INTERNATIONALBANK FOR WORLD BANK R E T C N O E N STRUCTION PM AND DEVELO March 2003 No. 21 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region CHILE: ACCELERATING E-BUSINESS FOR SMALL BUSINESS INNOVATION AND GROWTH James Hanna Small businesses are important for employment creation and work is a part of a larger forthcoming sector report by the growth in Chile. They provide 73 percent of all private sector Bank on Chile's new economy. employment; half in microbusinesses (own account and firms employing fewer than 10 employees). But small business average growth was only 2.8 percent from 1994- E-Business: Catalyzing Competitiveness 2000, less than half the 6.4 percent of large businesses. President Ricardo Lagos considers Chile's incorporation into `E-business' refers to the progressive process (see Figure 1) the global and digital economy a top priority: "... we are of (1) investment in information and communications discovering that technology will enable us to surmount the technologies (ICTs) such as personal computers, software, geographical disadvantages of our nation. It is our obligation Internet connectivity, and networking; (2) their application to to take advantage of it to the fullest." (Inauguration speech, business processes like market research, production, finance Santiago Times, November 24, 2000) The national strategy, and management; and (3) transactions between businesses "Chile: Toward the Information Society" lays out five key and other businesses, households, and/or governments over areas for digital development: technology infrastructure, computerized networks. According to studies in Chile (see community and business access; the legal framework for electronic transactions, education; and government Figure 1 - Model of E-Adoption Ladder services. Responding to this agenda, the transformed World Bank's "Chile: Business organizations Benefits Accelerating E-Business For open systems of e-business Small Business Innovation and information for ordering of customers, suppliers Growth" (November 2002) e-commerce production inputs and partners / new profiles Chile's small business sales/promotions from other business models website sector, benchmarks e-business and receiving sales businesses, sales to based on inter- place in orders using ICT, businesses and working between progress in Chile in relation to e-mail worldwide often from the consumer, order organizations and OECD countries, reviews public efficient market- consumer sector, fulfillment, internal individuals policies and programs emerging internal- window on and payments for management external world- on and off-line processes, and in Chile to promote e-business communic wide activities management of among small firms, and identifies ations suppliers inbound and some lessons from experience. outbound logistics Finally, it suggests measures that Extent of organizational might accelerate and deepen e- AdaptedfromCISCO LedInformationAge change &sophistication PartnershipStudy on E-commerce inSmall Business business adoption in Chile. This 1 Table 1) and OECD countries, when well integrated into E-Business in Chile: Progress and firms' business practices and organization, e-business can Constraints Table 1. Chile E-business Frequency Chile's Internet access rates and access growth are compa- (Percentage of all firms) rable to OECD country averages, except among % Sell on Buy on microbusinesses.. There are more pronounced gaps in web Size Purchases Internet Internet on Internet site use, which is markedly lower among micro, small and medium businesses in Chile (9-36% of all firms) than in Micro 4 10 20 digitally advanced countries like Denmark, Germany and the Small 14 16 8 United Kingdom (50-60%). Shallow digital integration in Medium 20 20 8 business processes is also reflected in low use of specialized Large 29 27 5 software applications for data and business management, and the lower incidence of online transactions. Total 6 11 18 Source: Centro Economía Digital, Santiago Chamber o Comerse, 2002 Constraints on e-business development by small business in Chile are generally similar to many OECD countries. The catalyze increased business process innovation and predominant constraints involve awareness-building, skills productivity, leading to higher competitiveness and growth. development, access to ICT-based business services, and financing e-business innovation. Network infrastructure Small businesses typically adopt digital solutions in stages. services and the security of electronic transactions are The first stage involves introducing email as a basic significant factors as well. The complexity of mainstream communication tool and the Internet for information ICT systems also presents substantial barriers to e-business searches, followed by development of websites for more adoption in Chile, as in many other countries, especially for focused information-sharing related to marketing, product the low-income microbusiness sector. design, etc. It is usually from this point that the re- engineering of business processes begins. The third step involves active online sales promotion and taking sales Awareness and Training orders and payments on-line. The fourth stage incorporates digital applications for ordering production inputs, filling orders, logistics and internal