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Growth of E-Business Worldwide

By United Nations

Global E-Commerce Thriving; Regional Disparities Persist, U.N. Reports

Asia-Pacific shows greatest potential, UNCTAD says

Electronic commerce is growing and thriving in many parts of the world, according to a U.N. report issued November 18. In the developing world, however, business-to-business (B2B) e-commerce must gain strength if nations are to take best advantage of the economic expansion opportunities offered by the new technologies.

The report, issued by the United Nations Conference on Trade and Development, found that Internet users are expected to number 655 million worldwide by the end of 2002. That's a 30 percent increase over the previous year, with the developing world accounting for a full third of all new users. An UNCTAD press release on the report says B2B is expanding at a lesser pace in the developing world, however, largely because of inadequate information and communications technology (ICT) infrastructure.

Asia and the Pacific lead the developing world in the deployment of broadband, government support for the new technologies and workforce computer skills. Fifty million new Internet users are going online in the region each year.

Latin America is also progressing, though the greatest Internet advances are being made by only a handful of countries in the region, UNCTAD reports. As many as 70 percent of Latin American enterprises have Internet access and are expanding in B2B.

Africa is the furthest behind of the developing regions in building an ICT infrastructure to equal that of the developed world. There was a 30 percent increase in data traffic from the continent last year, but rate of use amongst the population remains low - only 1 in 118. B2B is not expanding at a strong pace, but exporters of African products and crafts are doing a brisk trade with African expatriates in the business-to-consumer sector, the UNCTAD report says.

The report is available in full at http://www.unctad.org/Templates/webflyer.asp?docid=2923&intItemID=1397&lang=1&mode=highlights

Following is a press release on the UNCTAD report:

United Nations Conference on Trade and Development
November 18, 2002

GOOD PROSPECTS FOR IT INDUSTRY IN 2003, PREDICTS UNCTAD
Developing world looks to e-business for growth

E-commerce is thriving around the globe. But where developing countries are concerned, as long as the business-to-business (B2B) end of the market does not take off, e-commerce volumes there will remain "negligible", warns the E-commerce and Development Report 2002, released today by UNCTAD. The report says that the route to a prosperous B2B sector, and its attendant benefits for the economy at large, lies in joining regional and global supply chains.

Prospects for that happening are good, especially given that the rapid growth in both e-commerce and Internet use is expected to continue. This applies particularly to the developing world, where penetration rates are lower. Internet use soared 30% last year, with one third of all new users in the developing world. E-commerce is also increasing in these countries, although more slowly, and that is particularly true of B2B, which comprises 95% of all e-commerce. The main impediment to the takeoff of B2B in the third world is inadequate information and communications technology (ICT) infrastructure, as well as shortcomings in physical infrastructure, logistics and trade facilitation.

Regional outlooks vary

Asia and the Pacific dominate in all these areas, pointing the way for other developing countries and regions to follow. It leads in the deployment of crucial broadband technologies, and its governments play a key role in attracting investment in the sector and supplying a skilled, educated workforce to meet the growing needs for outsourcing by foreign firms. Its enterprises are also more integrated into intraregional and global trade flows than those of other developing regions. Asia and the Pacific now accounts for 46% of digital subscriber lines worldwide and is adding 50 million new Internet users each year. Given the sheer demographic weight of the region, the potential for further growth is clear.

Latin America is also making progress, although activity is highly concentrated in Argentina, Brazil, Chile and Mexico. Some 50-to-70% of Latin American enterprises in the formal sector have access to the Internet, and B2B is expected to continue its rapid expansion, primarily because of the large volume of intra-industry trade in the region. Large transnational corporations (TNCs), especially in the automotive sector, play a key role in both B2B and B2C (business-to-consumer) e-commerce. Online car sales are the largest e-retail item in Latin America, and online banking is also increasingly popular among businesses and consumers. Latin Americans are big users of mobile Tephony - a market that could well have an impact on the region´s future e-commerce.

In Africa, connectivity is slowly improving, but e-commerce there remains limited, the report says. Local Internet connection is now available in all African capitals, and legal monopolies in Internet service provision have almost disappeared, resulting in a 30% rise in data traffic from the continent last year. But the e-commerce infrastructure gap between developed and developing countries is largest in Africa, where only one in 118 people use the Internet - one in 440, when the five countries with the most users are excluded. E-commerce is concentrated in South Africa and Egypt, while B2B outside South Africa remains negligible. B2B opportunities do, however, exist for Africa in the online and offline services sector. And in the meantime, exporters of handicrafts and products and services targeting Africans outside their home countries are doing a thriving business in B2C.

Elsewhere in the world, the transition economies are seeing a rapid rise in both B2B and B2C, but very modest volumes overall, and it is unlikely that e-commerce there will reach 1% of global e-commerce before 2005. The more advanced reformers in Central Europe and the Baltic have relatively high rates of digital literacy, in contrast to the Balkans, the Caucasus and Central Asia. But "the differences between these two groups of countries are likely to deepen", the report predicts, "as the more advanced countries accede to the European Union". Favorable factors include the high number of B2B trading platforms emerging in Russia to handle exportable commodities; high levels of general education; and the spread of non-proprietary Linux server software, which lowers costs for start-up firms.

Growth continues in both the North American and Western European markets, with online retailing still in an intense growth phase. In the United States, B2C increased 19% in the first quarter of this year alone. Although the B2C share in the country´s total retail sales remains modest (below 3%), in some sectors online sales have already climbed to as much as 18% of total sales. Some such sectors - including software, travel and tourism services and music - could represent good opportunities for developing country suppliers. B2C volumes remain considerably lower in Europe, however, and although the arrival of the "physical" euro has probably encouraged more intra-European e-commerce, in some sectors the market remains fragmented due to cultural and linguistic barriers and differing consumer preferences.

