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How technology can maximize the potential of informal micro-businesses
Digital tech, established businesses, and governments can combine to help bridge formal and informal supply chains.
An enterprising vegetable seller in a traditional Indian market briefly became a social media star when – watched by an excited and curious crowd – she displayed a QR code for instant UPI payments on the bottom of her weighing scale bowl during the COVID-19 pandemic. A video shared by the Indian Railway Minister Ashwini Vaishnaw on his Twitter (now X) account quickly went viral.
Our research based on a sample of 7,510 microenterprises in India suggests that digital technologies can make a big difference to a micro-informal business, especially in a crisis. COVID-19 led many of them to adopt tools such as digital payment platforms and online communication systems, which transformed how they operated.
By investing in digital infrastructure, developing digital training programs, and encouraging microenterprises to adopt digital tools, governments and businesses can help informal businesses formalize and strengthen supply chain resilience.
Why informal microenterprises matter
Microenterprises foster local innovation, generate employment, and provide essential goods and services to underserved communities. They are essential cogs in global supply chains, acting as suppliers and consumers. Understanding and empowering these small yet crucial players is key to fostering a more inclusive and resilient global business ecosystem.
By recognizing the value of microenterprises, larger organizations can establish relationships that drive mutual growth. For example, they can provide microenterprises access to funding, technology, and training, helping them improve operational efficiency, comply with regulations, and scale their businesses. In return, they can benefit from partnering with microenterprises to enhance supply chain flexibility, reduce costs, and improve local responsiveness.
Established companies can also help integrate microenterprises into formal supply chains, offering a stable and reliable market for their products and services. Such integration can expose microenterprises to higher standards of production and service delivery, fostering an environment of continuous improvement and innovation.
During the pandemic, formal businesses and corporations felt the pressing need to include microenterprises in their customer base. For example, e-platforms like Agribazar in India waived registration fees for small-scale farmers already facing significant challenges due to logistical disruptions, lockdown restrictions, and the closure of mandis (traditional markets). This initiative resulted in a four-fold increase in portal registrations, primarily from small farmers. Farmers gained access to broader markets and sold their produce directly through the platform.
Corporations, governments, and technology startups can collaborate to support microenterprises in leveraging digital technologies, one of the most effective tools for formalization. Digital platforms can facilitate easier payment processes, better market reach, and enhanced customer engagement. In addition, the enhanced credibility of a digital presence can help microenterprises gain the trust of larger market players and regulatory bodies.
“Digital technology emerges as a transformative power, bridging the divide between informal and formal economies.”
The digitalization of microenterprises
Understanding the significance of formalization in tackling global challenges can be a game-changer. Formalization is also incentivized by the United Nations’ Sustainable Development Goals (SDGs) to unlock pathways to inclusive and sustainable economic growth, employment, and decent work for all. The focus on formalization is instrumental in fostering safe work environments and supporting the growth of micro, small, and medium-sized enterprises through access to financial services. Policymakers and international organizations are championing these initiatives to mitigate the drawbacks of informality, such as tax revenue loss, unsafe working conditions, and unfair competition.
Digital technology emerges as a transformative power, bridging the divide between informal and formal economies. From using smartphones for digital payments to leveraging social media for marketing, digital tools offer these businesses affordable ways to improve visibility and comply with formal regulations. Adopting digital technologies enhances operational efficiency and signals legitimacy to regulators and larger market players.
Our research shows that microenterprises become part of the formal economy as they adopt digital tools, opening up access to resources. The transition enhances their stability, growth, and sustainability. Formality ensures compliance with regulations, access to financial services, and the ability to engage in larger markets, fostering a more robust supply chain. Practical examples of how this can be achieved include:
- Encouraging formalization through digital payment systems. Governments can encourage microenterprises to adopt digital payment systems by offering incentives such as tax breaks or grants. For instance, by promoting mobile payment solutions like PhonePe and Google Pay, Indian microenterprises can reduce cash transactions, which are often unrecorded and risky. Digital payments create a digital trail that can be used for tax purposes.
- Digital training and certification programs. Corporations can partner with governments to offer digital training and certification programs for microenterprises. These programs can include training in digital marketing, e-commerce platforms, and financial management software. Certifications can also serve as a mark of credibility, helping businesses gain trust.
- Access to digital marketplaces and supply chains. Governments and corporations can collaborate to provide microenterprises with access to digital marketplaces. Flipkart Samarth supports rural artisans in India by providing opportunities to display products online, gain business insights, and access warehousing support. Similarly, large corporations and technology startups can collaborate to establish digital platforms inspired by successful B2B marketplaces like Udaan in India and Retailo in Pakistan.
- Simplification of the formalization process. Governments can develop user-friendly digital solutions to simplify tax filing and business registration in collaboration with corporations and local technology companies.
Microenterprises are pivotal in emerging economies.
The intersection of informal and formal economies
Microenterprises are pivotal in emerging economies. They serve as engines of local innovation, provide employment, and cater to the needs of communities underserved by larger companies. Yet many of these enterprises operate without formal registration, tax compliance, or access to institutional resources. This limits their potential by excluding them from formal supply chains and restricting their ability to scale or collaborate with larger organizations.
However, several large corporations are playing a significant role in supporting the formalization of microenterprises:
- Arcos Dorados, the largest McDonald’s franchise in Latin America, is developing a responsible value chain and supports small suppliers by providing training in quality standards, food safety, and business management.
- Unilever, through its Shakti program in Colombia, has empowered rural women to become micro-entrepreneurs by selling its products within their communities.
- Coca-Cola launched the Coletivo Recycling program in Brazil, which has led to improved working conditions and incomes for waste pickers through training and support,
- Nestlé has partnered with dairy farmers in Kenya to improve the quality of milk production and integrate them into the formal supply chain. The company provides training in best practices and access to better farming equipment.
- Walmart’s Direct Farm program in Central America helps small farmers improve their agricultural practices and gain access to larger markets.
Initiatives such as subsidizing digital training programs, reducing barriers to registration, and partnering with microenterprises for localized solutions can create a win-win scenario.
A pathway to value
For leaders in global supply chains, engaging with microenterprises requires a nuanced approach. Supporting digital inclusion and formality among microenterprises offers a pathway to creating value across the supply chain while fostering economic inclusivity. Initiatives such as subsidizing digital training programs, reducing barriers to registration, and partnering with microenterprises for localized solutions can create a win-win scenario.
Corporations, too, stand to benefit from integrating digitally adept microenterprises into their ecosystems. Such partnerships can enhance supply chain flexibility, reduce costs, and improve local responsiveness – all while contributing to broader development goals.
Microenterprises are linchpins in the supply chain continuum. Understanding their challenges – especially the interplay between digitalization and formality – is crucial to unlocking their potential. As we move forward, leveraging crises as opportunities for transformation and investing in digital pathways will be central to building a resilient, inclusive, and thriving global economy.
This is a practice-oriented translation of the academic article, Navigating Crisis through Digitalisation and its Impact on Firm Formality: The Case of Microenterprises in India, written by Muhammad Shahid, Esther Salvi, and Mehak Sajjad, and published in the International Journal of Sociology and Social Policy in 2024. This translation has been enriched with global practice examples in the context of India and beyond.
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