metadata: authors: 0: author: Bussolo,Maurizio
1: author: Dixit,Akshay Govind
2: author: Golla,Anne Marie
3: author: Kotia,Ananya
4: author: Lee,Jean Nahrae
5: author: Sharma,Siddharth
count: South Asia
docna: 0: docna: How Selling Online Is Affecting Informal
            Firms in South Asia
docty: Policy Research Working Paper
abstracts: cdata!: Understanding how e-commerce platforms
            are affecting the small, informal firms that sell on them is
            a question of growing importance to researchers and policy
            makers in developing countries. This paper examines this
            question using data from surveys of firms selling on two
            e-commerce platforms in South Asia. The businesses selling
            on these platforms range widely in terms of size, degree of
            formalization, and other characteristics. However, these
            firms -- even the micro and small ones, which tend to be
            informal -- are from a selected group, being owned and
            managed by individuals who are more educated and younger
            than the owners and managers of more typical firms in this
            setting. The sellers' main reason for joining the
            platforms is to access more customers. Most of the sellers
            report an expansion of their business after joining the
            platforms. They also report an increase in their incentive
            to register their business and their visibility to tax
            authorities. Other, less widespread channels of impact
            reported by the firms include the adoption of new or
            improved business practices and technologies, better access
            to finance, and greater flexibility in balancing home and
            work life. In general, these reported impacts do not vary
            significantly by firm size or degree of formalization,
            suggesting that even informal, small firms that have
            (selectively) joined e-commerce platforms can benefit from
            the greater market access facilitated by the platforms.
            Finally, given size and age, firms that have been selling on
            the platform for a longer period are more likely to
            experience these impacts, suggesting that firms learn how to
            use the platform more effectively over time.
display_title: How Selling Online Is Affecting
            Informal Firms in South Asia
listing_relative_url: /research/2023/02/34002354/selling-online-affecting-informal-firms-south-asia
topicv3: ICT Innovation and Transformation m1326189 2399,Innovation, Technology and
            Entrepreneurship m1327691 376,Market Linkages for SMEs m1504604 2652
publishtoextweb_dt: 2023-02-14T00:00:00Z
dois: 10.1596/1813-9450-10306
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
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1: author_key: 1944355
2: author_key: 1286933
3: author_key: 1906318
4: author_key: 1111908
5: author_key: 717230
model_extractions: Policy Research Working Paper 10306

# How Selling Online Is Affecting Informal Firms in South Asia

_Maurizio Bussolo_ _Akshay Dixit Anne Golla Ananya Kotia Jean N. Lee Prema Narasimhan Siddharth Sharma_ South Asia Region Office of the Chief Economist February 2023
Policy Research Working Paper 10306

# **Abstract**

Understanding how e-commerce platforms are affecting the small, informal firms that sell on them is a question of growing importance to researchers and policy makers in developing countries. This paper examines this question using data from surveys of firms selling on two e-commerce platforms in South Asia. The businesses selling on these platforms range widely in terms of size, degree of formalization, and other characteristics. However, these firms—even the micro and small ones, which tend to be informal— are from a selected group, being owned and managed by individuals who are more educated and younger than the owners and managers of more typical firms in this setting. The sellers’ main reason for joining the platforms is to access more customers. Most of the sellers report an expansion of their business after joining the platforms. They also report an increase in their incentive to register their business and their visibility to tax authorities. Other, less widespread channels of impact reported by the firms include the adoption of new or improved business practices and technologies, better access to finance, and greater flexibility in balancing home and work life. In general, these reported impacts do not vary significantly by firm size or degree of formalization, suggesting that even informal, small firms that have (selectively) joined e-commerce platforms can benefit from the greater market access facilitated by the platforms. Finally, given size and age, firms that have been selling on the platform for a longer period are more likely to experience these impacts, suggesting that firms learn how to use the platform more effectively over time.

This paper is a product of the Office of the Chief Economist, South Asia Region. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at mbussolo@worldbank.org, akshay_dixit@g.harvard.edu, amgolla@yahoo.com, ananyakotia@gmail.com, jlee20@worldbank.org, prema.narasimhan@berkeley.edu, and ssharma1@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# How Selling Online is Affecting Informal Firms in South Asia

Maurizio Bussolo, Akshay Dixit, Anne Golla, Ananya Kotia, Jean N. Lee, Prema Narasimhan and Siddharth Sharma<sup>∗</sup> JEL Codes: L81, L88, O17 Keywords: E-Commerce Platforms; Informal and Formal Firms; South Asia Topics: Market Linkages for SMEs; Innovation, Technology and Entrepreneurship; ICT Innovation and Transformation

> ∗This paper is part of a research program on Informality in South Asia conducted by the Chief Economist Office for South Asia at the World Bank. Financial support from the Digital Development Partnership (DDP) Multi-Donor Trust Fund is kindly acknowledged. We also benefited from extensive comments by Tania Priscilla Begazo Gomez, Ruchira Shukla, and Sayan Ghosh, and from the field work coordination by Mohammad Syful Hoque. We also thank the active collaboration of Nerissa Nashin from Chaldal, Bjarke Mikkelsen and Pireh Shafiq from Daraz, without whom this work would not have been possible. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

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# **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
both input sources and output destinations, and their use of (even basic) management practices is infrequent. Whether these common traits emerge because of optimizing choices by the informal firms or are the results of entry barriers or some other forms of exclusion is an ongoing debate in the literature on informality.<sup>5</sup> Whatever the ultimate cause, the expansion of the digital economy, and in particular the growth of e-commerce, has the potential to either shift the incentives behind these choices, for example to remain small, or to make the entry barriers less effective and, thus, ultimately to benefit informal firms. On the other hand, this expansion could exacerbate the gap between the formal and the informal sectors.

