ADB warns digitalization may cause small companies to lose market power

THE rapid acceleration of digitalization risks upending the dynamics of market power, often to the disadvantage of micro-, small- and medium-sized enterprises (MSMEs), the Asian Development Bank (ADB) said.

“The process of accelerated digitalization in recent years has also changed Asia’s competition landscape dramatically. COVID-19 hastened the widening of the scope of platforms and digital ecosystems, and the extent to which they are impacting markets today,” the ADB said in a recent working paper.

“It also accelerated the digital revolution that was already taking place, with firms upgrading their digital know-how and joining platforms to thrive in an increasingly connected and globalized world,” it added.

In the Philippines, employment in the MSME sector as a share of the total labor force was 64.7% in 2021.

“While these changes are ushering in opportunities and benefits to consumers, firms, and the economy as a whole, digital platforms also have characteristics that potentially yield them too much market power and present challenges to other stakeholders, especially MSMEs, that are an important pillar of many Asian economies,” the ADB added.

MSMEs are estimated to have accounted for about 30% of Asia’s total exports in 2013.

“In Asia, a majority of MSMEs operate in traditional wholesale and retail trade and other service industries, mostly in rural areas,” it said.

“This means that the sustained growth of MSMEs will play a critical role in achieving inclusive growth, maintaining poverty reduction, and narrowing regional disparities in developing Asia by providing employment and business opportunities for the young, unemployed or underemployed individuals, those working in the informal sector, women, and other vulnerable groups,” it added.

During the pandemic, digitalization also accelerated, but not all MSMEs benefited from this, the bank said.

“The outbreak of the COVID-19 pandemic in early 2020 fueled existing global trade tensions and economic uncertainty in Asia, leading to a sharp deterioration of MSME performance in the region. At the same time, however, Asia’s rapid shift to the digital economy in the MSME sector was facilitated by the COVID-19 lockdowns,” it said.

The bank said that competition policies should entail an “in-depth understanding of the nature of digital platforms.”

This will generate social benefits and foster further innovation and sustainable development in the region, it added. — Luisa Maria Jacinta C. Jocson