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    E-Trade Opportunities: Are Developing Countries Ready?

     

     
     
    © International Trade Centre, International Trade Forum - Issue 1/2001 

    Services exporting, software development and hardware represent three major market opportunities for firms in developing and transition economies. Traditional exporters can also harness new technologies to cut costs and reposition themselves in the international marketplace. But are the firms most likely to benefit ready to take the plunge?

    Old business in new ways... 

    The digital economy is reshaping international trade, as business practices change and new business intermediaries emerge. Old business in new ways, but also new business opportunities: this is what e-trade is all about.

    The changing marketplace 

    E-trade opens new opportunities to export-oriented firms, especially small ones. Firms can source production inputs more expeditiously, streamline (i.e., eliminate intermediaries) supply- and export-distribution chains and reduce business transaction costs. In short, e-trade allows the enterprise to reposition itself in the international marketplace.

    E-trade capability does not mean that the exporter must be able to conduct each stage of the international transaction electronically. For the moment the market does not demand it. Export development in the digital economy is not an "all or nothing" proposition.

    The challenge is, nevertheless, to work towards acquiring e-trade capability at every stage of the transaction. This requires a concerted response not just from the entrepreneur, but also from the public-sector strategy-maker and managers of trade support institutions (including banks).

    A staged approach 

    Firms should aim to acquire e-competency in stages. In brief, start by building capacity among a few individuals; create a basic web presence; "wire" the firm so that a communications infrastructure is in place for all to use; extend the electronic network and practices to partners, clients and suppliers outside the firm; and finally, rethink competitive strategies to take e-competency into account (see below). Small and medium-sized enterprises (SMEs) in developing and transition economies need

    not acquire this ideal level of e-competency in the short term. Nor do public-sector e-trade competency and development programmes need to be geared to this level of sophistication.

    Rather, public-sector programmes should ensure that export-oriented enterprises attain an e-competency level that can establish an e-presence in the international marketplace, and begin to introduce e-business systems into internal operations. (This would be equivalent to Stage 3 below.)

    Eventually, firms should move towards acquiring a total competitiveness response capability. Signals from the international marketplace confirm that this is the minimum level of e-competency expected of an export-competitive firm.

    New business opportunities 

    Three major categories of export opportunities have emerged: services exporting, software and hardware. Services exporting opportunities that exploit information and communication technology (ICT) are on the rise, as business practices change and new intermediaries emerge. Both software development and hardware exports are areas of opportunity, principally through partnerships with multinationals.

    Services 

    The Internet allows service providers to "go international", by broadening market reach. They can add value by offering a wider range of services, as well as more customization. New export opportunities for traditional service providers (such as engineering design and research) work best for companies with an established export track record. There are also major new opportunities - called "web-enabled services". These include portal site management, content development, web site design and promotion, e-training, online project management and telehealth consulting.

    Software development 

    For most software creators in developing and transition economies, the best way to secure export business is to partner with software producers and solutions companies located in major markets. Why? Because most software developers outside industrial economies do not have the brand recognition or market acceptance needed to commercialize their own products on an international scale. "[For] maintenance, customized development and IT consulting services, subcontracting to firms in developing and transition countries is becoming an extremely important aspect of today's digital economy," notes Kamar M.S. Aulakh of Quark, Inc., a major software developer (see below).

    Hardware markets 

    World import demand for ICT equipment and components (excluding electrical machinery) was close to US$ 600 billion in 1998, according to ITC calculations based on the United Nations COMTRADE statistics. Demand is growing at a rate of 12%-15% a year. As new technologies stimulate broader and deeper demand for Internet-based services and devices, the world import market for ICT equipment is expected to exceed US$ 1 trillion before 2005. The ICT sector has, in fact, become one of the major, if not the major, growth industries in foreign trade, exceeding world trade in agriculture, automobiles or textiles.

    Partner with multinationals 

    "The best strategy is to work with the MNCs [multinational corporations], rather than against them. They themselves are looking for partners," said R.K. Verma, Executive Director, Electronics Research and Development Centre of India, during the Executive Forum discussions.

    The ICT hardware market is dominated by multinational corporations. From the perspective of the exporter in a developing or transition country, the market is characterized by:

    • formidable entry barriers to independent producers;

    • geographic and organizational separation of research and product development, production and marketing activities;

    • task- or component-specific focus, rather than complete product focus (i.e., component production or assembly);

    • concentration on the lower end of the market's "complexity scale" (i.e., integrated circuits and computer parts) and limitations on moving up the value chain;

    • increasing competition among task and component suppliers, with the highest premium given to price and capability to respond to the sector's compressed product life cycle; and

    • competitiveness determined largely by proximity to major markets and growth poles (a paradox, given the distance-elimination nature of ICT technology).

    Firms in developing and transition countries that have established themselves in the ICT hardware market have done so primarily through participation in the expanding supply and subcontracting networks of multinationals.




    E-competency in the firm: A staged approach 

    IStage 1: Effective individuals. With the increasing pressures of the digital economy for total response capability, place initial attention on ensuring that personnel are familiar with new technologies, and know how to use the Internet and e-mail effectively.

    Stage 2: Basic web presence. Develop a web site and promote it among clients and suppliers through business cards and company letterheads. Use a professional web site designer. Concentrate on well-structured information, sound navigation and quick access. Avoid sophisticated imagery or technology.

    Stage 3: "Infostructure". Modify internal processes to the online models of buy-and-sell cycles that involve customers, partners, suppliers and employees. Integrate other basic business systems into the infostructure development process. Establish an internal network through which enterprise personnel can access information through a single point of entry.