There are potentially four main channels through which the digital economy can positively impact informal firms: 1) reduce capital inputs; 2) reduce matching and verification costs; 3) facilitate implementation of management practices; and 4) facilitate market access. Digital technology, defined by Goldfarb and Tucker (2019) as “the representation of information in bits”, affects economic activity fundamentally by reducing costs (and barriers) related to search, replication, transportation, tracking and verification. A small firm entering an e-commerce platform is potentially reaching a much larger pool of customers without the need of investing in marketing campaigns, and it can also benefit from an already established set of distribution channels.<sup>6</sup> The increased use and accumulation of digital information related to online economic transactions can also facilitate the adoption of management practices such as, for example, a more frequent and accurate monitoring of costs and revenues, or improved communication with employees, suppliers and clients. Management practices have been identified as a strong determinant of productivity gains even in small firms (Bloom et al. (2013, 2020)). With more online sales, small firms can more easily and transparently document income flows and these, in turn, can provide information to banks about their creditworthiness (Klapper, Miller and Hess, 2019). In general, with more visibility, the costs of verification go down and the reputation of the firm increases.

All these channels can generate positive impacts for informal firms joining the digital economy, but it is also possible that they may work in the opposite direction. Because of the increased visibility, and the higher risk of being audited by the tax authorities, some firms may avoid entering e-commerce. This is because they would not be competitive if they had to pay taxes or comply with other regulations. E-commerce platforms can be transformative, but their market power may also polarize countries’ industrial structures. Through more intensive use of digital channels, more productive companies can expand their market shares and boost their productivity, but the platforms’ pressure to lower prices and innovate can be unsustainable for less capable firms, which may shrink or exit the market.<sup>7</sup> And even if the logistical barriers are reduced by e-commerce, some ‘transactional’ barriers may remain. Couture et al. (2021) defines these barriers as those related with “lack of familiarity with navigating online platforms” or “[lack of] trust of transactions that occur before inspecting the

> 5See de Soto (1989) and Djankov et al. (2002) for examples of those who argue for an insider-outsider dualistic view of informality, and Levy (2010) and Maloney (2004) among the proponents of the incentives-choice approach. For a recent excellent survey, see Ulyssea (2020).

> 6Note that this is different from selling to standard brick and mortar supermarkets. As the case of Chaldal shows, brick and mortar supermarkets are supplied by distributors who tend to have an established set of suppliers. A small company needs to hire someone to deliver to each of the supermarkets or enter the books of a distributor. This consists of a large supply chain investment that is often out of reach for a small company. Also, a new product can be more easily visible on a virtual shelf than it would be on a normal physical shelf.

> 7World Bank (2018) provides several examples of the negative consequences of digital platforms’ excessive market power. Iacovone et al. (2015) have a clear analogous example of the entry of Walmart, which polarized the Mexican retail market.

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product or without interacting with the buyers [or sellers] in person” (p.37). They refer to the challenges of connecting rural producers to e-commerce in China, but these transactional barriers are likely to be present for small informal firms in other countries and even in urban settings. In fact, in their study in China, they find that the expansion of e-commerce has had no effect on producers and the only positive effects have been for richer and younger consumers who benefited from access to lower priced goods and services. This is another example of the potential polarization from the digital economy.

In sum, it is not obvious from the existing evidence whether the rise of e-commerce increases existing gaps between incumbent larger formal firms and informal ones, or it helps ‘level the playing The new empirical evidence from Chaldal and Daraz sellers’ data, the two case studies in this paper, is mildly positive. As reported by the firms selling on these platforms, the main reason for joining the platform is to access more customers. Most of these sellers report an expansion in their business after joining the platform. They also report an increase in their incentive to register their business and in their visibility to tax authorities. Other, less widespread channels of impact reported by firms include the adoption of new or improved business practices and technologies, better access to finance and greater flexibility in balancing home and work life.

The businesses selling on these platforms range widely in terms of size and other characteristics, and many of them are micro, small and medium-sized. In general, the reported impacts do not vary significantly by firm size and degree of formalization, suggesting that even micro and small informal firms that have joined e-commerce platforms can benefit from the greater market access facilitated by the platforms. However, firms using e-commerce, even the small ones, are from a selected group: they are owned and managed by individuals who are more educated and younger than the owners and managers of more typical firms.

The findings on the two case studies of this paper are encouraging as they seem to tilt the balance of evidence towards a positive impact on small, informal firms. That being said, these results cannot be easily generalized given the selective use of e-commerce among firms. While many small firms are using e-commerce platforms to reach a larger consumer base, the vast majority of them are still reliant on traditional brick and mortal retailing. Potential causes of this selective adoption of e-commerce include limited access to digital infrastructure among small firms and their target customers, informational barriers to the adoption of new technologies by firms, and limited capability of firms to profit from e-commerce. Understanding these causes better will be important for designing policies to broaden the development impact of e-commerce.

