Promoting Enterprise Digitalisation in Azerbaijan

Putting digitalisation at the centre of SME policy making

Digital solutions can boost SME performance

Digitalisation can be broadly defined as the use of digital solutions and data with the objective to improve business operations, create revenue, transform business processes (not simply digitise them) and create an environment in which data and digital information are in its centre (Peillon and Dubruc, 2019[11]). It has the potential to boost SME development as it increases companies’ ability to reach new markets, optimise and improve their operations, change the way how they engage with their employees. It can help them integrate more easily into global value chains, increase their innovation activity and boost productivity (OECD, 2019[12]). In particular, digitalisation can improve SME competitiveness via the following channels (OECD, 2021[13]):

• Digitalisation enables SMEs to more easily access strategic resources. Smaller businesses can leverage a wide range of digital instruments to finance their operations, such as peer-to-peer lending, crowdfunding, and initial coin offerings. SMEs with limited human resource management capabilities access a broader network of job-seekers that meet the desired skills profile.

• Digital technologies help SMEs reach a wider customer base and integrate more easily in global markets. Companies’ websites and online e-commerce platforms make it possible to advertise and sell their products to a global audience. Furthermore, digitalisation reduces the costs associated with transport and border operations and makes a wide range of services tradeable.

• Digitalisation allows SMEs to achieve scale without mass. Digitalisation of products and services allows SMEs to develop successful digital products and increase their customer bases, revenues and productivity, while significantly bringing down their marginal costs (scale).

• Digital platforms enable SMEs to capitalize on network effects. OECD research has shown how digital platforms can deliver positive network effects to SMEs outsourcing business functions, such as advertising, e-commerce and service delivery to online platforms (OECD, 2019[14]).

Digitalisation is multi-faceted and often involves the use of application and digital tools and technologies to solve specific problems and improve operations implemented by businesses. Table 2 describes the most common digital solutions adopted by SMEs.

Digitalisation can also improve company performance: businesses decide to invest in digital tools and practices for a variety of reasons, and ultimately the process of technology adoption should bring about tangible benefits for firms undergoing digital transformation. Digitalisation can fuel productivity growth, which in turn brings wage growth, improvements in living standards and more digitalisation. Adoption of digital technologies has the potential to improve SME performance across all sectors, enhance firm productivity and lift living standards.

The COVID-19 pandemic created an unprecedented need to accelerate SME digitalisation as unprecedented quarantine measures highlighted both the limitations of non-digital business models and the opportunity gap between digitalised firms and those who lacked digital profiles.

Table 2. Selected digital solutions often adopted by SMEs

Technology	Description	Selected examples of application
High-speed broadband	Defined as having download speed of at least 100Mbit/s (i.e. fibre).	Adequate network access is essential to fully exploit exiting services over the internet and foster the diffusion of new ones.
Customer-Relations Management (CRM)	Used for managing a company’s interactions with its customers and potential customers.	Coordination platforms: stakeholders can be put in direct contact and are constantly updated about the project’s progression.
Cloud Computing (CC)	ICT services accessed over the internet, including services, storage, network components, and software applications.	Cloud Accounting: multiple users can simultaneously update information which allows to fasten the process and accessibility.
Supply-Chain Management (SCM)	Used for managing the flow of goods and services and concerns processes that transform raw materials into final products.	Supervisory Control and Data Acquisition (SCADA) Plant Management: integrated platform to monitor equipment and resources across the production line.
E-commerce	Describes the sale or purchase of goods or services conducted over computer networks by methods designed specifically for the purpose of receiving or placing orders. E-commerce can take place through a range of different commercial relationships, involving any possible pairing of customers, businesses or governments.	E-commerce platforms: they simplify the purchase process, increase product visibility and allow to reach a larger number of customers.
Enterprise Resource Planning (ERP)	Used to enhance back-office efficiency and strategic planning. These are software-based tools used for managing and integrating internal and external information flows.	Asset Inventory Management: allows to monitor inventories, thereby limiting the risk of overproduction and waste.
Radio Frequency Identification (RFID)	Allow near-field communication and are used for product identification, person identification or access control, monitoring and control of industrial production, supply chain inventory tracking and tracing, service maintenance information management, or payment applications.	Warehouse Management: tracking of assets to reduce the risk of loss and increase efficiency in shipment.
5G	5G technologies are expected to support applications such as smart homes and buildings, smart cities, 3D video, work and play in the cloud, remote medical services, virtual and augmented reality, and massive machine-to-machine communications for industry automation.	Virtual Reality for Simulation: they allow to visualise finalised product, allowing to improve training and ease the design. Although they are already being used, 5G will make the experience more realistic and effective, prompting an increase in diffusion and usage.
Blockchain	A shared ledger of transactions between parties in a network, not controlled by a single central authority.	Blockchain for Trade Documentation: end-to-end exchange of documents enabled by blockchain, increasing transaction security and transparency among all stakeholders.
Internet of Things (IoT)	Refers to the rapidly growing network of connected objects that are able to collect and exchange data in real time.	Traffic monitoring: useful in the management of vehicle traffic in large cities.
Artificial Intelligence (AI)	Simulation of human intelligence processes by computers.	Efficient Energy Management: digital sensors to monitor energy consumption, which allow to predict energy needs and reduce waste and costs.