management improvements. In late 1999, the University of Chile studied businesses that OECD research shows that more small business were not using the Internet. One third said it was because of entrepreneurs climb the e-business ladder to improve costs, but 23 percent did not perceive its utility, and 38 productivity than to expand their markets (see Figure 2). percent said they had no particular reason to use it, had no interest, or were not knowledgeable about the subject--a full In Chile, a Ministry 61 percent who of Economy survey Figure 2 - Chilean MSME Perceptions of Contributions could not identify of 3,134 firms in of the Internet To Business Development the business benefits March-May 2002 of digital technology reflects a similar (Saenz 2000). finding: small busi- nesses perceive the Increases int'l. trade While Chile is strongest contribu- making significant Increases sales tion of the Internet efforts downstream to their businesses Reduces Costs to build access to as increased com- digital tools through Improves information petitiveness, fol- facilities and portals, on client market. lowed by improved its current efforts Increases market information competitiveness upstream to generate on clients. Prelimi- basic e-business 0 0.5 1 1.5 2 2.5 3 3.5 4 nary results from awareness among OECD cross-coun- the very large try analysis show that e-business reduces the costs of trans- number of small businesses need strengthening. In OECD actions linked to production and distribution, and enables countries, this is the most common e-business promotion firms to manage their supply chains more effectively. In activity. Design of awareness-raising programs could Chile, recent regression analyses done by the Santiago benefit from benchmarking of programs in leading OECD Chamber of Commerce also found a positive and significant countries in this field, such as UK, Scotland, Sweden and relationship between sales and operational profitability with Ireland. These programs should include: respect to both ICT intensity and digital functionality. 2 · expanded information campaigns and workshops for programs to better support building e-business capacity. In business clusters and trade associations that facilitate addition, more diversified private sector financing of new e- "peer-to-peer" exchanges of experience among small business adoption initiatives by small businesses should be business entrepreneurs; encouraged. This should include consideration of (i)incentives for mobilizing private venture capital for · development of cases successful e-business adoption individuals, early stage growth firms and spin-off companies by Chilean small businesses; and to improve their potential for successful commercialization; and (ii) promoting online diagnostic and advisory tools that · training content focused on specific business require- help financial institutions to assess the potential benefits of ments rather than on technology use that emphasizes e-business, determine a firm's e-readiness, develop and business value-added instead of simply information implement customized e-business strategies, and help assess search, and helps en- financing requests. trepreneurs to inte- grate digital tools into their businesses. Legal Framework Access and Chile was the first Latin American country to privatize networking its telecommunications sector, and the sector is quite Given the breadth of the competitive. Basic small business sector in t e l e c o m m u n i c a t i o n s Chile, their limited infrastructure has improved purchasing power, and network access since the technical privatization. The fixed requirements of doing e- telephone network has been business, sustainable and fully digitized since 1993 and effective intermediaries are critical to accelerate e-business Chile's ICT trade policy is the best in the region, with free development. Telecenter models which emphasize market access to ICT goods and services thanks to zero connectivity have been the favored approach, particularly in tariffs on PCs and peripherals and a uniform 7 percent tariff Latin America; yet they have offered minimal added value to on telecommunications equipment. In January 2002, Chile's entrepreneurs and have poor records of financial Congress approved a bill establishing a framework for sustainability. Continued efforts are needed in Chile to electronic transactions. The new law recognizes digital expand their use to a larger segment of the sector, with signatures, e-documents and e-contracts, and defines the greater emphasis on sustainability and services that yield obligations of institutions providing electronic certification. higher business value-added. Specifically, Infocenters for Still, additional steps are needed to help accelerate e- small business need to: business adoption by small business, including: · develop more local and regional content relevant to · adopting and disseminating simplified implementing small business, and training programs that promote en- regulations for electronic transactions to promote un- trepreneurs' use of good business practices; derstanding and maximum uptake by small business; · adapt software functionality and develop e-marketplace · helping to deepen the market for certifying identity and tools that focus on specific small business sectors; and