The rest of the paper is organized as follows. Section 2 describes the two e-commerce platforms examined in this paper and the key descriptive characteristics of the surveyed firms, which sell on them. Sections 3 and 4 discuss the main results of the analysis of the surveys of sellers operating on Chaldal and Daraz. Section 5 discusses how the sellers are a select group of firms. Section 6 concludes the study.

# **2 Setting and Data**

## **2.1 Two Digital Platform Models**

Chaldal is an online grocery service operational in four cities in Bangladesh. Established in 2013, it offers 1-hour delivery on over 6,000 products. Chaldal is currently operational in 4 cities. Chaldal operates its own warehouse system in each city to guarantee timely supply to the platform. Chaldal 4
also operates an on-demand delivery service, GoGoBangla, which offers logistics services to small e-commerce businesses, as well as a network to connect farmers directly with retailers (the Chaldal Vegetable Network), and plans to open a direct-to-consumer pharmacy. Chaldal is expanding rapidly: as of September 2021, the platform claims it has grown by 120 percent over the last year, with some 40 million USD revenue; it has plans to enter 15 new markets and expand from 8,500 products to 30,000 by the end of 2021. See Shu (2021). for more details.

At the time of data collection (mid 2021), Chaldal had over 350 suppliers. These include large multinationals (such as Unilever), with which Chaldal has partnerships. However, Chaldal also sources goods directly from farmers and manufacturers and works with smaller-sized wholesalers. Chaldal plays an active role in identifying and selecting suppliers. To meet customer expectations, Chaldal must have certain goods in stock, as well as offering a variety of brands and price points. At the same time, warehousing goods that do not sell is costly. For that reason, Chaldal seeks suppliers for goods with high turnover, and expects suppliers to have a marketing budget and plan to ensure their goods sell. Suppliers must also provide all required licensing and certification, such as relevant licenses from the BSTI (Bangladesh Standards and Testing Institute), IRC (Import Registration Certificate), and VAT registration. Firms must deliver the goods to Chaldal’s central warehouse, then wait until the goods are sold before payment. Firms must also have packaging suitable for the delivery model.

For suppliers, working with Chaldal would be similar to supplying large, modern brick-andmortar supermarkets, even if the digital model makes it easier for consumers to search by category or brand and compare prices. However, these large brick-and-mortar supermarkets are not common in Bangladesh where most groceries are still relatively small stores with limited capacity. Chaldal’s larger inventory allows it to stock newer or less established brands. Supplying firms also save on the cost of establishing distribution channels by distributing to Chaldal’s central warehouse, rather than many small stores. For the smallest firms, however, licensing requirements, the need for marketing, and the need to wait until goods are sold may limit their ability to sell through Chaldal. For firms that have trouble with licensing or marketing, Chaldal’s legal department can provide some advice on how to obtain the required licenses. Chaldal also offers partnership marketing to firms, which can help them advertise their product via Chaldal’s website and social media accounts as well as through Google and Instagram ads.

The second platform is Daraz, an e-commerce marketplace established in 2015 which operates in Pakistan, Bangladesh, Myanmar, Nepal, and Sri Lanka. Compared to Chaldal, Daraz reaches a much larger market as it reports some 35 million customers and 100,000 vendors. As a separate part of its platform, Daraz operates online grocery stores with same-day delivery. Since 2018, Daraz has also operated its own delivery service, Daraz Express, which operates warehouses and facilitation centers and first/last mile delivery. The company estimates that 60 percent of deliveries through its site use Daraz Express.

Daraz offers multiple advantages for even very small or new businesses. The platform aims to make selling on the site accessible to anyone with a smart phone, and provides a quick, threestep online process to start a store on the platform. No office, start-up capital, or employees are needed. Daraz offers vendors short online training videos on all aspects of setting up and running an online store on the platform (Daraz University). Their sales center also provides links to Businessto-Business (B2B) providers who provide support services such as product listing write-up, site management, photography, and packaging (Daraz Vendor Support Center).

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# **2.2 Data Collection**

The sample frame for the Chaldal survey was all small and medium sized suppliers (“vendors”) who had supplied goods through Chaldal in the last 3 months. The survey was implemented by computer-assisted telephone interviews (CATI), fielded in June 2021 by the Chaldal call center. The vendor list provided by Chaldal included 346 firms. However, some firms could not be reached or had closed, and 35 refused to participate. The final sample consists of 127 firms with a completed interview. Some 42 percent of interviews were conducted with the owner of the firm, 34 percent with a manager, and 51 percent with someone in the sales department.

Data on Daraz vendors was collected through an online survey, sent to vendors who had filled at least 50 orders on Daraz during the last 6 months by email. The target sample included 14,660 firms in Bangladesh, Pakistan, Nepal, Sri Lanka, of which only owners were interviewed. Data collection took place in July 2021. A total of 1,842 firms responded to at least some questions, with 1,549 continuing to the end of the questionnaire. Interviews were conducted only with firm owner/directors.

The full questionnaires used to collect data from firms supplying Daraz and Chaldal are available in Appendix A4. Given the different structures of these two e-commerce platforms, the two questionnaire are similar but not identical.