Source: (OECD, 2019[15]); (OECD, 2019[16]); (ITU, 2019[17]).

Companies from different sectors can benefit from using these technologies at various stages of their digitalisation journey, ranging from the basic level of digitalisation to medium and advanced. Box 1 provides an example on how a company in the food manufacturing sector would apply digital solutions to improve its operations, optimise resources and ultimately increase efficiency.

Box 1. Example: Stages of Adopting Digital Solutions by the Food Manufacturing Sector

Selected digital solutions can be used on different stages of company development

Stage 1

During the first stage of digitalisation, the focus is on streamlining operations and optimising resources by automating labour-intensive tasks to improve productivity. At this stage, Enterprise Resource Planning (ERP) can be used for implementing solutions such as quality assurance, inventory management, fleet management, sales/order management and workforce management. Cloud Computing (CC) can also be used for inventory and fleet management, and sales/order management. The benefits of using ERP and CC at this stage are optimisation of features such as storage space and conditions, elimination of human Unvalides, improving productivity or quality of food products, reducing inventory costs, more efficient tracking and management of sales to capture new business opportunities, and more. Access to high-speed broadband is also essential at this stage in order to perform these operations.

Stage 2

At this stage, the focus is on integrating assets, scaling business reach and accessing new opportunities through integrated platforms and optimised operations. Supply-Chain Management (SCM) and ERP at this stage are useful for implementing digital solutions such as e-commerce, manufacturing analytics, manufacturing operations management, overall equipment effectiveness and product authentication. The benefits of using these technologies at this stage involve increased efficiency in identifying problems at source affecting the quality of food, providing demand forecast for products based on trend analysis, increased productivity and improved traceability and accountability, improving the performance of equipment and building brand confidence amongst customers.

Stage 3

In stage 3 of digitalisation of a company, Internet of Things (IoT) and Artificial Intelligence (AI) can be used for implementing augmented reality for training and inspection, supervisory control and data acquisition plant management, predictive maintenance using big data and autonomous robots. A company in the food manufacturing sector in the late-stage of its digitalisation journey would benefit from these solutions through improved supervisory monitoring and control across the production line, optimisation of resources and a reduction of cost through scheduled maintenance of equipment, increased productivity and improved safety standards, and more.

Note: Example based on the industry plan for the food manufacturing industry created by SMEs Go Digital Project of Singapore.

Source: (IMDA, 2021[18]).

Promoting SME digitalisation calls for policies promoting digital culture and technology adoption

Promoting proactive SME digitalisation involves addressing market failures that put small firms at a disadvantage and creating an environment that provides equal opportunities for growth for SMEs and large firms. In order to create better conditions for a digital economy, it is important to manage the barriers that hinder technology adoption and innovation by SMEs.

Promoting SME digitalisation calls for: i) measures creating favourable framework conditions, ii) policies addressing market failures that put small firms at a disadvantage, which are related to their size, and iii) promotion of a digital culture among businesses and the general population (see Figure 6).

Figure 6. Framework for supporting SME digital transformation in Azerbaijan

Source: OECD analysis.

Digitalisation is associated with risks related to security and digital divides

Despite its benefits, digital transformation is also associated with risks. SMEs that pursue digitalisation without implementing proper cybersecurity measures are vulnerable to digital security attacks. Digital security incidents have a wide range of causes, and can range from unintentional events such as human error, system bugs or other non-malicious causes, to malicious external actors engineering methods of attack on companies’ digital systems. The COVID-19 crisis, which drove a lot of firms to move their operations online, also provided an opportunity for hackers to intensify attacks. Despite having lower “attack surfaces” – a lower volume and value of data to hack – when SMEs fall prey to cyberattacks, costs can be disproportionately large in terms of revenue. SMEs also tend to have lower investment in cybersecurity systems, often due to lack of funds. Furthermore, traditionally, smaller firms have a tendency to rely less on dedicated employees for carrying out ICT security-related activities compared to larger firms, largely due to less financial resources that could be dedicated to hiring security specialists (OECD, 2021[19]). These conditions make it particularly important for SMEs to pursue their digitalisation policies in tandem with investing in strong cybersecurity measures.