    Stage 4: The extended organization. Deepen the level of shared information. Begin developing an external business network by providing clients and commercial partners with limited, firewall-managed access to the enterprise's infostructure.

    Stage 5: Business transformation. Build the external business network to include the concept of "communities". Tailor the web site to the visitor and develop capacity to track usage and enhance the visit. Redesign business processes behind the web site to ensure that they meet not only internal efficiency needs but also the requirements of clients and partners with access to the enterprise's infostructure.

    Stage 6: Strategic transformation. At this stage, the Internet will have become an integral part of the enterprise's systems, its processes and, above all, its thinking. It is now time for management to rethink the nature of the enterprise's business and apply its e-competency to redefine, as appropriate, what products and services it offers, how it offers these products and services, and the implications for its relationships with clients and business partners.

    Source: I. Worrell, I. Sayers, P. Williams, ITC




    Where are software development opportunities for developing countries? 

    What a major software developer has to say about suppliers from developing and transition countries: 

    "To remain a market leader we must retain the best and brightest software engineers. To do so, we have established software engineering centres in a number of developing countries.

    "Software development is Quark's core business and must remain an in-house function. This is standard practice in the product-oriented software industry. Consequently we do not outsource software development to independent companies, no matter how good and price-competitive they may be. Rather, we set up subsidiaries in countries where competitively priced expertise exists.

    "But in areas other than product engineering, such as maintenance, customized development and IT consulting services, subcontracting to firms in developing and transition countries is becoming an extremely important aspect of today's digital economy.

    "Generally the selection criteria for internationally subcontracted IT work are the same as for any other type of business. The importing companies look at two primary factors - cost and quality. Another important factor for software companies is the ability to deliver on schedule.

    "In addition to China, India and Singapore, there are several countries in eastern Europe and Asia that have already displayed capabilities or are making headway in this area. The secret to a successful working relationship in the software industry between head office and offshore subsidiaries or subcontractors is communication, as software development is a somewhat long and arduous process that requires constant consultation between team members. The advantage that Commonwealth countries have is their ability to communicate in English.

    "For the national export strategy-maker, the focus should be on education, experience and infrastructure."

    Summary of an interview with Kamar M.S. Aulakh, Vice-President, Research and Development, Quark, Inc., a major software development company headquartered in the United States. The full text of ITC's interview is available on the Executive Forum web site under "July Brainstorming". 

    Are Developing Countries Ready?
    Three ITC Surveys
     

    A series of surveys conducted in preparation for the Executive Forum 2000 indicates that e-competent firms are the exception. The survey results, and the Executive Forum 2000 consultation, reveal that there has not been a concerted effort within the business community of most developing and transition economies either to acquire e-competency or to use the Internet as a tool to increase or, at the very least, maintain international competitiveness. This is particularly the case of the SME sector - the sector that, in the majority of developing countries, makes the greatest contribution to national export performance.

    Exporting SMEs - use of ICTs 

    In one survey, ITC contacted 50 "connected" SMEs in South-East Asia, North Africa, the Middle East and eastern Europe. Each has a web site. The objective was to acquire their views on ICT as a business development tool and in so doing, gauge their e-trade readiness.

    The survey produced surprising results. It revealed that connectivity is seen as a valuable communication tool, but not as an essential aspect of competitiveness. The use of ICT was acknowledged as important to establishing a modern and innovative business culture within the enterprise but was regarded as having no, or minimal, direct impact on sales prospects or purchasing efficiencies.

    Few of the managers contacted considered web strategy an integral part of their overall business. Nor did they believe that the application of ICT would become a fundamental element of their long-term business development strategy. For the vast majority, the seamless e-transaction is a long way off because of perceived difficulties in introducing online financing and payment, and customs collection and taxation applications.

    Garment exporters - electronic purchasing practices 

    A second survey of developing country SMEs focused on the use of the Internet to generate purchasing efficiencies. The survey covered garment exporters in Bangladesh, the Philippines and Sri Lanka who imported a significant amount of their fabric requirements. The survey confirmed that e-mail was the only application so far used by these enterprises. Most did not see a need to use the Internet to find new supply sources. None used the "request for quotation" facilities provided by Internet-based applications. None bought or managed international logistics over the Net.

    National trade promotion organizations 

    A third survey of 51 developing and transition economy trade promotion or-ganizations showed uneven response to the demands of the digital economy. Less than half canvassed by ITC indicated a specific e-trade component in their national export development strategies. Among the countries that have an e-trade strategy, few have an integrated approach to ensuring that the right environment exists for e-trade growth and even fewer have established a comprehensive programme of support to the business sector.

    Brian Barclay, ITC, coordinated the Executive Forum 2000. Natalie Domeisen co-moderated the e-mail discussions for Executive Forum 2000. 




    E-trade capability defined 

    "E-trade capability" means a firm can:

    • Conduct preliminary market research and identify possible commercial partners.

    • Promote capacities and establish an e-presence through a web site.

    • Initiate and maintain regular contact with prospective clients and suppliers through e-mail.

    • Acquire credit references.

    • Negotiate terms and contract specifics.

    • Exchange and sign contracts on the basis of digital signatures.

    • Order materials to produce contracted goods, and monitor production and delivery status.

    • Expedite clearance of imported materials through customs.

    • Coordinate production and delivery with subcontractors.

    • Provide the buyer with information on order production and delivery.

    • Coordinate shipment with freight forwarders.

    • Acquire certificates of origin and other export documentation.

    • Organize payment to suppliers through the local banking system.

    • Receive payment from the buyer through the international banking system.



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