# **2.3 Descriptive Statistics: Chaldal Survey**

Firms in the Chaldal sample are mostly established manufacturing or trading firms, and they range widely in size (table 1). The average firm has 749 employees, although this number is driven by a few very large firms, with 14 surveyed firms having a workforce of more than 1,000. In the sample, 36.6 percent of the firms have 1-19 employees (including the owner), 27.7 percent have 20-99 employees, and 35.7 percent have 100 or more employees (figure 1). About half of the firms in the sample (50.5 percent) have monthly sales of at least 10 million Bangladesh Taka (115,800 USD in 2021) and 11 percent have monthly sales below 500,000 Taka.

Table 1: Characteristics of sellers on Chaldal

||Mean|Standard Deviation|
|---|---|---|
|How many workers work at this business?|749.2|2098.38|
|Firm age (years)|16.5|15.13|
|Time on Chaldal (years)|3.2|2.58|
|Trader/wholesellers|0.4|0.49|
|Manufacturer|0.5|0.50|
|Farm/dairy|0.1|0.23|
|BA or higher education|0.8|0.36|
|Owns two-wheeler|0.6|0.49|
|Owns car|0.3|0.45|
|Owns phone|1.0|0.09|
|Owns refrigerator|1.0|0.13|
|Owns land|0.9|0.34|
|VAT reg.|.92|.27|
|Observations|127||

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On average, the firms in the sample have been in operation for 16.5 years, with 90 percent of them having been in operation for a period between two and fifteen years. Most of them describe themselves as manufacturers (54.3 percent), while a substantial percentage are also traders or wholesalers (39.4 percent). Farms, dairy, and livestock producers make up a comparatively small share of the sample (5.5 percent).

Figure 1: Chaldal vendor size (number of employees) <!-- Start of picture text --> 35.7<br>27.7<br>24.1<br>12.5<br>1-5 6-19 20-99 >=100<br>Number of workers (including owner)<br>60<br>Share of total firms (%) 40<br>20<br>0<br><!-- End of picture text --> Firms supplying to Chaldal also have a high level of registration. For example, 92 percent have VAT registration.

For most of the surveyed firms, sales through Chaldal represent less than a quarter of their total sales. Among the firms, 76.7 percent say that Chaldal represents 25 percent or less of their total business sales in the last month, compared with only 9.5 who report that Chaldal represents 76-100 percent of their sales (figure 2).<sup>8</sup> Firms in the sample sell through a variety of outlets, including brick-and-mortar supermarkets and shops, their own physical and online stores, wholesalers and traders, and digital platforms other than Chaldal.

> 8This might be because most firms in the sample had been in operation for some time before they began to sell through Chaldal. On average, the surveyed firms are 16 years old but have been selling on Chaldal for only 3.2 years.

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Figure 2: Percent of total sales on Chaldal by firm size <!-- Start of picture text --> < 0.25 0.25 to 0.5 0.5 to 0.75 > 0.75 < 0.25 0.25 to 0.5 0.5 to 0.75 > 0.75<br>Small (0-20 employees) Large (> 20 employees)<br>60<br>40<br>percent<br>20<br>0<br><!-- End of picture text --> As noted earlier, survey respondents were a mix of firm owners, managers and sales managers. These respondents are on average 35 years old, and mostly male. Among the respondents, 84 percent have at least a Bachelor’s degree. This is a relatively high number in the context of firms in Bangladesh, as discussed later in this paper.

# **2.4 Descriptive Statistics: Daraz Survey**

Data from the Daraz survey highlights some similarities but also important differences from the case of Chaldal.

In terms of geographic dispersion, 41.6 percent of the Daraz vendor sample is from Pakistan, 27.7 percent from Bangladesh, 21.8 percent from Sri Lanka, and 8.8 percent from Nepal. Compared to Chaldal, firms in the Daraz sample are on average young and small in size (table 2). The average age of responding firms is 3.4 years; 51.0 percent have been operational for two years or less, and 18.5 percent have been operational a year or less (figure A.1). Firms have on average 3.5 employees (in addition to the owner). Some 86.9 percent of firms in the sample have fewer than five employees, and 14.1 percent have no employees (figure 3).

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Table 2: Characteristics of sellers on Daraz

||Mean|Standard Deviation|
|---|---|---|
|How many workers work at this business?|3.5|14.13|
|Firm age (years)|3.4|5.17|
|Time on Daraz (Years)|1.6|1.31|
|Owner’s age|29.9|8.25|
|Owns motorcycle|0.6|0.49|
|Owns car|0.3|0.44|
|Owns refrigerator|0.8|0.37|
|Owns smart phone|1.0|0.13|
|Owns land|0.6|0.50|
|Registered|0.7|0.44|
|VAT reg.|0.3|0.44|
|Observations|1842||

Figure 3: Daraz vendor size (Number of employees) <!-- Start of picture text --> 86.9<br>11.0<br>1.7 0.4<br>1-5 6-19 20-99 >=100<br>Number of workers (including owner)<br>100<br>80<br>60<br>40<br>Share of total firms (%)<br>20<br>0<br><!-- End of picture text --> In contrast to the Chaldal vendor sample, many firms in the Daraz sample show signs of low levels of formality. Only 25.9 percent have VAT registration. 9 Among the firms, 72.7 percent operate either out of the owner’s home or in a separate building on the same lot, and 43.2 percent have family involved in the business, including 15.1 percent which use other family members as unpaid workers. For many business owners the business is part time: 53.3 percent have another job

> 9Moreover, while 56 of the Daraz sample firms are registered as sole proprietorship companies, 25.4 percent do not have a formal legal structure.

