Information and communication technologies (ICT) are leading to a hyperconnected world where people and businesses can communicate with each other instantly. It is introducing new business opportunities by improving efficiency and productivity and generating new products and services (World Economic Forum, 2012). Much like the advent of railways and electricity, it is also profoundly changing the dynamics of economic growth.
The global online population is increasing at a rapid pace: The number of global Internet users increased from 361 million in 2000 to 2.4 billion in 2012 (Internetworldstats. com). Asia has the largest number of Internet users, accounting for 45 percent of the global online population, followed by Europe (22 percent) and North America (11 percent). In 2012, Africa evidenced the largest increase in Internet usage since 2000 (3,600 percent), followed by the Middle East (2,640 percent) and Latin America and Caribbean (1,311 percent) (Table 20.1).
1. Global E-Commerce
The size of global e-commerce (comprising business-to-business and business-to-consumer transactions) was estimated at $16 to 20 trillion in 2013, accounting for about 14 percent of global sales. There are already a number of stories about business successes with global online sales. A producer of draperies and other goods in New York, for example, sells her products in faraway places as South Africa, Turkey, and Saudi Arabia. Women entrepreneurs in Guyana are selling hand-woven hammocks to consumers in different parts of the world via the Internet. Global business-to-business e-commerce has also been quite successful in a number of industries. Websites such as E-steel, COVISINT, and Commercx are linking buyers and sellers of steel, car parts, and plastics, respectively, and facilitating greater volumes of cross-border trade (Freund and Weinhold, 2004).
2. The Internet and International Trade
Many studies show the positive effects of the Internet on international trade. The Internet reduces search costs (the cost of matching buyers and sellers) as well as the costs of finding agents, distributors, or retailers. Local distribution costs, including wholesale and retail margins, are estimated to be about 55 percent ad valorem tariff for the United States and 40 percent for other countries (Anderson and Van Wincoop, 2004). The Internet enables direct links in the supply chain. It also allows direct sales to the consumer without using intermediaries. Brynolfsson, Hu, and Michael (2003) show that increased product variety through electronic markets can be a significant source of consumer surplus gain. This happens because online retailers are able to provide a large number of products for sale without regard to warehouse space. For example, the number of book titles available at Amazon.com is fifty-seven times greater than the stock of books in any large bookstore. Internet retailers have unlimited “virtual inventory” and can offer a greater range of products and services to consumers than brick-and-mortar retailers. The Internet platform also allows firms to learn far more information about consumer preferences (e.g., through search engines, website visits, terms used to search for information) and thus tailor advertisements that are targeted to specific market segments at a relatively low cost.
Freund and Weinhold (2004) show that the reduced transaction costs arising from the Internet help increase the volume of international trade. The positive effects of the Internet are larger for developing countries than for advanced nations, partly because advanced countries have developed the requisite infrastructure and networks to access world markets. The new platform thus reduces the importance of past linkages for current trade. The Internet is likely to have a greater effect on the volume of trade in services (than on goods) because of the intrinsic nature of services.
In spite of the rapid increase in global e-commerce, there are still a number of challenges to overcome:
- Logistics and payment issues: Even though the Internet provides easy access to global goods and services, shipping and distribution to different corners of the world can be difficult. The Internet does not eliminate challenges related to transportation, distribution, and tariff and nontariff barriers, as well as payment and financing. Some businesses may not have acquired the core capabilities for exploiting electronic banking: technical and business dynamic capabilities such as managing customer relationships and integrating physical and virtual channels.
- High return rates: Consumers cannot touch and see the physical product and may have a different impression when they actually see the product. Furthermore, the cost of shipping and tariffs may make the product less competitive. Some estimate that international return rates for goods ordered online can be as high as 80 percent.
- Customer trust: The biggest challenge to online commerce is ensuring customer trust. The threat of online scams, credit card fraud, and similar problems may make customers reluctant to use online stores.
- Limited ICT readiness in many developing countries: In many developing countries, the level of ICT readiness is still quite low because of an insufficient development of ICT infrastructure. This makes it difficult to access a good part of this market online.
Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.
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