# **1 Introduction**

Using data collected in cooperation with two e-commerce platforms – Chaldal which operates in Bangladesh and Daraz which is present in several countries in South Asia, including Bangladesh, Nepal, Pakistan, and Sri Lanka – this paper investigates whether engagement with e-commerce is linked to increased sales and productivity gains for informal firms in South Asia.

This question is relevant for this region where a stubbornly high share of informality is a key development issue, and where the recent expansion of e-commerce is often portrayed as an opportunity to expand market access for informal firms. Excluding agriculture, three-quarters of South Asia’s workers were informal around 2017, the highest share among developing regions. And, in terms of their number, the share of informal firms is even higher, reaching 99 percent in India according to data from the Annual Survey of Industries and the National Sample Survey (NSS) of Unincorporated Enterprises of 2015-16.<sup>1</sup> Remarkably, these shares have not changed much in the last two decades, World Bank (2020). In contrast, even if still comparatively small, the e-commerce sector has been growing rapidly. In 2015, the share of online sales in retail sales was only 1.6 percent in India and 0.7 percent in Bangladesh as compared to more than 15 percent in China and the United Kingdom.<sup>2</sup> However, reports in the business media and by industry associations suggest it is growing fast. For example, in 2021 e-commerce’s share of retail sales in India had already reached 5 percent and is expected to expand at 20 percent annually in the next few years.The COVID-19 crisis seems to have accelerated this rise, though it remains to be seen if the momentum will be sustained: according to the e-Commerce Association of Bangladesh, total e-commerce revenues increased by 70-80 percent in the space of a few months during 2020.<sup>3</sup> The expectation that the digital economy can have broad impact on development by better connecting the informal sector with markets is reflected in the e-commerce expansion plans that governments in many developing countries have recently announced.<sup>4</sup> These plans may produce positive results; however, hard empirical evidence on the connections between the digital economy and informality and the impact of these connections is, to date, still quite thin.

Informal firms are of many different types – ranging from economic activities run by a single selfemployed person with almost no other inputs, to small businesses which exclusively employ family members, to slightly larger firms with a few external employees and some assets – and face quite distinct challenges depending on the sector and market in which they operate. However, behind this heterogeneity, informal firms share some common traits: their size tends to be small, they have limited access to credit and thus they are not capital-intensive, they experience difficulties in employing and retaining skilled workers, they have a restricted geographic reach in terms of

> 1Informal employment includes, according to International Labour Organization (2013)’s definition, all individuals working in informal enterprises as owners, employees or contributing family members, as well as those employed in formal firms as casual or temporary workers without a formal contract. In turn, informal enterprises are unincorporated enterprises owned by households, including those consisting of a single owner-worker (the self-employed). A key characteristic of such enterprises is that there is not a clear separation between the unit of production and its owner. Since, in the region, many regulations, as well as tax obligations, apply only to firms above a certain size threshold, in this paper small firms are considered informal.

> 2Kathuria et al. (2019).

> 3 `www.newagebd.net/article/114200/the-growth-of-e-commerce-during-the-pandemic-in-bangladesh` .

4Couture et al. (2021) report that the Chinese government has featured e-commerce as a means to alleviate poverty in its “No.1 Central Documents” each year since 2014. Likewise, governments in Bangladesh, the Arab Republic of Egypt, India, and Vietnam have announced investment plans to boost the digital economy (see references in Couture et al. (2021)). See also UNCTAD’s new technical assistance platform, “eTrade for All: Unlocking the Potential of E-Commerce in Developing Countries” `https://unctad.org/topic/ecommerce-and-digital-economy/ etrade-for-all.` 2