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or source of income.

On average, the Daraz sample firms have been selling goods on Daraz for 2.6 years. For most firms in the sample – 69.2 percent - sales through Daraz make up 50 percent or less of their total sales (figure 4).

Figure 4: Percent of total sales on Daraz <!-- Start of picture text --> < 0.25 0.25 to 0.50 0.5 0.5 to 0.75 > 0.75<br>40<br>30<br>20<br>percent<br>10<br>0<br><!-- End of picture text --> Owners of firms in the sample tend to be young, male, and tertiary educated. Some 55.3 percent are younger than 30 years old, while only 3.1 percent are 50 or older (figure A.2). Women comprise 10.7 percent of the sample. Many – 50.1 percent - have completed a vocational program, while 25.2 percent have completed a Bachelor’s degree or higher (figure A.3).

# **3 The Impact of Joining an E-Commerce Platform**

## **3.1 The Impact of Joining Chaldal**

The survey data suggest that firms are joining e-commerce platforms such as Chaldal primarily to access a larger market. More than 90 percent of Chaldal sellers report that they joined the platform to reach more customers (figure 5). Diversifying sales outlets and achieving more steady/reliable sales are also major reasons for joining the platform. Although some sellers also joined Chaldal because it offers better terms than those found on other sales outlets, almost none joined the platform in expectation of higher prices.

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Figure 5: Reasons to work with Chaldal <!-- Start of picture text --> 94<br>47<br>43<br>21<br>18<br>7<br>2<br>Reach more customers Wanted to diversify sales outputs<br>More reliable/steady sales Chaldal offers better terms<br>Response to COVID-19 Other<br>Higher prices<br>100<br>80<br>60<br>Percent of firms (%) 40<br>20<br>0<br><!-- End of picture text --> In line with their expectation that working with Chaldal would enable access to more customers, most Chaldal sellers (more than 80 percent) have experienced an increase in sales revenues after joining the platform (figure 6). Nearly 40 percent of them report hiring more workers -including skilled workers - since joining the platform. Moreover, more than 80 percent of Chaldal sellers agree or strongly agree with the statement that their business has expanded since joining the platform (figure 7).

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Figure 6: Have sales and employment increased after joining Chaldal?

<!-- Start of picture text --> 85<br>39<br>34<br>Total sales revenue No. of full-time employees<br>No. of skilled employees<br>80<br>60<br>40<br>Percent of firms (%)<br>20<br>0<br><!-- End of picture text --> Another potential consequence of platforms such as Chaldal is the facilitating of business formalization. This could be a side-effect of the growth experienced by platform sellers, since many business licensing and tax registration requirements start to apply after firms cross certain minimum size thresholds. Moreover, selling on a platform may entail becoming more visible to tax and regulatory authorities, increasing the risk of being penalized for regulatory non-compliance. More than 85 percent of the Chaldal survey respondents strongly agree or agree with the statements that joining a platform such as Chaldal increases the incentive to formally register the business, and that it increases the likelihood of being visible to tax authorities (figure 7). Note that Chaldal requires its suppliers to comply with requisite business licenses and tax registration, and also offers advisory assistance to promote compliance among its sellers. Some 26 percent of Chaldal sellers report having changed their legal structure or registration since joining Chaldal.

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Figure 7: Impacts of joining Chaldal <!-- Start of picture text --> Business grown<br>Registered for Daraz<br>More flexibility<br>Easier to WFH<br>Connect<br>Customer trust<br>Easier loans<br>0 20 40 60 80 100<br>percent<br>S disagree Disagree Indifferent<br>Agree S agree<br><!-- End of picture text --> Joining an e-commerce platform may enable firms to better signal credit-worthiness to banks, improving their access to formal credit. The evidence for this hypothesis in the case of Chaldal is mixed: 33 percent of Chaldal sellers strongly agree with the statement that joining the platform has helped them get easier access to financing, but 29 percent strongly disagree with it (figure 7). The survey also asked firms if their use of bank loans increased since joining the platforms. Of the respondents, 17 percent replied in the affirmative to this question. Note that a negative reply to this question could also reflect a lack of demand for credit.

Consumer trust is another important issue for firms selling on a digital platform, particularly in settings where formal consumer protection mechanisms are weak. On the one hand, e-commerce platforms may face more consumer distrust than traditional shops because of their newness. On the other hand, e-commerce websites can build consumer trust through quality control, seller feedback mechanisms and liberal returns or refund policies. Consumer distrust issues seem to have been largely surmounted in the case of Chaldal, given that more than 80 percent of sellers strongly agree or agree with the statement that consumers trust the quality of a product sold on the platform more than they trust the quality of products sold at other shops or stores (figure 7).

Selling on a digital platform could also encourage firms to upgrade their business practices by improving their access to information on technologies and consumer preferences, and by generating the incentive to innovate in order to capture a large share of the online market. This appears to be true for a sizable fraction of Chaldal sellers, though generally not for the majority. For example, 13
about 46 percent of Chaldal sellers report having increased their product quality since joining the platform (figure 8). About 51 percent of them state that they have improved how they market products since joining Chaldal, and 47 percent report having upgraded inventory and logistics management.

