Digital tools such as online marketing, payment processing and electronic bookkeeping allow even the smallest businesses to punch above their weight in terms of exploiting efficiencies and competing in larger markets.
So, why would any small business forgo these advantages? For many in Latin America, it may come down to bribery.
Corruption is more than just a societal ill — it damages the ability of communities to participate in the global economy, says associate professor of management information systems Mariana Andrade-Rojas.
“This has become a problem for the development of these economies,” Andrade-Rojas says. “In these countries, around 80 percent of employment is provided by small and medium enterprises, and they’re being left behind. That means the salaries of the workers are lower. The kind of benefits they offer are different. And the communities cannot move forward because of a lack of resources, lower sales and lack of advancement.”
Andrade-Rojas studies what keeps businesses from adopting new technologies and how some firms overcome those obstacles. Sometimes it’s a lack of resources. Other times, it’s an over-reliance on industry norms that are working “well enough.”
But there can also be external factors. In a recent study of small-to-medium-sized Latin American businesses, Andrade-Rojas found bribery was a major obstruction keeping firms from adopting digital technologies.
Her paper, “The Effects of Bribery on the Digitization of Small and Medium Enterprises in Latin America,” was published earlier this year in Information Systems Journal. Andrade-Rojas and her co-author, Michael Erskine of Middle Tennessee State University, built their study to elaborate on a series of World Bank Enterprise Surveys of 1,549 small- and medium-sized firms in six Latin American countries.
The World Bank conducts surveys in multiple countries, collecting data on technology use, access to capital and labor, firm size and age, manager experience, research and development expenses, exported goods, whether ownership is domestic or foreign and bribery pressure.
Using data from longitudinal surveys in Argentina, Bolivia, Ecuador, Paraguay, Peru and Uruguay, Andrade-Rojas and Erskine found exposure to bribery had a large impact on suppressing a business’s uptake of digital tools.
“We looked at the data and saw a lot of these businesses are not digitizing,” Andrade-Rojas says. “We wanted to be able to say, ‘Why not?’ Based on our analysis, one of the commonalities was bribery.”
In many communities, bribery can look like the cost of doing business more efficiently, she says, taking the shape of unofficial fees a company pays to turn on electricity or internet services. Or it can be bolder, with local officials pointedly asking for monetary gifts.
Either way, when corruption is widespread in a community it becomes a ghost expense on businesses’ balance sheets, reducing the amount managers can invest in technology or training.
“These are mostly manufacturing firms, and they still rely on a lot of manual labor,” Andrade-Rojas says. “They do not necessarily need digitization to run their operations. So, when they need to cut something to account for money allocated to bribes, it’s going to be digitization investments first.”
However, even as the cost of digital tools has come down, most small and medium businesses resisted digitization. One reason? Digitization makes it harder for owners to hide the money they are paying for bribes.
“They know they have to operate in a corrupt system, so they don’t want to have digital records of (that) money,” Andrade-Rojas says.
That’s becoming a liability as more federal and state governments require businesses to file tax documents digitally. And it’s already a liability in terms of market participation, Andrade-Rojas says.
“These firms cannot compete internationally and can’t collaborate with firms outside their communities, because there is always this problem of different levels of digitization,” she says. “International or larger firms cannot do business with these local firms because their records aren’t as transparent as they need them to be.”
Andrade-Rojas and Erskine also found the longer the tenure of a business’s manager, the stronger the tie between bribery and a lack of digitization. When managers are used to operating in a system that requires bribes, they’re more likely to accept it as the way business is done. They’ll opt to maintain the status quo thinking they’re doing what’s best.
Andrade-Rojas says better training of managers could help curb this impact and suggests businesses form cooperatives to advocate for good governance practices and ban together to resist requests for bribes.
Yet the largest takeaway may be for policymakers and advocacy organizations. It’s not enough to offer businesses in developing nations training and financing to help them adopt new technologies, Andrade-Rojas says. Without tackling corruption, these businesses will continue to be left behind.