E-commerce and Small Businesses

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1 October 2007 No. 22 Executive Summary E-commerce and Small Businesses Leah Sperer Koret-Milken Institute Fellow

2 About the Koret-Milken Institute Fellows Program The Koret-Milken Institute Fellows Program accelerates Israel s economic growth through innovative, market-based solutions for long-term economic, social, and environmental issues. The program focuses on connecting government, philanthropic, and business resources that are vital to national growth and development. Directed by the Milken Institute Israel Center, the Koret-Milken Institute Fellows Program awards annual fellowships to outstanding graduates of Israeli and international institutes of higher education. Fellows serve yearlong internships at the center of the nation s decision-making the Knesset, government ministries, and other Israeli agencies and aid policymakers by researching and developing solutions for various economic and social challenges. In addition, fellows craft their own policy studies aimed at identifying barriers to economic and employment growth in Israel. The fellows studies, carried out under the guidance of an experienced academic and professional staff, support legislators and regulators who shape the economic reality in Israel. The program offers the ultimate educational exercise, combining real-life work experience with applied research five days a week. Throughout the year, fellows receive intensive training in economic policy, government processes, and research methods. They acquire tools for writing memorandums, presentations, and policy papers, and they develop management, marketing, and communication skills. The fellows participate in a weekly workshop, where they meet senior economic and government professionals, business leaders, and top academics from Israel and abroad. They also participate in an accredited MBA course that awards three graduate-level academic credits that are transferable to other universities in Israel. The course, which focuses on financial and economic innovations, is taught at the Hebrew University of Jerusalem s School of Business Administration by Professor Glenn Yago, Director of the Milken Institute Israel Center and Director of Capital Studies at the Milken Institute in California. Fellows Program alumni can be found in senior positions in the public and private sectors. Some serve as advisers to government ministries while others work at private-sector companies or go on to advanced studies at leading universities in Israel, the United States, and Great Britain. Within the program s framework, more than 80 research papers have been published, catalyzing reforms, reducing barriers, bringing about economic growth, and improving the quality of life for Israeli citizens. The Koret-Milken Institute Fellows Program is nonpolitical and nonpartisan. It is funded by the Koret Foundation, the Milken Institute, and other leading philanthropic organizations and individuals in the United States and Israel. More about the program: Contact us: info@kmifellows.org

3 E-commerce and Small Businesses Leah Sperer KIEDF Koret Fellow E-commerce is increasing around the world, but small businesses in Israel lag far behind. We recommend: Reforming the State Tender Law to allow tenders to be issued online. The Bank of Israel should license Internet banks to facilitate online payment by Israelis. The public and private sectors should offer small businesses information and training in the use of e-commerce. E-commerce in Israel In 2005, e-commerce in Europe totaled $97 billion, 1 and in Australia, $39.6 billion. 2 In the U.S., Business-to-Consumer (B2C) e-commerce in 2007 is expected to total $200 billion. 3 Israel lacks official statistics a problem in its own right but worse, estimates of Israeli e-commerce at the end of 2005 were only $350 million. 4 Consumer use Almost four million Israelis, comprising 72% of the total population above 13, use the Internet. 5 In 2005, 62% of households owned a computer and 49% were connected to the Internet. The percentage of computer ownership and Internet connections in Israel rises with the level of income, indicating that the populations with the greatest purchasing potential are heavy users of the Internet. 6 A demographic mapping of the Internet in Israel supports this conclusion. At the start of 2006, the average Internet user was younger, more educated and with a relatively higher income than the representation of these groups in the total population. 7 Fifty-five percent of Internet users purchase goods and services over the Internet; a percentage that has been on the rise since 2000, as the figures in Table 1 show. Most use the Internet to search for information, so that even those who have not made online purchases are exposed to businesses operating online. 42 [ 1 ]

4 Table 1: Internet Use among Internet Users in Israel, Information search Purchase of goods and services 2000 (June) 2001 (June) 2002 (May) 2003 (November) 2004 (May) 2004 (November) 2005 (Annual average) 2006 (January July) 2007 (January) 70.6% 92% 88% 95.6% 93.5% 93% 95% 96% N/A 20.7% 29% 37% 40.3% 40.4% 42% 41% 60% 55% Source: TNS data quoted at Gal Mor, 1.7 Million Israelis Surf the Net, Ynet, June 17, 2002; Gal Mor, Survey: About 40 Percent of Israelis Surf the Net, Ynet, June 23, 2004; Gal Mor, 3.4 Million Israelis Surf the Net, Ynet, July 12, 2005; Gal Mor, 2.7 Million Israelis Surf Every Day, Ynet, July 31, 2006; Gal Mor, Tim Survey: The Israeli Users are More Diverse, Ynet, January 17, The percentage of Israelis making purchases online in 2005 is not high in comparison with international figures. In Israel, 21% of Internet users, approximately 1.4 million individuals, made online purchases; a figure slightly lower than the EU s 23.1%. 60 Graph 1: Percentage of Individuals Purchasing Online, Czech Republic Spain Belgium Israel EU-25 Average Austria Finland Germany UK Denmark Sweden Source: Based on Gal Mor, 3.6 Million Israelis Surf the Net, Ynet, January 3, 2006; Morag Ottens, Use of the internet among individuals and enterprises (Eurostat, December 2006), p. 6, (July 5, 2007). [ 2 ] 43

