chains’ in each sector.

In terms of trends in digitalisation I outline three main directions – thintegration, platforms and full chain digitalisation:

Thintegration

In many sectors, exporters adopt some forms of ICT and connectivity to support efficiency and improvements in local interactions, but this adoption can be described as ‘thintegration’ (thin-integration, hat-tip to Murphy & Carmody). It fails to make a dramatic impact of the relationships they have or improve profits. This type of common adoption of ICTs, which can barely be called ‘digitalisation’, suggests that many small firms are limited in their digital participation of value chains related to secondary aspects of the digital divide such as skills, motivation etc.

One limitation for small firms is that systems and platforms often have barriers to small firm use. System designers and policy makers should consider how to push for more favourable systems which better consider and integrate smaller firms.

infographic

Infographic from the ‘digitalisation ad value chains’ chapter from the Information Economy Report

Platforms

Multi-sided platforms are much discussed and platforms use is growing. It should be noted though that this is more marked in some sectors over others. Value chains which can be described as ‘buyer-driven’ (those with a few powerful firms on the retail side), or where quality requirements are more challenging tend to have been limited in use of platforms.

In other sectors, the emergence of globalised platforms is facilitating export trade for small firms, particularly involving final products and some niche goods. Crucial to success is the localisation of large platform providers in lower income countries and a range of policies (such as online payments) that can support fair and expansive use of these platforms.

At a strategic level, careful consideration to support competitive advantages over mass market competition will be an important path for impactful platform use. Digital economies have been marked by their move from mass markets towards a range of ‘long tail’. By more strategically integrating their production into the long tail, smaller firms might best gain from platforms.

Full chain digitalisation

It is early days with most initiatives still in a pilot stage, but we are seeing moves in some sectors towards full chain digitalisation. In these case a wide range of processes are automated, with digital data flows in all aspects of the chain and use of information systems to manage this data.

For small exporters, there appear to be some potential benefits of such systems as they may widen participation in exporting. Digitalised value chains offer strong potential to simplify interactions, and thus expand the ability to integrate a far larger number of smaller firms at a viable cost.

There are however, dangers of these tightly integrated value chains in that they impose new challenges and risks on smaller firms. Not least, our review highlights cases of buyer-driven value chains where digitalisation pushed control to lead firms and imposed new instability on smaller firms and this might also lead to collapses in labour forces in the longer term.

From policy perspectives, policy directions that support beneficial digitalisation for example, m-payment ecosystems can support a move from more fragmentary digitisation in value chains towards digital integration of existing firms. are beneficial Reducing the instabilities and labour impacts of digitalisation are potentially more challenging for policy makers (being led by private firms) and highlights a further areas of research around policy.

 

As can be seen from this work, evidence suggests the process of digital transformation are beginning to occur amongst small exporters in developing countries, but that there is a range of different outcomes which depart quite significant from the current global discussions that often equate digitalisation with just automation and big data. The full background paper has more detail

 

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