Wandering through the airports of the world, weary travellers may well have noticed the regular HSBC ads forecasting the business trends of our changing world. One of the advertising series, echoed in a well-aired TV commercial, depicts that North American staple: the kids’ lemonade stand. This stand, however, is unlike the normal run-of-the-mill one: it seems the young entrepreneur behind it accepts three major currencies, not just the local one. As the tagline argues, “In the future, even the smallest business will be multinational”.
While HSBC is clearly trying to show itself as a forward-looking, visionary bank, the reality is that, in one instance at least, such a future is already upon us. That is because new communication and web-enabled technologies are already bringing the world to the virtual lemonade stands of the smallest entrepreneurs.
These small and micro-enterprises are able to complement their traditionally locally-focused retail skills with the latest technologies, allowing them to access global markets with much lower entry barriers. Not only are they able to accept several currencies, but they can effectively pitch their lemonade stand anywhere a willing consumer is located and become a trusted exporter.
Traditionally, exporting has been a complex and costly task. The libraries of business schools are well stocked with thick manuals and studies of foreign market entry, franchising, exporting and trade policies. The extra costs that exporting involves, from adaptive marketing to shipping insurance, have tended to make it an exclusive activity, reserved to a small, select clique of highly productive large corporations.
In a recent survey on firm heterogeneity and trade, published in the Annual Review of Economics (see references), the authors noted that “one of the most striking features of the micro data is that firm participation in international trade is exceedingly rare”.
Indeed, the authors showed that a remarkably small proportion of US firms engage in international trade. Out of 5.5 million firms operating in the US in 2000, only 4% exported.
Even when focusing solely on firms active in manufacturing, mining and agriculture, where markets tend to be more international, the authors found that only 15% were exporters. They also showed that exporters were generally larger, more productive, paid higher salaries and employed higher-skilled workers than their non-exporting counterparts.
What’s more, the authors showed that out of those US firms that exported, 64% exported to a single country. Only 14% of exporting firms sold to five or more countries, and the average number of destination markets was as low as 3.5.
However, online platforms are lowering trade barriers. It has become almost a mantra of modern policy dialogue to say that the Internet is changing everything. In some cases, the rhetoric of change is just that: rhetoric. However, in the field of online trade the change is real and quantifiable. Recent research by Lendle et al. (2013) looked at a dataset covering US business sellers on eBay in 2010 to get a glimpse of what a more connected and frictionless world may entail for small businesses. Technologies such as those available to firms via the eBay platform are likely to be the sort of tools needed to help homemade lemonade brewers reach a global customer base. This is because online platforms enable individuals and firms to connect across cultural and national borders. These connections are made over an online platform with support services such as marketing, dispute resolution mechanisms, review processes, payment and delivery solutions.
In short, the online marketplace allows shoppers to get the products they want from the merchant they trust, no matter where they are in the world. Merchants wishing to export do not need to spend time and money to acquire deep knowledge of their destination markets and establish business contacts and distribution networks. Instead, they can use online platforms to gain international visibility for their inventory and technology tools to build trust with remote customers.
The matching of buyers and sellers is thus highly simplified. What’s more, seller rating mechanisms and the community spirit that online platforms generate may help to deter opportunistic behaviour. International transactions have always tended to be risky, with diverse governance systems and sometimes poor contract enforcement. However, technology allied to information transparency helps to reduce those risks. So the question remains: are merchants using eBay’s technology as a platform to access the world?
The answer is a resounding yes! The research by Lendle et al. found that a remarkably high 85% of business sellers on eBay were engaged in cross-border sales in 2010. This is much higher than the offline number which varies between 5% and 15%. Moreover, size matters less. In fact, irrespective of size, US firms on the eBay Marketplace are almost equally likely to export.
eBay exporters are also much more multinational than their offline counterparts. Lendle et al. found that US business sellers on eBay exported to on average 9.3 different countries and more than 50% export to more than five countries–a much higher proportion than offline (see graph). This is not just a US phenomenon, with the situation mirrored by eBay sellers in the UK, France and Germany.
The research findings by Lendle et al. also suggest that exporter-destination relationships established using the eBay platform are more likely to survive over the years than those concluded offline. In a study of Spanish exporters by Esteve- Pérez et al. (see references), the likelihood that exporter-destination relationships would perish during a four-year period was a remarkable 90%. The equivalent loss rate for eBay sellers is about 65%.
The future of globalised micro-multinationals is already partly upon us. Technology dramatically reduces information friction and can help create trusted cross-border relationships with customers. This gives all businesses, no matter how small, a helping hand in crossing borders.
Access to the enormously larger customer pools found in world markets compared to local ones means firms have more chances of succeeding. However, the attentive reader will have noted that we say that the future of micro-multinationals is “almost” upon us. This is because global trade is not entirely frictionless…yet.
Small businesses are held back by trade rules, processes and administration systems created for a world where large corporations alone engaged in international trade. Policymakers already know that it is the small and medium-sized enterprises that are providing much of the growth impetus in the current sluggish global economy. They also need to recognise that these medium, small, and indeed micro-enterprises are increasingly engaging in cross-border trade. They need to seize the opportunities this growth potential offers for both small businesses and consumers, and focus on how to adapt trade policies, customs procedures, and shipping processes to complement web-based technologies and facilitate online trade for businesses of all shapes and sizes.
If eBay is any good as a crystal ball, small web-enabled businesses will grow truly international operations and reach consumers in the most remote markets. So let’s get the right policies in place today.
Esteve-Pérez, Silviano et al (2012), “The duration of firm-destination export relationships: Evidence from Spain, 1997-2006”, Economic Inquiry. Vol. 51, No. 1.
Lendle, Andreas, et al (2013, forthcoming), “eBay’s anatomy”
© OECD Observer No 295 Q2 2013