Why are companies that sell on e-commerce platforms so globalized?

My new blog at TradeUp blog: http://www.tradeupfund.com/blog/why-are-e-commerce-sellers-so-globalized

As one explores international trade data, a stunning fact emerges: only 1 percent of America’s 30 million companies export. The remaining 99 percent sell only in the U.S domestic market. The explanation simple: especially small and mid-size U.S. companies have been lulled by the vast domestic market: why go through the pain of reaching foreign customers if your Ohio company already sits in a market with a quarter of the world’s spending power and can “export” to New York, Illinois, and Texas? 

Yet the United States is not an exception: only a minority of companies in any one country export – only 6 percent of Mexican companies, 10 percent of French companies, and 25 percent of Swedish companies. This is because exporting is expensive. Researching markets, finding foreign customers and partners, localizing products and services to meet foreign tastes and standards, marketing and sales, international distribution and shipping, and managing regulatory paperwork all entail costs and test a small business CEO’s mental bandwidth. Exporting has traditionally been only for exceptional businesses able to shoulder its costs and stomach the risks.

Ecommerce is turning these facts on their head. In the United States and elsewhere, 97 percent of companies selling online on eBay and other platforms export. These “e-exporters” regularly reach an average of 19 foreign markets, a stark contrast to offline exporters that typically export to just 1-2 countries, usually Mexico and/or Canada. And unlike offline exporters that typically do not last in the export game, online exporters have staying power: of even the very smallest companies, 54 percent remain active exporters after five years. Of the larger ones, 71 percent do. These patterns are very similar around the world. In Chile, Latin America’s star trader, 100 percent of companies that sell on eBay also export, on average to 28 different markets. 

 
The reason for the stunning difference between online and offline exporters is that the Internet kills distance in international trade. Trade economists have long used as their workhorse the gravity model, where trade between countries is a function of their GDPs and distance: large countries that are close to each other trade much more than small countries that are distant. France and Germany have mammoth $210 billion in trade; Sweden and Peru have less than $500,000. Distance is a big drag on trade: every 1 percent increase in distance implies a 0.7 percent less trade. German trade with Brazil, which is almost the same economic size as France but 6,000 miles farther, is only 13 percent of Germany’s trade with France.

Yet when economists analyze online trade, the distance effect vanishes: it has no meaningful explanatory power. This does not mean that shipping costs do not rise with distance; they do. What it shows is how dramatically online platforms expand the buyer’s visibility of sellers far away: the seller’s products are clearly visible and easy to explore across oceans. Online platforms’ star ratings systems, customer reviews, and payment tools such as Paypal gives the buyer a sense of trust, the lubricant of trade that in the offline economy takes several transactions between buyer and seller to build. Now the buyer can ride on the views of his peers about the seller, rather than on more indirect information such as the seller’s country image. Imagine a Korean wine importer looking for Argentine wines: now she will be able to screen and compare wineries online and order cases without ever paying a visit to the other side of the Pacific, and base her purchasing decision on information about the exporter’s reputation, rather than on the messy country profile. 

These patterns also mean that trade in the digital economy is pulled more than pushed: sellers are found, and made into exporters, by foreign buyers, rather than sellers going out and finding buyers, as is the case in offline trade. Empirically, online exporters are often “passive exporters” – companies that post their goods online and are serendipitously discovered by foreign online shoppers. Though wallflowers, these companies are much more globalized than their offline exporter peers, yet incur none of the same costs of pushing products on customers – networking, attending trade missions, renting booths at foreign trade shows, and traveling overseas to wine and dine foreign prospects. Of course, many are waging on the battlegrounds of mobile marketing, geotargeting, and social media advertisement. 

Customer service too is dramatically more efficient for online companies: when customers have access to their own personal accounts online, they do not need to be calling companies at all. And no banks are needed to secure payments when everyone can pay on PayPal or Bitcoin. 

Ecommerce platforms are the modern day version of migrant networks, such as the Chinese Diaspora, that economists have long known boost international trade by providing buyers product information, accelerating buyers’ search of suppliers, and enforcing contracts. 

Cross-border ecommerce is on track to grow at 10-15 percent rates annually, double the rates of overall world trade, to make up some 10 percent of global trade by 2017. China is the big prize: according to the Boston Consulting Group, in 2015, China will have 700 million netizens, almost twice as many Internet users as the United States and Japan combined. The next prize are the other 4 billion to-be Internet users that are going to log on by 2025. Anything can be sold to anyone anywhere: garage sales will be global. 

Everyone gains. What is unfolding is the highest expression of the New Trade Theory that earned Paul Krugman a Nobel Prize in economics in 2008: gains from trade expand as countries sell an ever-greater variety of goods at a lower cost. This insight will be ring even truer in the ecommerce economy as cross-border ecommerce will satisfy preferences that consumers did not necessarily even know they had. 

Ecommerce also accelerates international development. For example, India’s recent opening to investment by foreign ecommerce companies including Amazon, Walmart, and eBay is bound to boost domestic consumption, empower small merchants across the country, and eliminate costly middlemen in the supply chains. 

Getting online now is a great globalization strategy for any aspiring or current exporters. We here at TradeUp are highly supportive of companies that set up their own e-stores and place products on ecommerce platforms from Amazon to Alibaba. Here are good guides for preparing your business for ecommerce by UPS and by the government: http://www.forbes.com/sites/ups/2013/07/16/how-to-build-an-export-friendly-e-commerce-site/ and http://export.gov/missouri/static/E-Commerce%20Guide_Latest_eg_us_mo_032053.pdf. 

We also believe that policymakers need to raise their game and remove obstacles to e-exporters, especially prevalent the developing world, such as curbs on Internet freedoms, high fees and tariffs on cross-border online sales, and complex customs regulations that complicate shipments of small parcels, the hallmark of the online economy. The wide digital divides between the larger emerging markets and many less advanced parts of Africa, South Asia, Latin America, and Eastern Europe too await bridging. But the online opportunity is real and can be exploited right now, while governments mull over rules.

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2 Responses to Why are companies that sell on e-commerce platforms so globalized?

  1. This post hits the nail on the head. Now that we are able to buy and sell online, without having to pay heavy shipping fees, taxes, ect…..We are able to reach businesses ranging from Canada to Mexico. Having a business plan for the internet is not only a good idea, it is necessary!

    This was a great read, thanks for sharing!

    • Kati Suominen says:

      Belated thanks for these very kind comments and congratulations on all the great work you are doing! Keep it up and our export engines going! Best wishes, Kati

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