LocationsInformal businesses and the shift to digital: What we learned from small enterprises joining the digital economy
August 29, 2023
By Alberto Cottica, Research and Development Specialist, UNDP Accelerator Labs
and Eduardo Gustale, Monitoring, Experimentation and Learning Specialist, UNDP Accelerator Labs
Digitalization of informal businesses increases their visibility and legibility to the rest of society.
Businesses across the planet are embracing digital tools. Digital technology is changing the way they do everything, from logistics to accounting, from payments to marketing. But what about micro- and small businesses that make up the backbone of many Global South economies? Is the digital revolution a chance for them to catch up, or is it leaving them further behind? Some months ago, 13 UNDP Accelerator Labs ran a survey to better understand how micro and small enterprises in the Global South, many of which are not formally registered and therefore part of the grey economy, have been using Internet services in their everyday activity and more specifically during the pandemic. While the full results and open-source datasets are available here, we are eager to share some top line results and exciting findings in this blog post.
We think the results of this survey are promising because if confirmed by further research, this shift to digital could open new opportunities to forge a more inclusive economy, especially for vulnerable informal workers in the Global South. This survey fits in with the work for the research and development focus of the Accelerator Labs on the relationship between digitalization and formalization of the economy.
The informal economy is the world’s biggest employer: 60 percent of workers worldwide, and as many as 90 percent in the lowest-income regions, are informally employed. The digitalization of informal businesses increases their visibility and legibility to the rest of society. For example, you could think of estimating the number of informal businesses in a city or region by counting the number of vendors on Facebook Marketplace for that city or region. From the same data, you could infer the activities they are involved in, and even reach out to them to offer income support, training or access to services.
Most micro- and small businesses use Facebook and WhatsApp
The data consists of 1,013 questionnaires, completed in the summer of 2022 by micro- and small businesses (over 80 percent of them have only one or two employees) in 13 countries of the Global South such as Ecuador, Guatemala or Uganda. Over 60 percent of these businesses are not registered and more than 80 percent report using digital tools such as Facebook Marketplace. Respondents in Ethiopia and Haiti have the lowest digitalization levels while those in Bangladesh and Morocco have the highest, close to 100 percent.
In all countries, by far the most used tools are Facebook and WhatsApp, both of which support businesses via e-commerce functionalities like Facebook Marketplace and WhatsApp for Business. This is not entirely a surprise. Helped by the COVID-19 pandemic, Facebook Marketplace achieved one billion users in 2021. Meta enjoys a dominant position among informal businesses in the global South: around 90 percent of the micro- and small businesses that use any digital tools report using Facebook and WhatsApp. While these digital tools offer new opportunities for informal businesses to sell their goods online especially when economies went in lock-down, their dominant position also raises concerns and implies potential risks for data protection, privacy and anti-competitive behavior.
Female entrepreneurs are more digital, but face barriers to formalization
The data allows us to compare a business’ level of formalization with its uptake of digital tools and the entrepreneur’s gender. We find that businesses that are more formal also tend to be more digital, but the correlation is not so strong as you might expect. Additionally, female entrepreneurs are more likely to use digital tools in their businesses, but also more likely to own a fully informal business. Digitalization, then, is not a surefire shortcut to formalization, certainly not for women.
Micro- and small businesses find digital tools helpful and plan to continue using them
The questionnaire asks whether, and how, the use of digital tools had helped respondents run their business in the year before the survey. 80 percent of respondents report that digital tools have been of at least some help. Around 65 percent report using them to find new customers; about half report that digital tools have directly helped them increase their sales.
As part of our ongoing work to better understand the digitalization of the informal economy, the Accelerator Labs found that the COVID-19 pandemic forced the hand of many informal businesses. As they could no longer rely on their in-person modes of operation, many businesspeople had to adopt new ways of working that involved using the Internet. For example, informal agricultural producers in Malaysia turned to WhatsApp to sell their produce during lockdowns. This new survey confirms the finding, but also finds that over 95 percent of the businesses have continued using these digital tools after COVID-19 restrictions were lifted – and plan to continue to do so. In the Malaysian case cited above, the community expressed great sense of pride in their achievement after successfully raking in revenues and profits from Christmas sales, despite COVID-19 travel restrictions. They acquired a new capability and are not going to let it go. It looks like the informal businesses have joined the digital economy to stay.
Addressing persistent issues and those who remain left behind
Overall, owners of micro- and informal businesses report a positive experience in adopting digital tools. Despite this, problems remain. Almost 20 percent of respondents report not using any digital tools in their businesses. The main reasons for non-adoption appear to be a lack of digital literacy; expensive and/or bad Internet access services; and negative experiences with digital tools. Most bad experiences refer to scams or fraud. For example, in Bangladesh, a business owner wrote that a competitor has put in false orders and several respondents mentioned fake customers approaching their Facebook profiles. Another category of negative experiences relates to respondents feeling overwhelmed using digital tools. For instance, a business owner in Peru shared a sense of being overwhelmed by having to deal with 24 hours of online orders and the physical effects of spending too much time in front of screens.
In conclusion, our survey suggests that digital tools are being taken up by informal businesses in the Global South, contributing to efficiency and productivity gains. However, not everyone is reaping the benefits of the digitalization of micro and small enterprises. Female entrepreneurs and entrepreneurs with weaker digital skills find themselves at a disadvantage. We are asking the question, how can digitization benefit us all?
The full analysis, as well as the data supporting it, is available in the report. If you know of any data or observation that could help us enrich this picture, please get in touch.
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The UNDP Accelerator Labs who took part in the survey are Bangladesh, Ecuador, El Salvador, Ethiopia, Fiji/Vanuatu, Guatemala, Haiti, Mexico, Morocco, Namibia, Peru, Syria, Uzbekistan. We thank Paola Costantino; Dean Mohseen; Najoua Soudi; Ana Grijalva; Marissa Asen; Adhamjon Kuchkarov; Kenda Alzaim; Netsanet Mekuria; Ramiz Uddin; Mariana Olcese; Klariksa Moodley; Okelo Fekadu; Yrika Maritz, Berna Mugema; Luís Cervantes; Antonie Pierre; Victor Tablas; and Lorena Moscovich, for their participation and Sebastian Meyer and Hugo Martinez for their support with data analysis.