Figure 8: Have business practices improved after joining Chaldal?

<!-- Start of picture text --> 50.8<br>46.5 46.8<br>45.7<br>38.2<br>30.4<br>Marketing of goods Accounts or bookkeeping<br>Product quality or packaging Use of digital technology<br>Management of inventory or logistics Equipments or facilities<br>50<br>40<br>30<br>Percent of firms(%)<br>20<br>10<br>0<br><!-- End of picture text --> 14
# **3.2 The Impact of Joining Daraz**

Figure 9: Impact of joining Daraz <!-- Start of picture text --> Business grown<br>Registered for Daraz<br>More flexibility<br>Easier to WFH<br>Connect<br>Customer trust<br>Easier loans<br>0 20 40 60 80 100<br>percent<br>S disagree Disagree Indifferent<br>Agree S agree<br><!-- End of picture text --> Overall, we find similar patterns when examining the data from Daraz users, although they tend to be smaller businesses on average, and are much more likely to be in sole proprietorship and informal.

Figure 9 shows that on average and across the four countries in our sample, firms on Daraz report significant benefits of participation in the Daraz e-commerce platform. A strong majority of firms respond “Agree” or “Strongly Agree” to the statements that the business has grown since joining Daraz, that they registered the business in order to use Daraz, that their work-life balance has improved since joining Daraz, that they value working from home, that they can connect with other entrepreneurs, and that they have increased consumer trust on Daraz. In addition, a significant group report that they “Agree” or “Strongly Agree” that it is easier to get loans for their business since joining Daraz.

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# **4 Heterogeneity in the Impact of Joining E-Commerce Platforms**

This section examines whether the impact of joining an e-commerce platforms depends on seller firm size and formality status. It compares the self-reported impacts of joining Chaldal and Daraz by seller size, controlling for other seller attributes. It also examines the relationship between the seller’s registration status and the impact of joining Daraz. In the case of Chaldal, there is too little variation in the measured registration status of sellers to permit such comparison. Because unmeasured dimensions of formality are likely to co-vary positively with firm size, it is not easy to distinguish between the impact of size and formality.

## **4.1 Heterogeneity in the Impact of Joining Chaldal**

The survey suggests that the impact of joining Chaldal is not different between large and small firms; i.e. firm size does not seem to matter. The difference in the share of “small” Chaldal sellers - those with 20 or fewer employees- and larger ones who report that their sales increased after joining the platform is statistically not significantly different from zero. This is also true for other self-reported outcomes such as employment increase, incentives to register, tax visibility, customer trust, access to finance and bank loans.

Figure 10 presents the estimated coefficients on a dummy for firm size being 20 or fewer employees, controlling for firm age and tenure on Chaldal.<sup>10</sup> The only outcome for which the size dummy is statistically significant is customer trust, but even this is not robust to controlling for other firm owner/manager characteristics such as education and asset ownership.<sup>11</sup> When using a continuous measure of firm size (the log of its total employment) instead of a binary size categorization, it appears that smaller firms are _more_ likely to experience an increase in sales after joining Chaldal.<sup>12</sup> This sensitivity of the regression results to the way that firm size is measured could be because there is considerable size variation among Chaldal sellers with more than 20 employees.

> 10The corresponding regression results are shown in table A.2

> 11See table A.3

> 12See table A.7.

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Figure 10: Impacts by firm size on Chaldal <!-- Start of picture text --> Estimated coefficient on dummy for firm size <= 20 employees<br>with 95% CI, for various outcomes<br>Sales increase Employment increase Incentive to register increase<br>Tax visibility increase Customer trust increase Easier access to finance<br>Bank loans increase<br>.4<br>.2<br>0<br>-.2<br>-.4<br><!-- End of picture text --> One dimension along which smaller Chaldal sellers appear to experience a smaller impact is the adoption of new business practices. Sellers with 20 or fewer employees are significantly less likely to report an increase in the use of digital technologies and improved or new equipment or facilities after joining the platform (figure 11). This pattern is robust to controlling for other seller attributes.<sup>13</sup>

> 13The regression results are shown in tables A.4, A.5, A.6. Figure 11 corresponds to the specification in table A.5. The regression outcomes include an index of change in business practices, generated as the sum of the binary responses to the six questions regarding changes in business practices upon joining Chaldal. For example, a firm’s business practices index is equal to 6 if it responds in the affirmative to all six questions: improved or new marketing methods, improved or new accounting methods, improved product quality or packaging, greater use of digital technology, improved management of inventory or logistics, and improved or new equipment or facilities.

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Figure 11: Impacts on business practices by firm size on Chaldal <!-- Start of picture text --> Estimated coefficient on dummy for firm size <= 20 employees<br>with 95% CI, for various outcomes<br>Marketing Accounting Packaging<br>Digital technology Logistics Facilities<br>Index of business practices<br>.5<br>0<br>-.5<br>-1<br>-1.5<br><!-- End of picture text -->

# **4.2 Heterogeneity in the Impact of Joining Daraz**

In the case of Daraz, too, the patterns suggest that smaller firms benefit equally or potentially more from participation in the e-commerce platform. A series of regressions compare Daraz sellers with fewer than 5 employees to larger sellers.<sup>14</sup> After controlling for time on Daraz in years, firm age in years, and country fixed effects, the coefficient on fewer than 5 employees is marginally significant only for the outcome of more flexibility after joining Daraz (figure 12).<sup>15</sup> For this particular outcome, smaller firms appear to benefit more from joining Daraz.

