Ecommerce is a global phenomenon. More than 1.3 billion people worldwide buy goods and services online, making digital enterprises some of the most high profitable companies of all time. However, small and medium-sized businesses in developing countries struggle to access the international market.
In an effort to increase global trade, Naray Law was commissioned by the International Trade Center (ITC) — a United Nations Agency —to write a research paper about how small companies and solo entrepreneurs in Africa should conduct business to access the US and European markets.
This was an extraordinary opportunity for Naray Law to work closely with a United Nations Agency. The result of our hard work was the publishing of Building Bridges to New e-Commerce Markets: A Blueprint for Small and Medium-Sized Enterprises in October 2020.
In this article, I explain the problems we found and how adapting your ecommerce business structure can help to improve international trade.
What is the Issue for Small and Medium-Sized Businesses?
Firms in developing countries find it difficult to reach markets outside of their locality. This has nothing to do with the quality of their products and services, and more to do with the legalities and restrictions imposed on trade.
Countries in Africa are typically excluded from global payment services — such as PayPal — and struggle to access major ecommerce marketplaces like Amazon. As a result, the businesses in these excluded countries are missing out on a great deal of revenue. If they do find a way to access key markets, VAT (value-added tax) number and tools to deal with customs duties could have a serious effect on profits and long-term viability.
What Solution Did Naray Law Find?
There are many benefits for companies when they operate as multinationals. When a subsidiary, or a new company, adopts the legal structures of another country, they can trade as a local agent. In effect, many of the challenges that SMEs face breaking into an international market will be removed.
Some of the more common problems that can be resolved include:
- Ownership of a foreign bank account
- Exclusion from online payment services
- Restricted marketplace access
- Customs duties
However, there are costs that enterprises must consider first. A business in a developing country would have to justify the costs of expanding into international territories before administering a foreign structure.
If an expansion into the US, UK and EU can be justified, Naray Law discovered a business would see advantages such as:
- Access to Local Service Providers: There are many services that are only available to organisations operating in North America and Europe. These include: payment solutions and easier access to online marketplaces. If a subsidiary (or a new entity) also has a local address, they may gain access to transport, insurance and marketing at a locally competitive rate.
- Direct Market Access: There are fewer — or in some cases, no — intermediaries needed to enter the market. This will save businesses on costs and allows for a faster trading process.
- Better Import Process Control: It’s easier and potentially more cost-efficient to declare customs duties and VAT once you have a local presence. The import process is simplified as each company has its own registration, identification and VAT numbers. In addition, VAT refund for investments and expenses in the new country is possible.
- Control of Distribution Channels: By joining local associations and obtaining certificates offered only to local organisations, the international structure of the company could easily satisfy compliance laws and build trust.
- Improved Logistics: A local address makes it more straightforward to contract a logistics provider.
How Should SMEs Structure Their Ecommerce Business?
When determining the viability of expanding into an international market, smaller businesses in developing countries should ask themselves five questions:
Is an International Structure Necessary?
Setting up in a different country is expensive, and for very small companies and solo enterprises, the costs may be too much for them at that point in time. If this is the case, it may be worth operating just from their country of origin, gaining experience and insights on the business and the demand for their products.
After achieving sufficient success in their country of origin, then it is worth considering an international structure.
Where is the Best Place to Set Up?
The research paper Naray Law was commissioned to write focused on several European countries and the United States as feasible markets to expand into.
The answer to this question will depend on where the enterprise wishes to conduct business, but it is worth remembering that the United States has one of the most attractive jurisdictions to set up internationally-owned ecommerce business structures.
Which is the Best Legal Form?
Each country has their own rules and regulations. As an example, Swiss associations do not require members of the committee to be residents, which can save on the cost of appointing a local agent to be a company representative.
Capital-based entities such as corporations and limited liability companies in the US, UK and Estonia are attractive due to the ease of setting up foreign ownership structures.
The best legal form will depend on the purpose and priorities of the SME and the laws that govern the company’s country of origin.
How to Choose the Best Distribution Channels?
60% of B2C (business-to-consumer) sales take place on an online marketplace, so it’s imperative to gain access to these as soon as possible. Some markets are tougher to enter than others. Amazon can be a very interesting way to access a foreign market. They offer access to millions of consumers, and by selling using Amazon’s fulfilment service, customers often have complete confidence in the expedited service regardless of who the seller is.
Which Payment Methods are Necessary?
Consumers expect common payment methods to be available when they make a purchase. If they are not, the enterprise may lose out on a sale.
The enterprise will need a bank account to access payment solutions, and a fintech bank may prove to be more accommodating to foreign entrepreneurs.
How Naray Law Can Create Your Corporate Structure for ecommerce
As the author of Building Bridges to New ecommerce Markets and a specialist e-Commerce lawyer, I have an exceptional amount of experience and knowledge in creating corporate structures for SMEs.
My expertise in this sector has been utilised by the United Nations, and I am in the perfect position to help your business.
For more information on my services and how they can assist in the growth plans for your enterprise, please get in contact with our team for a free consultation session.
To read the full report, click here for a PDF Download.