Another risk associated with digitalisation is the growing digital divide between firms that accelerate the development of their digital culture and those that do not. With broadband connection being a pre-requisite for businesses to be a part of the digital community, firms that are less connected (for instance, those that do not have access to the internet) fall behind better-connected competitors. Given that a sizeable number of firms in Azerbaijan do not have an online presence or access to the internet, blanket policies for digitalisation of firms put smaller firms with less financial capacity at risk of losing customers and falling out of the market. With the growing reliance on e-commerce and online platforms for business operations, there is a growing concern that the push for digitalisation can be disruptive, leading to a more polarised economy and an uneven playing field, with large firms reaping the benefits (EIB, 2020[20]).

Digitalisation is among Azerbaijan’s policy priorities

In 2015, Azerbaijan has launched 12 Strategic Roadmaps to ensure economic diversification and sustainable economic growth. Digital transformation of the economy was embedded in this strategic reform agenda and a number of related reforms were implemented between 2016 and 2020. Digitalisation was covered under the Strategic Roadmap for Development of Telecommunications and Information Technologies (ICT Roadmap) and the Strategic Roadmap for the Production of Consumer Goods at the Level of Small and Medium Enterprises in the Republic of Azerbaijan (SME Roadmap).

The ICT Roadmap, which was implemented under the supervision of the Ministry of Digital Development and Transport (MDDT), identified three strategic targets and 10 policy priorities aimed at improving governance, supporting productivity growth and digitising government services (see Table 3).

Table 3. Strategic targets and policy priorities of Azerbaijan’s ICT Roadmap 2016-2020

Strategic target	Policy priority
1. Improve governance structures, and strengthen ICT	1.1. Establish an independent regulatory body
	1.2. Liberalise the telecommunication market
	1.3. Increase mobile infrastructure investments
2. Increase productivity and operational efficiency of the business environment	2.1. Extend digital payments and apply ICT in education system
	2.2 Extend technology-based operations in business environment
	2.3. Upgrade technology education with the involvement of businesses
	2.4. Improve the electronic systems of government institutions
	2.5. Increase knowledge and skills in the ICT sector
3. Digitise government and social environment	3. 1. Improve the information systems of government institutions
	3. 2 Create an end-to-end integrated e-health infrastructure

Source: Government of Azerbaijan (2016), Strategic Roadmap for Development of Telecommunications and Information Technologies, https://monitoring.az/assets/upload/files/6683729684f8895c1668803607932190.pdf.

In addition to the ICT Roadmap, there are a number of measures under the SME Roadmap aimed at boosting the digital transformation of Azerbaijan’s economy, and its SME sector in particular. For example, SMBDA provides SMEs with financial and non-financial support including in the area of SME digitalisation. Policy initiatives to support SME access to finance, such as the Entrepreneurship Development Fund and Mortgage and Credit Guarantee Fund, can ease SME access to digital technologies and provide SMEs with financial resources needed to undergo digital transformation. Moreover, business incubators can help build digital awareness and boost abilities of entrepreneurs to implement digital solutions.

The digital transformation is also envisaged by Azerbaijan 2030: National Priorities for Socio-Economic Development, a strategic policy document approved in February 2021. The document identifies 5 priorities: i) Sustainable growth and competitive economy, ii) Society based on inclusive and social justice, iii) Competitive human capital and innovations, iv) Stronger development of Azerbaijan’s territories and, v) Clean environment and green growth. The document outlines the overall vision and should be followed by a set of five-year strategy documents and policy action plans, which should detail policy objectives and actions across different policy areas. It is expected that digitalisation of the public and the private sector will be high on the reform agenda and planned SME development strategy 2021-2025 will define a set of policy intervention to promote uptake of digital technologies among SMEs and general population.1

Adoption of digital technologies by SMEs in Azerbaijan remains limited

Limited access of Azerbaijan’s enterprises to computers and the internet continues to limit their ability to benefit from digital solutions. For example, while the share of enterprises with internet access increased significantly in the last decade, only 51.5% of enterprises in Azerbaijan were using the internet in 2019, compared to 13.8% in 2009 (see Figure 7). Despite the significant progress, Azerbaijan still lags behind regional peers and OECD countries. For example, 90% of companies from Belarus and Ukraine reported access to the internet, as do almost 100% of companies from the OECD area (The State Statistical Committee of the Republic of Azerbaijan, 2019[21]) (OECD, 2021[13]).

