Artificial Intelligence will create tremendous opportunities for Micro, Small, and Medium Enterprises (MSMEs) to scale up market access, and scale down certain activities currently undertaken by humans. But it also risks eradicating whole sectors that MSMEs are involved in, especially in the services sector such as data processing, data analytics, translation and more.

To better understand AI’s impact, we must examine three key aspects:

1. Helping small businesses: Through AI, MSMEs can improve their operational efficiency, gain better insights into their markets, make data-driven decisions, and streamline their processes.

2. Changing consumer behavior: AI will shape the way consumers interact with businesses, giving MSMEs new opportunities to attract and retain customers and help MSMEs better meet consumer demands and preferences.

3. Disrupting some MSMEs: Unfortunately, not all MSMEs will survive the AI transition.

One of the critical issues underlying AI adoption is digital readiness. Despite the rapid pace of digital innovation, many businesses, particularly in developing countries, are not yet digitally prepared. This growing digital divide is particularly stark among rural populations and women, who often face barriers in accessing the necessary technologies.

For AI to be effective, it relies heavily on data. However, too many MSMEs struggle with data-related issues, whether in terms of compliance, financial management, or sourcing. Without robust data practices, these businesses will struggle to fully harness the benefits of AI.

While AI is advancing rapidly, the regulatory environment is lagging behind, especially in developing nations. MSMEs make up around 95% of businesses in these countries, yet very few have clear AI guidelines or frameworks. In many cases, there are no AI regulations at all. This creates a significant risk: without proper oversight, businesses may misuse AI, and opportunities to monetize or scale AI-driven innovations could be lost.

Inconsistencies in AI policies can create substantial challenges for MSMEs, which often lack the resources to navigate complex regulatory landscapes. Currently, there’s overlap, ambiguity, and a lack of common terminology in AI regulations, which could make compliance even more difficult for smaller businesses.

The absence of AI regulations can lead to a range of negative consequences:

• No regulations means no regulating

• No regulating means no ownership

• No ownership means no monetizing

• No monetizing means no development outcomes

At the global level, discussions about AI regulation are taking shape. However, there’s still debate over which organizations should lead these efforts. Should the International Telecommunications Union, informed by the Global Digital Compact, take the lead? Or should AI regulation fall under the World Trade Organization (WTO)?

In September 2023, the WTO Public Forum proposed that AI and trade could be the subject of future negotiations, and the UN Human Rights Council also held a special meeting on AI’s impact on human rights.

These discussions highlight the growing awareness of AI’s importance across various international organizations. However, much more needs to be done to ensure that AI regulations are designed in a way that benefits MSMEs, rather than placing additional burdens on them.

AI’s influence on the job market is another key concern. According to the Inter-American Development Bank’s (IDB) recent AI Generated Index of Occupational Exposure (GENOE), AI has the potential to significantly disrupt employment by automating tasks that were once performed by humans. The report predicts:

• A 28% chance of job replacement within the next year,

• A 38% chance within five years,

• A 44% chance within ten years.

This equates to roughly 980 million jobs worldwide that could be affected by AI disruption. Lower- and middle-income workers, many of whom are employed by MSMEs, are likely to bear the brunt of these changes.

Despite these risks, AI also presents numerous opportunities for businesses that embrace it. If applied intelligently, AI can help MSMEs analyze market trends, identify new market opportunities, manage regulatory requirements, and streamline their sourcing processes. The International Trade Centre, for instance, is already using AI in its Global Trade Helpdesk, helping businesses access crucial trade information more efficiently. AI can also assist in trade facilitation, particularly for smaller businesses dealing with low-value shipments or trusted trader programs. 

Generative AI is already proving to be a valuable tool for entrepreneurs and small businesses. Acting as a ‘co-pilot,’ AI can help MSMEs navigate complex legal and exportation documents, supercharge their marketing efforts, and explore new markets. For businesses aiming to expand internationally, AI offers a range of tools that can simplify entry into foreign markets.

In addition, AI can help businesses meet sustainability goals by improving supply chain traceability. Many multinational corporations are under increasing pressure to demonstrate sustainable practices, and AI can help them gather and analyze data from their suppliers, including smaller MSMEs. For MSMEs themselves, AI can facilitate sustainability reporting and improve access to green finance by integrating data for reporting purposes and navigating diverse sustainability requirements.

AI will also transform consumer behavior, creating new opportunities for small businesses. For example, Apple’s iPhone 16 is designed specifically for AI, allowing users to generate text and images through natural language prompts. Consumers will be able to take photos of products and instantly find places to purchase them. 

However, this also highlights the need for MSMEs to ensure their products are available online. AI-driven search engines will soon be able to match consumer preferences with specific products and services, but only if those products are accessible on digital platforms.

Policymakers need to focus on making AI more accessible for MSMEs. In the relatively few countries with national AI policies, about one-third focus on fostering AI innovation and adoption, including training programs. Additionally, about one fifth provide financial support for AI research and development. Although these policies are not specifically targeted at MSMEs, smaller businesses can still benefit from such initiatives.

The G20 has recognized this need and recently issued a paper on ‘Policy Examples on How to Enhance the Adoption of AI by MSMEs and Start-ups.’ The paper emphasizes the importance of raising awareness, ensuring access to data and finance, and creating a supportive business environment for AI adoption. While these initiatives are promising, further investment, technology transfer, and open-source access are needed to ensure that MSMEs in developing countries can also benefit.

At the regional level, very few trade agreements currently include AI provisions. Most focus on broader digital economy issues, and there is a notable absence of MSME-specific AI policies. However, Singapore has taken the lead with its Digital Economy Partnership Agreements (DEPAs), which offer valuable lessons for other countries.

The WTO’s MSME Group, chaired by Barbados and consisting of 103 members, is working to make information more accessible for MSMEs and policymakers. This includes the development of platforms like Trade4MSMEs and databases that collect MSME-related trade policy data. These efforts aim to enhance financial inclusion and support women entrepreneurs.