The Internet and SME Participation in Exports
Introduction
Internet infrastructure nowadays underpins economic and social activity worldwide. Its presence alters the way firms conduct international business by dramatically reducing information frictions, search costs and communication costs and by forming the e-commerce1 landscape. Small and medium-sized enterprises (SMEs) have been well known for their contributions to economic development and social well-being, and better access to global markets is key to strengthening SME contributions (OECD, 2019b). Whether SMEs are given more opportunities in international trade through the spread of Internet technology then becomes an important issue.
How does the development of the Internet affect the share of SME exports in total exports? The removal of trade barriers by virtue of the development of the Internet could stimulate the exports of both large firms and SMEs, but the extent of enhancement may differ. One view is that large firms may become the main beneficiaries by accounting for an even higher share in total exports as the Internet develops. Given large firms’ advantages in scale and scope, they are able to exploit many new opportunities that are out of reach to individual SMEs.2
The other view is that the share of SME exports is likely to rise in response to the increasing penetration of the Internet. Advances in digital technologies, differing from other trade facilitation measures such as lower tariffs3, have led to the emergence of online services and e-commerce platforms such as Alibaba, Amazon, Ecplaza, and Tradeindia. Their important intermediary role in international commerce has gained attention, as they lower barriers to starting and operating overseas businesses for SMEs, thereby realizing SMEs widespread participation in the global market (e.g., Kuwayama, 2001; OECD, 2019a; (World Trade Organization WTO, 2016) and offering them a level playing field for competing with their larger competitors (Cho and Tansuhaj, 2013). Although large firms have been early adopters of the Internet (World Bank Group, 2016), the development of the Internet may matter more to the exports of SMEs. Therefore, this is an empirical question to be explored.
To guide the empirical analysis, we propose an adaptation of the Helpman et al., 2004 model by incorporating the firm’s indirect exporting technology via e-commerce platforms. The model predicts that the increasing penetration of the Internet could enhance the share of SME exports. Specifically, we consider that firms exporting via e-commerce platforms pay lower fixed export costs, but higher service fees that translate into higher variable trade costs. In the presence of well-established e-commerce platforms, all SME exporters, or even some less productive large exporters, choose to export indirectly instead of directly exporting, and only the most productive firms choose to overcome the high fixed costs of directly exporting to foreign markets. As the development of the Internet propels e-intermediaries to keep evolving and revealing more cost advantages, the fixed costs of indirect exporting fall at a higher rate than the fixed costs of direct exporting, which leads to a larger share of SME exporters and a smaller share of exports by large firms in total exports.
Our empirical examination mainly relies on the Exporter Dynamics Database, which records the share of exports by the top 1%, 5%, and 25% of exporters from 1997 to 2014. One minus each share above is employed to characterize the share of SME exports in total exports. The standard deviation of the export value per exporter in the database is employed to control for the dispersion of exporter size. The development level of the Internet, which is the key explanatory variable, is measured by the percentage of individuals in the total population that use the Internet, which is based on the World Development Indicators.
The prediction that the development of the Internet boosts the share of SME exports in total exports is empirically supported in this work. The empirical analysis takes advantage of two data samples at the exporting country-product(HS2)-destination-year level (CYH2D) and at the exporting country-product(HS6)-year level (CYH6) separately. After controlling for various country characteristics and fixed effects at the lowest possible levels to partial out corresponding unobserved variables, we find that in the exporting country, the significantly negative effect of the development of the Internet on the share of exports by the top 5% or 25% of exporters remains in both samples.
This paper contributes to the burgeoning literature on the effects of information and communication technologies (ICTs) on international trade4 by exploring the nature of exporters in terms of their size. Although this line of literature has generally recognized the trade-liberalization effect of Internet technologies,5 the impact may not be the same across heterogeneous firms. We employ export share instead of export flow as the dependent variable in this work. The change in the share of SME exports sheds light on the resource allocation between SMEs and large exporters, especially when their exports both increase. In addition, some common determinants of the trade flows of SMEs and large exporters are eliminated when calculating the export share theoretically so that their potential confounding effects in explaining export share could be of less concern.
The following strategies and corresponding findings are also worth noting. First, we incorporate telephone development in the empirical specification to make a comparison with the development of the Internet, considering that they both fall into the category of national telecommunication infrastructure with active roles in reducing transaction costs. In contrast to the negative effect of the Internet on the share of large exporters, we find that telephone development exerts a statistically positive effect on the share of large exporters. We interpret the evidence as reflecting the key difference that the formation of e-commerce platforms relies fundamentally on the Internet, but not on phone calls.