5 Business Use The TNS Teleseker survey of 2002 provides the most up to date information about business use of the Internet and online commerce in Israel. According to the survey, among businesses owning a computer, 75% use the Internet and 34% offer online marketing or make purchases or sales. 8 In 2006, 85% of the online trade was divided among 4 competing e-platforms: Nana shops, P1000, Allsale, and Walla!shops. Approximately 150 businesses use P1000 and a similar number use Nana shops. 9 The Zap website offering price comparisons included 793 participating stores in Allprice s index of online stores contains 649 businesses. 11 It appears the B2C market in Israel is relatively centralized and does not yet involve most of Israeli businesses. Because most of the online trading in Israel is currently done through e-platforms, a small number of businesses benefit from the ever-expanding trade. In addition to these platforms, other companies offer independent websites trading through customer-based and specialized sites, but they apparently represent a small percentage of the online market. Government Use In Israel, government use of the Internet is mostly through the e-government project of the Finance Ministry. A wide array of services is offered to Israeli citizens and businesses that seem to be satisfied with such offerings, which save money and time. 12 More important are state purchases: by publishing tenders online the government has saved approximately NIS 300 million since The use of the Internet for tenders has increased transparency, competition, fairness, and the ability of companies to compete for the tenders, as well as reducing administrative costs and improving relations between the government and its suppliers. 14 A wider use of the Internet for tenders is stymied because of tenuous local legal rulings that the Tender Law of 1992 does not cover online tenders, thus requiring the government to obtain special exemptions from the State Tenders Committee before using the Internet. 15 In addition, the government publishes tenders on various ministry websites and all tenders are published on the Israeli Governmental Advertising site, but usually a business cannot apply for the tender online. E-commerce and Small Businesses Small businesses have gradually been learning the importance of using the Internet and electronic technologies to advance their development. Most small businesses in developed countries have a computer and are connected to the Internet. 16 Nonetheless, exploiting these technologies is often more complicated and depends on the size of the business. The gap between small and large businesses in different fields grows as the technology in use becomes more complicated. Many small businesses and micro-enterprises hesitate to adopt e-commerce for sales or for purchases. Moreover, most small businesses selling on the Internet sell to consumers and not to other businesses. 17 Considering 44 [ 3 ]

6 the amount of e-commerce around the world, and the fact that most of it is business to business (B2B), it appears that small businesses are not managing to exploit the many advantages of this large and expanding market: Expanding markets beyond local areas and contacting new customers. Small businesses and businesses located in a country s periphery need these advantages more than other businesses. Increased contact with suppliers and customers. Increased marketing and publicity. Cost savings. Purchasing online brings with it considerable savings along with low administrative costs and a need to maintain lower stock levels, as well as publicizing competitive prices. Increased chance of business survival. E-commerce, when used as a market tool, may increase the rate of survival of small business in Israel, which at the moment is rather low for the first five years of operation. 18 Nonetheless, small businesses wishing to adopt e-commerce in Israel face several obstacles, such as: 1. Lack of administrative and technological expertise. Small businesses differ from medium and large businesses in the number of their employees assigned to technological issues and an inability to offer training to their employees. Small businesses often lack the strategic, administrative or operative understanding of e-technologies and need to hire other businesses to help them adopt these technologies, at additional cost Economic cost. Small businesses are often limited in their ability to raise funds and thus are more worried by the investments required to purchase and maintain technologies Security and customer trust. Consumer confidence is an important aspect of small business and online customers purchasing from a business they are not familiar with may lack this necessary confidence. 4. Lack of legal and regulatory clarity. Unresolved legal issues concerning contracts, trades and guarantees as regards e-commerce are a significant obstacle to adoption of e-commerce by small and medium sized enterprises. 21 In addition to which, as noted above, the State Tenders Law requires that the government attain special permission to publish tenders online. 5. Online means of payment. Use of credit cards is the most popular means of payment on the Internet, but several distortions and failures in the Israeli credit industry cause small businesses to be essentially held prisoner by the credit card clearing service companies. 22 Today there are two means of paying for e-commerce: the first is by means of online payment companies, which transfer funds securely. The leading firm of this type is PayPal, but Israelis do not usually have access to PayPal as it requires having a bank account in the U.S. 23 The second method is electronic bank transfers, which are especially [ 4 ] 45

