Can Online Marketplaces Reduce Barriers to Growth for Small Firms?

This project asks whether large, semi-coordinated online marketplaces can provide the benefits of expanded market access with much lower costs than foreing trade expansion.

Small and medium enterprises (SMEs) play an enormous role in many developing countries. Yet, individual small firms tend to stay small. One explanation for this failure to grow is that SMEs lack sufficient market access. Recent empirical work suggests expanding small firms' access to foreign can introduce new skills and expand firms' production/profitability. However, setting up trade with foreign markets can be a slow, costly and complex process, thus remaining out of reach for many SMEs. This project asks whether large, semi-coordinated online marketplaces can provide the benefits of expanded market access with much lower costs than foreing trade expansion. More specifically, it wishes to: evaluate the extent to which online marketplaces create new opportunities for trade; understand firms' constraints when facing market-access expansion; and determine how markets/policymakers can assist firms in meeting greated demands in quantity and quality.To answer this question, the researchers are partnering with Jumia Corporation in Kenya, the first and largest online marketplace on the African continent.

Building upon anecdotal evidence that a small share of invited SMEs expands onto online marketplaces, this project will first examine what determines/inhibits firms' adoption using survey and secondary data. Then, two different randomized experiments will be used to answer the research questions. Firstly, out of a sample of 500 potential target SMEs, identified by Jumia, 250 will be assigned to a specifically targeted recruitment campaign. Secondly, among firms who already use the platform, several different treatments will be offered, to reduce some of the frictions that may plague firms using the platform. Thus, some firms will be offered a loan of about 500-1000 USD, to minimize stock-outs and improve production processes. Others will be offered a sales guarantee during peak demand, conditional on the firm meeting a stocking target. Lastly, other firms will be offered training for managing product shipping and delivery.

Small firms play an enormous role in economies throughout the developing world. At the same time, online marketplaces are rapidly expanding everywhere, Africa included. It only makes sense then to better understand the benefits and costs that these burgeoning marketplaces offer, in addition to identifying the barriers that prevent small firms from taking advantage of these new opportunities. This project will shed light on many of these policy questions, extending the existing policy conversation on the constraints of small-firm growth into a new and important direction, that of online marketplaces.