Figure 7. Internet and computer usage in Azerbaijan, 2019

Source: (The State Statistical Committee of the Republic of Azerbaijan, 2019[21]).

Despite the lack of official data on the adoption of digital solutions by SMEs, the available evidence suggests that Azerbaijan’s SMEs are not taking advantage of available digital technologies and are lagging behind in adopting digital solutions. For example, only 9.8% of enterprises in Azerbaijan have a website compared to the average of 76.7% in OECD countries (The State Statistical Committee of the Republic of Azerbaijan, 2019[21]). A survey implemented by United States Agency for International Development (USAID) with companies operating in agriculture and tourism from Azerbaijan, Ukraine, Georgia and Belarus found that a majority of companies in this sector did not adopt digital solutions to make their operations more efficient and bring their products closer to customers (USAID, 2021[22]). Azerbaijan also lags behind its regional peers in utilisation of internet activities by individuals. Specifically, Azerbaijan has a particularly low share of population that uses internet banking, finds information about goods or services, purchases goods or services online (see Figure 8).

Figure 8. Internet activities undertaken by individuals

Source: ITU.

According to the World Bank’s enterprise surveys, the pandemic has accelerated the use of digital tools for companies of all sizes in Azerbaijan. More than 60% of small and 70% of medium-sized enterprises in Azerbaijan have increased their online activity (see Figure 9). Some of these changes are going to become irrevocable, as SMEs that experienced the benefits of going digital are unlikely to (fully) return to a brick-and-mortar model once the pandemic is over (OECD, 2021[13]).

Figure 9. % of firms that started or increased online business activity in response to COVID-19

Source: (World Bank, 2021[3]).

Digitalisation policy agenda is distributed among different institutions with limited co-ordination

Digitalisation is under the responsibility of several ministries and public institutions (see Figure 10). The MDDT is responsible for the policy agenda related to digital infrastructure, security and regulation, and also oversees initiatives supporting uptake of digital technologies, especially by companies operating in the IT sector. Institutions under the MDDT responsible for digitalisation include the Electronic Security Service (cybersecurity education and awareness), the Innovation and Digital Development Agency (uptake and adoption of digital technologies), Aztelekom LLC, AzInTelecom LLC, Baku Telephone Communication LLC (telecommunication services provider), the Data Processing Centre (e-signature, SmartPay systems), an ICT Application and Training Centre (e-governance training, skills development).

The Ministry of Economy is responsible for the policy agenda related to SME development and economic diversification. It oversees the Small and Medium Businesses Development Agency (business development services), the Entrepreneurship Development Fund (financial support), and the 4th Industrial Revolution Centre (awareness and information support).

Azerbaijani Service and Assessment Network (ASAN) and ASAN Support for Family Business (ABAD) operating under the State Agency for Public Services and Social Innovations (SAPSSI) provide e-government services for SMEs and the general population and support development of family-run businesses located primarily in the rural areas of Azerbaijan. Established under the same agency, the Centre of Development of Electronic Government, as well as the Center of Innovations aim to improve electronic services, particularly those related to government-to-business (G2B) and business-to-government (B2G). The Center of Innovations provides in particular also services to start-ups and co-working services through its “Innoland” Incubation and Acceleration Center.

The Ministry of Education is responsible for embedding digitalisation in the curriculum and implementing programmes to support digital literacy among the wider population. During the COVID-19 pandemic, the Ministry of Education quickly shifted to online education. However, many students, especially those from rural areas or from low-income families did not have access to online education during the lockdowns.

Figure 10. Public institutions responsible for digitalisation agenda in Azerbaijan

Source: OECD authors based on the Project Working Group meetings.

Overall, the digitalisation policy agenda in Azerbaijan remains fragmented, spread across legal and strategic documents and public institutions with limited co-ordination. This can be partially explained by the complexity of that agenda, which cannot be clearly associated with one policy initiative or institution and is rather multi-dimensional. However, a number of institutions and initiatives have overlapping objectives and limited co-ordination/co-operation results in lower impact of their activities.

Note

← 1.  Digitalisation is also embedded in a number of presidential decrees and orders, such as 1) on “Improvement of management in the field of digital transformation”; 2) on “Improvement of management in the field of digitalization, innovation, high technologies and communication”; 3) on “approval of State Programme on enhancement of digital payments in the Republic of Azerbaijan in 2018-2020 years”.