> 14The size threshold (5 employees) is different from that chosen in the case of Chaldal (20 employees) because of the difference in the size distribution of Chaldal and Daraz sellers. There are very few Chaldal sellers with 5 or fewer employees.

> 15The corresponding regression results for these outcomes are shown in table A.9. Table A.8 shows their raw associations with size.

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Figure 12: Impacts by firm size on Daraz <!-- Start of picture text --> Estimated coefficient on dummy for firm size <= 5 employees<br>with 95% CI, for various outcomes<br>Business grown Registered for Daraz More flexibility<br>Easier to WFH Connect Customer trust<br>Easier Loans<br>.3<br>.2<br>.1<br>0<br>-.1<br>-.2<br><!-- End of picture text --> There is also no evidence for differential effects of firm size on the use of Daraz features such as product management features, order management features, reviews, customer messenger, financial statements or promotion tools (figure 13).<sup>16</sup>

> 16The corresponding regression results for these outcomes are shown in table A.11, while table A.10 shows their raw associations with size.

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Figure 13: Use of platform features by firm size on Daraz <!-- Start of picture text --> Estimated coefficient on dummy for firm size <= 5 employees<br>with 95% CI, for various outcomes<br>Product management Order management Review<br>Customer messenger Financial statements Promotion tools<br>.2<br>.1<br>0<br>-.1<br>-.2<br><!-- End of picture text --> In terms of directly looking at registration status as an explanatory variable, we find that registered firms are less likely to value the flexibility and ability to work from home associated with Daraz (figure 14). Put otherwise, unregistered firms benefit more from participation in the Daraz e-commerce platform in terms of flexibility and the ability to work from home. This result is robust to the inclusion of controls for time on Daraz in years, firm age in years, and country fixed effects.<sup>17</sup>

> 17The corresponding regressions are shown in table A.13, with raw associations in table A.12.

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Figure 14: Impacts by registration status on Daraz <!-- Start of picture text --> Estimated coefficient for registration status<br>with 95% CI, for various outcomes<br>Business grown Registered for Daraz More flexibility<br>Easier to WFH Connect Customer trust<br>Easier Loans<br>.2<br>.1<br>0<br>-.1<br>-.2<br>-.3<br><!-- End of picture text -->

# **4.3 Heterogeneity by Tenure: Learning on E-Commerce Platforms?**

The surveys suggest that sellers who have been on the platform for a longer period of time are more likely to experience some of its impacts. Given firm size and age, an additional year of tenure on Chaldal is associated with a 6-7 percent higher probability of having expanded employment since joining the platform (figure 15). Firms that have been on a platform for more years are also more likely to report incentives to register, increase in bank loans and an improvement in business practices (figure 16).<sup>18</sup> These patterns suggest that firms learn how to use the platform better over time. An alternative explanation is that sellers who are unable to benefit from being on the platform selectively exit the platform.

> 18The plotted estimates of the coefficient on time spent on Chaldal are from the regressions shown in tables A.2 and A.5.

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Figure 15: Impacts by time spent on Chaldal <!-- Start of picture text --> Estimated coefficient on time spent by firm on Chaldal<br>with 95% CI, for various outcomes<br>Sales increase Employment increase Incentive to register increase<br>Tax visibility increase Customer trust increase Easier access to finance<br>Bank loans increase<br>.1<br>.05<br>0<br>-.05<br><!-- End of picture text --> 22
Figure 16: Impacts on business practices by time spent on Chaldal <!-- Start of picture text --> Estimated coefficient on time spent by firm on Chaldal<br>with 95% CI, for various outcomes<br>Marketing Accounting Packaging<br>Digital technology Logistics Facilities<br>Index of business practices<br>.4<br>.3<br>.2<br>.1<br>0<br><!-- End of picture text --> A similar association with tenure is observed in the case of Daraz. Given size and age, sellers that have spent more years on Daraz are more likely to report an increase in sales (figure 17). They are also more likely to report using Daraz features such as order management, product reviews, customer messenger, financial statements and promotion tools (figure 18).<sup>19</sup>

> 19The plotted estimates of the coefficient on time spent on Daraz are from the regressions shown in tables A.9 and A.11.

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Figure 17: Impacts by time spent on Daraz <!-- Start of picture text --> Estimated coefficient for time spent on Daraz<br>with 95% CI, for various outcomes<br>Business grown Registered for Daraz More flexibility<br>Easier to WFH Connect Customer trust<br>Easier Loans<br>.1<br>.05<br>0<br>-.05<br>-.1<br><!-- End of picture text --> 24
Figure 18: Impacts by time spent on Daraz <!-- Start of picture text --> Estimated coefficient of time spent on Daraz<br>with 95% CI, for various outcomes<br>Product management Order management Review<br>Customer messenger Financial statements Promotion tools<br>.1<br>.05<br>0<br>-.05<br><!-- End of picture text --> In Table A.14, we look at the impact of tenure on Daraz on registration status, as a rough test of the hypothesis that participation in digital platforms induces firms to register their businesses. We find that time on Daraz is positively correlated with business registration – that firms on Daraz are less likely to report being unincorporated – but has little impact on VAT registration. This result is robust to the inclusion of controls for firm age and country fixed effects.