confidentiality of a variety of electronic communica- tions and transactions, using trust seals, quality labels · improve feedback mechanisms on client needs and sat- and other mechanisms that complement Government's isfaction, and better measure the performance of opera- recently launched "e-certchile"; and tors and managers of Infocenters. · expediting amendments to Chile's privacy act covering the use of personal data which make specific reference Financing e-business innovation to e-business. Chile has many programs to support business innovation in general and digital development in particular. Four main Lowering the ICT Complexity Barrier programs encourage technological innovation and are generally well received, although many small firms are unaware of them. Better dissemination of these programs Most mainstream ICT systems have been designed in OECD should be incorporated into awareness-raising and training markets, and generally do not well suit the capital and skills 3 mix of lower income groups in emerging markets. This Overall Conclusions presents major barriers to e-business adoption by small businesses. Although Chile is not a large market, it would Although the policies and legal framework governing provide a very good environment for developing and testing network access and electronic transactions in Chile are simplified software (to facilitate business planning, market relatively advanced, the focus, approach and dimensions of research, marketing, financial analyses, etc.) and new existing programs need to be improved to fully tap e- devices, such as applications driven by voice and touch business adoption as a tool for small business innovation and screen recognition, that micro-businesses could learn readily growth. Much greater effort is needed to generate basic e- and use easily. business awareness and e-business skills among the many small businesses in a sector- and location-specific manner. The Government, in cooperation with the local ICT industry More emphasis should be given to building and networking and small business groups, should launch a research and the capacity of intermediaries--trade associations, NGOs, development program for its own market (and potentially banks, universities and the ICT industry--to deliver e- others) to develop commercially viable applications and business support services. Small business-dedicated delivery systems particularly adapted to micro and small Infocenters need to reach out to a larger segment of the business needs.. sector, adapt applications to individual client needs, , and improve financial sustainability of services provision. A E-Government for Small Business much stronger effort is also merited in R&D to help lower the ICT complexity barrier faced by small businesses. Existing business-related activities supported by the Chilean government's electronic services can be grouped into 4 major types: (i) transactions, such as business registration References and other interactive forms, taxation and social security- related transactions; (ii) information collection and provision Agapitova, Natalia and Lauritz Holm-Nielsen 2002 "Chile-- of information, such as business and corporate legislation, Science Technology and Innovation." LCHD Paper Series local government information and building zoning; (iii) Department of Human Development. Latin American and government procurement; and (iv) government consultation Caribbean Region. World Bank 2002 activities, such as calling for inputs into new planning or zoning initiatives. Part of this e-government effort supports Saenz, Nicolo Gligio 2000. "Análisis y propuestas para la small business development, for example, through: diffusion de Internet en las pequenas y medianas empresas latinoamericanas," Inter.-American Development Bank. · www.compraschile.cl - a system of information on August. public purchases and contracting which covers more than 100 public services in Chile. Companies that wish to do business with the public sector need register only Learn more about this program once. The full report: · www.sii.cl - the tax collection agency web site distrib- "Chile: Accelerating E-Business for Small utes free software for preparing annual tax returns. Business Innovation and Growth" Nearly 50 percent of taxpayers have paid income tax by the via the Internet, and 26 percent of all returns for 1999 Private Sector Development Cluster were submitted through the Internet. Finance, Private Sector and Infrastructure Management Unit Latin American & Caribbean Region · www.redsercotec.cl - SERCOTEC's portal aims to sup- The World Bank Group port small business management, facilitate new busi- is available for download at http://www.worldbank.org/lac, ness opportunities and encourage business networks by or by email request to en_breve@worldbank.org. providing access to training courses, consulting ser- vices, and management support; and About the Author · "VideoNegocios" and "Inter-PYME" - ProChile's ex- James Hanna is a Lead Operations Officer in the World port development programs oriented toward providing Bank's Latin America Caribbean Region and is the Team better understanding of markets and management sup- Leader for the Project. port and training. About "en breve" Subscribe to "en breve" by sending an email to en_breve@worldbank.org 4