Digital platforms fundamentally alter how business is conducted. This is particularly true for small businesses because platforms help them find potential buyers worldwide. No wonder recent unicorns like Nykaa have emerged from these online businesses.

A fundamental challenge that small businesses face is that potential customers need to know that the business exists and how it is different from its competitors. Small businesses must prove to potential buyers that they can deliver what is promised. Further, logistics such as payment, shipping and delivery must be managed for transactions. All these factors add significantly to the entry and scaling-up costs for small businesses.

Digital platforms reduce these costs for small businesses through targeted advertising and logistics support to facilitate entry and scaling up. Small businesses would have had to rely on more expensive and less effective conventional advertising such as pamphlets and radio if these digital platforms were not available.

While the reliance on digital platforms is increasing worldwide, the tussle between digital platforms and regula- tors has also intensified over the years. Across the world, regulators are becoming increasingly concerned about how platforms treat complementors companies who do business on the platforms.

While big complementors, regulators and the platforms are heard, one voice is systematically ignored: the voice of nascent small businesses that rely on these platforms for advertising and sales. Traditional wisdom is that platforms set terms for complementors because those businesses do not have a choice.

Therefore, to preserve the interests of small businesses, regulations are required. Is this correct?

We surveyed close to 1,500 small na- scent businesses for our September 2023 report, ‘Small Firms and Digital Platforms’. The intent was to understand how these small businesses use digital platforms for their survival and scaling-up strategies. This is what our study found:

  1. One in four businesses- a high proportion for small and young companies that use digital platforms have expanded to more geographies, including foreign countries, than those that did not use such platforms.
  2. Small businesses are multihoming (using multiple platforms) on advertising and sales platforms.
  3. The average number of platforms a business is present on is close to three for both advertising and sales.
  4. Multi-homing occurs not just across established platforms but also between established and emerging platforms.
  5. Newer platforms can, and have, entered digital markets, and established themselves by getting business from small companies.
  6. Platforms offer multiple functionalities to these businesses to improve their visibility and business choose accordingly. Some companies gravitate toward image-based platforms, while some to text-based ones. For a business, the choice of platform boils down to what they perceive as the image of their product and which strategy yields the highest returns. In that sense, digital platforms may complement each other even while competing.

These results have broader policy Implications.

  1. For any regulation to be effective, we must understand the costs and benefits of the proposed intervention to the local economy.
  2. While we can learn from other juris- dictions, we must test those theories in the Indian context.

Our motivation for the study was to understand the digitisation of small busi- nesses. The value these platforms bring to small businesses differs significantly based on the business’ country of origin. Higher frictions to the flow of informa- tion and fragmented logistics networks are more likely in emerging economies than in more developed ones. A digital platform’s value to a small business in an emerging economy like India is likely higher than that of an advanced economy.

For India to grow inclusively, it must encourage small businesses. One way to do that is to facilitate small businesses moving online to scale up and expand their marketing reach. Any regulation of such platforms must consider the dynamics of such businesses and how platforms are a channel for these businesses to grow.

Our study unambiguously shows that a better regulatory approach in the Indian context is to improve the environment for emerging platforms, easing their entry. Any attempt at regulating the established platforms should keep these findings in mind.

Chadha is fellow, India Development Foundation, Pingali is faculty member, IIM Ahmedabad, and Sokol is faculty member, University of Southern California, US.

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