Second, we construct a measure of the submarine cable infrastructure, and add it as an additional regressor to control for the qualitative differences of Internet traffic across countries that are not reflected by Internet penetration. This infrastructure is the key to cross-border data transfer. Due to the heavy reliance of e-commerce platforms on system capacity and data transfer speed for their services, the trade facilitation effect of improved Internet quality could be stronger for indirect exporting than direct exporting. A higher level of the submarine cable infrastructure is found to be associated with a larger share of SME exports. In this way, we provide suggestive evidence on the potential role of e-commerce platforms that is consistent with the baseline results.
Third, by exploiting the CYH2D sample further, we find that the share of SME exports increases with the development of the Internet to a lesser extent in sectors that have more traditional intermediaries relative to other sectors. Meanwhile, sectors that have more traditional intermediaries have larger shares of SME exports than other sectors, but the difference may lessen as the Internet develops. The results shed some light on the imperfect substitution relationship between e-commerce platforms and traditional intermediaries.
Empirical works that relate the development of the Internet exclusively to the trade performance of SMEs are scarce. Lendle and Olarreaga (2017) show that online markets provide smaller firms access to international markets by using data from eBay sellers. Lanz et al. (2018) find that SMEs tend to participate more in global value chains in countries where a higher share of the population has fixed broadband subscriptions. Our study provides further evidence that the impact could be biased in favor of SMEs, as it quantitatively assesses the impact of the Internet on SMEs in terms of their share in total exports using internationally comparable data.
Research on the traditional intermediaries in international trade (e.g., Blum et al., 2010; Ahn et al., 2011; Felbermayr and Jung, 2008 and Akerman et al., 2018) has investigated the influence of traditional intermediaries on the export behavior of SMEs. To some extent, e-intermediaries act similarly to wholesalers and other traditional intermediaries in international trade. However, e-intermediaries differ from traditional trade intermediaries inasmuch as the Internet plays an elementary role in the emergence and development of e-intermediaries.
The rest of the paper is organized as follows. Section 2 introduces the theoretical framework for modeling firm heterogeneity with e-commerce platforms. Section 3 describes the empirical strategy and the data in detail. The empirical results from the CYH2D sample are presented and discussed in Section 4, while those from the CYH6 sample in Section 5. Section 6 presents the conclusions.
Section snippets
Theoretical framework with e-commerce platforms
The emergence of online services and e-commerce platforms, which exploit scale or scope economies and network externalities, allows each additional user, when doing business, to take advantage of new technologies without incurring by itself high fixed up-front costs. For example, the expansion of the Internet removes the need to set up costly electronic data interchange (EDI) network; and complementary services offered by some online platforms include fulfillment, logistics, customer service
Empirical specification
To explore the effect of the Internet on the share of SME exports in total exports empirically, we consider the following specification:where is the outcome variable denoting the logarithm of the share of exports by large exporters in industry at the HS 2-digit level from source country to destination country in year . Correspondingly, represents the share of SME exports in total exports.
Empirical findings from the CYH2D sample
The sample at the exporting country-product(HS2)-destination-year level (CYH2D) serves as the basis for the analysis in this section. It consists of 58 exporting countries, with partial or entire time spans ranging from 1997 to 2014. The full exporting country list for the sample can be found in Table B.1. The product variation is at the lowest possible disaggregated level (HS2) for bilateral trade data.
The CYH2D dataset provides information for answering the following questions: First, does
Empirical findings from the CYH6 sample
In this section, we discuss the results based on the sample at the exporting country-product(HS6)-year level (CYH6). The CYH6 sample does not allow estimations using bilateral trade data in the same way as the CYH2D sample, but the product variation is at a much more disaggregated level. Another advantage is that the estimation using the trade data aggregated at all the destinations may take into account the correlations among the destination markets via the e-commerce platforms. It can be
Conclusion
Can the rise of technologies based on the Internet and the remodeling of economic activity that accompanies it offer more opportunities for SMEs to participate in global markets relative to their larger competitors? This study examines the effect of the development of the Internet on the share of SMEs in total exports. Theoretically, we adopt the heterogeneous firm model of Helpman et al., 2004 to include the opportunity for firms to export indirectly to foreign markets via e-commerce
Acknowledgements
I am grateful to the editors and two anonymous referees for their helpful comments. All errors are mine.
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