# **5 E-commerce Sellers Are a Selected Group of Firms**

The Chaldal and Daraz surveys reveal that while the firms selling on these e-commerce platforms may vary substantially in terms of size and other key characteristics, they are a selective group of firms. Specifically, their owners or senior managers have above average levels of education and are also comparatively young.

Consider the case of Chaldal. Since the average size of Chaldal sellers is quite large, it would be misleading to compare Chaldal sellers to typical small and micro firms in Bangladesh. A recent World Bank survey of small to large-sized Bangladeshi manufacturing firms provides a more useful comparison point (Gu, Nayyar and Sharma (2021)). Note that the sample of the World Bank manufacturing sector survey is tilted towards large firms, compared to the Chaldal seller sample: 86 percent of the firms in the former have more than 20 employees, compared to only 60 percent in the latter. And yet, only 54 percent of the senior managers of the firms in the Bangladesh 25
manufacturing sector survey have a graduate (B.A.) or higher degree, as opposed to 79 percent of the owners/managers of the businesses selling on Chaldal. More than 90 percent of the firms in the Bangladesh manufacturing sector survey are managed by the owner or their family, in comparison to 82 percent of Chaldal sellers. Thus, firms selling on Chaldal have higher levels of managerial education and a lower prevalence of family management than typical manufacturing firms in Bangladesh.

Given the small average size of Daraz sellers, a recent representative survey of family business in India may be an appropriate comparison sample for the Daraz survey.<sup>20</sup> In India, among family businesses with at least one hired worker, only 25 percent of the owners have tertiary (above senior secondary) education. In comparison, the majority of Daraz sellers have tertiary education. The average age of the owners of Indian family businesses is about 45 years, compared to 30 years in the case of Daraz sellers. Daraz sellers may be small, but they are a highly educated and youthful subset of small business owners in South Asia.

# **6 Conclusion**

The quantitative case studies presented in this paper have contributed to the scant evidence base on the ways in which selling on e-commerce platforms impacts small firms in developing countries. The main channel of impact highlighted by the surveys is the greater access to product markets enabled by the reduction in transactions costs. This finding is significant in light of the growing evidence that there are important demand-side constraints to firm growth, such as the high costs of gaining initial market access (Atkin and Osman (2017)) and slowly building a customer base (Foster and Syverson (2016)). The case studies also suggest that this easing of demand-side constraints to growth increases e-commerce sellers’ incentives to formalize and undertake complementary changes to business practices and technologies. Strikingly, micro and small-sized firms from the informal sector report these benefits to the same extent as do medium to large-sized formal firms.

The case study approach used in this paper has helped assess the potential mechanisms through which firms are able to reap benefits from using e-commerce platforms. But being based on the subjective reports of e-commerce sellers and lacking a control group, this approach is not suitable for causal impact evaluation. Our findings thus highlight the need for more quasi-experimental or experimental research into estimating the impacts of e-commerce on firms in developing countries.

The selective use of e-commerce by firms in South Asia is also worth stressing. This issue is not limited to e-commerce platforms. Interviews with other types of digital platforms that facilitate business to business (B2B) transactions also suggest that for a number of reasons, their usage is concentrated at the upper end of the spectrum of small firms. For example, Power2SME, a B2B platform in India that aggregates orders of raw material for small firms, requires firms to have a turnover of at least 50 million Rupees, a threshold well above the revenue of most small informal firms. This is because aggregating orders when each order size is very small is prohibitively costly even with the digital platform technology. In addition, a key reason highlighted for the lack of use of the platform is that a majority of small firms prefer to purchase their raw materials through informal networks. This would remain a (transactional) barrier even if a platform such as Power2SME were to offer subsidized logistics, delivery services and access to financing. In fact, Power2SME has an active strategy of outreach to SMEs and microenterprises: it identifies industrial belts in the country

> 20The World Bank COVID Module of the Center for Monitoring the Indian Economy (CMIE) Consumer Pyramids Household Survey (CPHS), January-April 2021 wave.

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and reaches out to their industrial cluster associations to offer them its services and support.<sup>21</sup> These outreach efforts from private digital platforms signal the scope for many complementary public policy interventions ranging from improving access to digital infrastructure, efficient postal and parcel service and access to finance, to information and support campaigns to make online economic transactions more familiar and trustworthy to the informal sector. In sum, governments’ backing for these complementary factors and an active approach to the regulation of the digital economy will remain important going ahead.

> 21Power2SME outreach initiatives include: a) SME Transformation Camps which aim to empower SMEs digitally and educate SMEs on technological means to address the issues related to raw material procurement, research and innovation, taxation, working capital loans and more; b) webinars which have reached thousands of SME; and c) linking up with Wadhwani Foundation to bring to the clients of the Foundation the Sahayata Business Stability program, which provides up to 10,000 SMEs with transformational business consulting at a highly subsidized rate, equipping them with the expertise necessary to survive, stabilize, and grow in the face of market challenges.

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