In B2B, the share of online transactions in total B2B sales is mounting quickly on both sides of the Atlantic and could reach 20% in the next two to four years, representing a massive shift of business operations towards the online environment. Some 26% of all US sales, mostly B2B, will be traded online by 2006, with 19% forecast for Europe. Also by 2006, the currently large gap between European and North American B2B purchasing should fall by 30%, as European firms are currently spending a higher percentage of their information technology (IT) budgets on e-business solutions than their North American counterparts.

After looking at the prospects for, and impact of, e-commerce in each region, the new UNCTAD report delves into the extent to which investment in IT can contribute to development. The answer is a qualified "yes". "The existence of a local IT sector or of investment from IT multinationals might contribute to the takeoff of e-business in developing countries if" - and here is the qualified "yes" - "it promotes IT awareness and culture in the local business sector, if it advances the IT competencies of the workforce and if it brings the technology closer to the local business community".

Developing countries´ IT exports rising

A flourishing IT industry worldwide will also help, of course. Its expected pick-up next year could be of particular benefit to developing countries, whose export growth in IT products is higher (23.5% in the past decade) than in the developed world (10.8%). Not only that, but the share of developing countries and transition economies in IT exports keeps rising, and IT now accounts for a higher proportion of developing country exports than it does in the industrialized countries. This is largely because TNCs are increasingly locating hardware production in emerging markets and because developing countries are making efforts to develop the local IT production capacities that attract TNC outsourcing. The result: IT products (mainly semiconductors and electronic data processing) now represent a larger share of developing countries´ exports than that of agriculture, textiles and clothing products combined. The only downside is that the third world´s stake in IT export markets is higher in the commoditized IT products, which are characterized by low value added.

Two main trends in the IT industry are favoring its ascendancy in developing countries.

--The development of open-source (non-proprietary) software, such as the Linux operating system, which is now used on 30% of all active website servers: The report calls these products an "ideal match" for current developing country hardware, such as ordinary, low-cost PCs.

--The customization or localization of IT, and especially software products and websites, for local and regional markets: Many SMEs from developing countries are cooperating with TNCs in making their products or services suitable for a given niche client or foreign market. Major opportunities are posed by the growing demand for "Arabizing" software in the Middle East - Arabic being the world´s sixth most widely spoken language - and a number of mainly Egyptian companies are already moving from the production of media content (books, films and broadcasting) to website and software translation and web hosting. These activities can in turn serve as a springboard for new ventures and other business opportunities.

The report finds that, while these trends are promising, they all require technological infrastructure and workforce skills "beyond the reach of most small and medium enterprises (SMEs) in developing countries".

Investment trends in IT, on the other hand, offer more positive signs: most such investment in developing countries is greenfield investment, resulting in a net increase in their production facilities. An UNCTAD survey of 35 large IT multinationals found that their IT investment abroad is focused on customer support service and distribution, and in regions to which the companies export. Ultimately, this means that the more local e-commerce and e-business there is to support that investment, the more TNCs will invest.

IT companies are heavy e-commerce users. Their subsidiaries in developing countries, although active users of such tools as E and the Web, tend to engage less in advanced e-business practices. However, many respondent firms indicated that e-commerce facilitated the establishment of their IT ventures in developing countries. The presence of international IT firms is also boosting e-commerce in these countries and generating Internet traffic, both of which could help bring down telecommunications costs. Other positive effects are the generation of an "e-business culture" among local entrepreneurs, enhanced capacity of the local productive sector and a more competent local workforce.

Most foreign IT investors depend heavily on local labor, to the tune of 80% of their total workforce in developing countries. Some 69% of that local labor is skilled, suggesting that national expenditures on both primary and university education will be well rewarded. The intense linkages reported by the companies surveyed with local companies in the host countries are another cause for optimism because of their contribution to improved competitiveness, higher productivity levels and growth and expansion of the local economy as a whole.

UNCTAD´s E-commerce and Development Report 2002 also takes a look at opportunities for developing countries in the services export sector, which is being transformed by e-commerce. Between 1990 and 2000, developing countries´ exports of services grew almost twice as fast as the world average. Leading the way among the dynamic services - which experienced above-average sales growth in global markets - are many that can be delivered online ("e-services"), such as computer-related and travel and tourism services. While developing countries´ share in the global e-services market is still small, many of them are gaining world market share in the export of communications services, financial services and royalty services.

In case studies of Costa Rica and India, the report shows how much e-services can potentially enhance export competitiveness and produce high value-added services that give a major boost to the local economy. In Costa Rica, software services exports have surged from $16,000 in 1997 to $60 million in 2000. At the same time, the growth of the domestic IT industry has led more and more firms to use ICT in their business activities, enabling them to move rapidly into e-commerce, e-banking and e-tourism. India´s IT services exports - software and business process outsourcing in particular -- have almost doubled in two years, and currently account for more than 16% of exports and 8% of foreign exchange earnings. The two countries differ in many ways, but both have succeeded in creating a critical mass of IT-literate workers and IT know-how, have experience in high-tech development and can rely on contacts in their major export markets.

These achievements, the report suggests, can be replicated by other developing countries. But to seize those opportunities they and their partners will have to increase market access and address domestic bottlenecks in technology, payments, telecommunications and standards, as well as lower tariffs and deregulate further.

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United Nations Reports