Is e-commerce the future for SMEs in Central America?

By Damien Shiels and Mayra Alfaro de Morán

Photo: QuinceCreative / Pixabay

COVID-19 has made the digital revolution more important than ever and has dramatically increased e-commerce. According to an UNCTAD report, global e-commerce sales jumped to $26.7 trillion in 2019, compared to 2018, showing the rising importance of online sales. Due to restrictions imposed as a result of Covid, firms have been forced to digitalize at least part of their operations and sales to adapt to the pandemic situation and to reactivate economies. The digital revolution is crucial for innovations to reduce physical contact, improve access to regional and international markets, and increase investments.

According to the IFC report: “Digital Entrepreneurship and Innovation in Central America”, small firms in the region are just beginning to systematically adopt technology as the COVID-19 crisis has forced buyers in the region to go online. Most Central American firms are still using manual methods and basic digital tools to manage their operations, sales, marketing, and decision-making processes. However, the COVID-19 crisis has forced buyers in the region to go online, and firms have followed. Two-thirds of micro and small firms report increases in online sales during COVID-19.

The IFC report confirms that firms that use technologies intensively in Central America grow faster and are more productive. This is partly because more productive firms have more resources to adopt technologies and talent, but it is also because technologies have made their adopters more productive. The report shows that over 40 percent of small and medium firms and over 50 percent of large firms that have adopted technologies intensively also report having gained new customers and increased their productivity due to new technologies. This suggests that there are in Central America great opportunities for efficiency gains through the adoption of technology.

So, is e-commerce the future for SMEs in Central America? IFC’s study confirms it is. The report states that firms in the region see e-commerce and other technologies as especially transformative in their sectors over the next decade. Over 40 percent of firms see e-commerce as the most transformative technology in their sector, over a quarter of firms in financial services see fintech as the most important technology, and some 20 percent of manufacturing firms see automation as most transformative technologies in the coming decade.

However, firms also perceive challenges to adopting technologies. These include lack of awareness about what technologies exist, uncertainties about the return on investment, difficulty on accessing finance to acquire these technologies and qualified talent to use it. Digital service providers perceive an outdate business environment. They face a lot of bureaucracy, including challenges with fiscal regulations, business registration, and cybersecurity risks as barriers to digital services provision in their countries.

What can Central America do to address these challenges? The report is encouraging because it reveals that MSMEs want to digitalize, and they see e-commerce as specially transforming for their businesses. What Central America needs is a digital business transformation strategy that considers (a) the promotion of digital technologies that can boost productivity; (b) increased access to finance for digital tools; © improvement of procedures and the regulatory framework as well as revision of specific regulations for the digital sector at the national and regional levels; (g) promotion of linkages between supply of and demand for technology; and (h) increasing MSMEs’ digital transformation skills, especially for women.

Damien Shiels, Regional Manager, Creating Markets Advisory (CMA)

Mayra Alfaro de Morán, Senior Operations Officer

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IFC

IFC, a member of the World Bank Group, is the largest global development institution focused on the private sector in emerging markets.