7 relevant to B2B commerce and have onerous terms for small businesses. 6. Perception. Small businesses often believe incorrectly that e-commerce is not appropriate for their particular service or product. 24 Recommendations Encouraging technological development in traditional industries and in small businesses will help them attain economic sustainability and eliminate the duality in the Israeli economy, where significant growth occurs in the hightech sector and far less in traditional sectors. Moreover, because consumer, business and government use of e-commerce is on the rise, small businesses that do not modernize may find themselves left even further behind, without access to markets and customers, thus jeopardizing their existence. Therefore we recommend: 1. Training and increased awareness. Assistance provided to small businesses should be based on increasing awareness of the importance of e-commerce as well as the ability to use it. Small businesses should have the choice of whether to use the assistance to be provided by the Israel Small and Medium Enterprise Authority or private sector assistance (a voucher system could be used to facilitate this). In addition, an online program should be developed for promoting e-commerce with emphasis on how to establish a business and assess that business s ability to integrate technological changes. 2. Regular surveys. Regular surveys to be executed by the Central Bureau of Statistics are important in order to identify trends, plan ahead and rate Israel on international scales. 3. Consumer confidence. Consumer confidence is critical for the expansion of business by means of e-commerce. It would be very helpful to have a recognized seal of approval for Internet sites, allowing businesses to show that they are specially suited for Internet trade, and providing consumers with more confidence in their Internet purchases. For this purpose, the private sector is well suited and actually prepared, as such a seal of approval is already being used by the Emun Hatzibur consumer organization. 4. Regulation. The problems preventing increased use of the Internet for state tenders must be resolved. 5. The public sector as a model. Increased use of e-commerce by the government will increase transparency, confidence and competitiveness in state purchases. It will also encourage small businesses to adopt e- commerce as a means of dealing with the public sector. 6. Online payment systems. The Bank of Israel should allow the establishment of an Internet bank or banks that would offer inexpensive banking services to consumers at lower prices than the traditional banks. 46 [ 5 ]

8 Such a bank would reduce the centralization in the Israeli banking sector and increase the payment options available to those participating in e- commerce. Endnotes: 1 emarketer, E-Commerce Sales in Western Europe to Double in Three Years, press release, September 25, 2006, (July 1, 2007). 2 Stuart Kelly, Around the Markets: Web Stocks Rise Again in Australia, International Herald Tribune (July 14, 2006), (July 1, 2007). 3 TNS, Monitoring the Information Economy, 8th Factual Report (June 2005), com/06_bi/bmwa_english/faktenbericht_8/abbildungen/folie351.jpg (July 1, 2007). 4 The Economist Intelligence Unit, Israel: Overview of e-commerce (September 13, 2006), globaltechforum.eiu.com/index.asp?layout=rich_story&doc_id=9351&country_id=il&title=israel%3a+o verview+of+e%2dcommerce&channelid=4&categoryid=31&country=%country.u% (February 2, 2007). 5 TNS Teleseker, TIM Survey, Winter 2006/7, press release, January 23, Central Bureau of Statistics, Findings from the Household Expenditure Survey 2005, press release, July 26, 2006, p. 10, (July 5, 2007). 7 Gal Mor, 3.6 Million Israelis Surf the Net, Ynet, January 3, 2006 (Based on the TIM Survey 2006). 8 Gal Mor, 76 Percent of Israeli Businesses are Connected to the Net, Ynet, January 14, 2002; Gal Mor, 64% of the Computerized Businesses in Israel Use the Internet, Ynet, February 20, 2001 (based on the TIM Businesses Survey). 9 The Economist Intelligence Unit, Israel: Overview of e-commerce; Dani Alovich, P1000 manager, interview with author, March 21, 2007; Kobi Cohen, Nana Shops manager, interview with author, March 21, Zap Website, (July 5, 2007). 11 Allprice Website, (March 22, 2007). 12 Overview: The Governmental Payment Service, gov.il Newsletter, Issue no. 30, September Ministry of Finance, e-government Report 2005, (March 1, 2007). 14 Overview: Online Tenders Service: From Idea to Success, gov.il Newsletter, Issue no. 27, June Ministry of Finance, e-government Report OECD, ICT, E-Business and SMEs (Paris: OECD, 2004), p. 9, (February 22, 2007). 17 e-business W@tch, The European e-business Report 2006/7 (Luxemburg: Office of Official Publications of the European Communities, 2007), p. 13, EBR06.pdf (July 5, 2007); Eurostat, Statistical Office of the European Communities, The internet and other computer networks and their use by European enterprises to do ebusiness (December 2006), p. 2, epp.eurostat.ec.europa.eu/cache/ity_offpub/ks-np /en/ks-np en.pdf (December 27, 2006). 18 Chiara Criscuolo, Kathryn Waldron, E-commerce and productivity, Economic Trends No. 600 (UK.: November 2003), p. 53, pdf (July 5, 2007); Israeli Small and Medium Enterprises Authority, and BDI Coface, Businesses Survival in Israel (July 2006), pp. 29, 32 38, (January 30, 2007). 19 e-business W@tch, The European e-business Report, p Ibid. 21 OECD, ICT, E-Business and SMEs, pp Ministry of Finance, Accountant General, Committee Report on Market Failures in the Credit Card Sector (February 2007), (March 10, 2007). 23 PayPal Website, (February 13, 2007). 24 OECD, ICT, E-Business and SMEs, p [ 6 ] 47

9 FELLOWS Koret PROGRAM Milken Institute תוכנית עמיתי קורת מכון מילקן בית מילקן, רחוב תל חי 13 ירושלים,