Beyond the Digitalization: Key Strategies to Boost MSMEs Digitalization in Indonesia

The valuation of Indonesia’s digital economy has reached US$70 billion in 2021[1], making Indonesia one of the digital economy giants in the world. The flourishing digital economy in Indonesia is largely due to the rapid growth of the e-commerce sector within the past few years. The E-commerce sector has US$53 billion in value, equal to 70% of digital economy’s total valuation in 2021.[2] Having one of the largest digital economy markets in the world, the country’s e-commerce sector is expected to experience a 100% growth rate throughout the decade. The projected growth of the e-commerce sector will boost Indonesia’s digital economy valuation to reach US$300 billion by 2030. It is also forecasted that by 2030 the e-commerce sector will contribute IDR 24.000 trillion to the country’s GDP.[3]

To sustain the rapid growth of the digital economy, the Indonesian government has deployed various initiatives, such as the MSMEs Go Digital (UMKM Go Digital) initiatives that promote the digitalization of local MSMEs.

MSMEs have a significant contribution to Indonesia’s economy. Almost 89% of the country’s workforce is employed in MSMEs, and this particular sector also made up 61.1% of Indonesia’s GDP in 2021.[4] With such contributions, it is not exaggerated to say that MSMEs are the foundation of Indonesia’s economy.  Thus, MSMEs digitalization is essential for digital economy growth.

 Indonesia’s Efforts to Digitize MSMEs

According to data from the Ministry of Informatics and Communication, 19 million MSMEs have adopted digital technologies and utilized digital economy platforms to conduct their business. Compared to 8 million digitalized MSMEs in 2020, the latest number of digitalized MSMEs showed more than a 100% increase. [5] In addition to this achievement, data from Bank Indonesia also shows an impressive number of digital payment system adoption among MSMEs. In mid-2022, 90% of 20.9 million merchants that has adopted the QR payment system were MSMEs.[6]

Many often attribute the rapid digitalization of MSMEs to the Covid-19 pandemic. However, although such an assumption may be valid, other variables also pivotal digitalization. One example is the MSMEs Go Digital initiative, which assists MSMEs in going digital and being onboard in the marketplace. The government provides digital skill training for MSMEs to ensure a seamless digitalization process. Aside from receiving training, MSMEs participating in the initiative will have access to various coaching programs and business loan programs offered by the Association of State-Owned Banks (Himbara). The government has also initiated the Proud of Indonesian Products (Bangga Buatan Indonesia) movement to magnify the promotion of local products in the marketplace.

Beyond the Digitalization

However, despite the government’s support, various challenges still prevent Indonesia from expanding coverage of MSMEs digitalization to the fullest. The first challenge is the lack of adequate digital infrastructure, digital skills, and access to various MSMEs digitalization initiatives that the government has commenced. Meanwhile, the second challenge is ensuring that digitilized MSMEs are not only using digital technologies as tools to conduct business but also as means to transform their business approach and strategy digitally. 

When it comes to MSMEs digitalization, there are three digital transformation models that should be taken into consideration[7]::

 1.) MSMEs with a high level of digital maturity: utilizing digital technology to digitalize the organization;

2.) MSMEs that experience liquidity constraints but have a low level of digital maturity:  utilizing digital technology for selling and marketing purposes only, and;

3.) MSMEs with limited digital literacy but high social capital: utilizing digital technology to collaborate with other parties with high digital literacy.

In the context of Indonesia, the majority of digitalized MSMEs do not have high digital skills, as suggested by research conducted by Amartha and Katadata Insight Center. The study concluded that the adoption of digital technology for productive purposes among MSMEs was only 22.55%.[8] Thus, referring to the classification of the digital transformation model developed by Priyono et al., most digitalized MSMEs in Indonesia are in the second category.

To harness the full potential of digitalized MSMEs, MSME players must be encouraged to utilize digital technology beyond its marketing purposes. MSMEs should be able to incorporate digital technology for other purposes, such as providing a better consumer experience, developing more products and business endeavors, and building a solid network.

The challenges faced by Indonesia are beyond the technical aspect of digitalization. However, challenges related to the lack of digital literacy are even direr among MSMEs from outside the Java-Bali region. Such concern was highlighted by

Chef Michael, head of the Education and Entrepreneurship Division, MSMEs Association of  Labuan Bajo. Chef Michael shared that most association members have used digital technology for marketing purposes. However, most MSMEs in Labuan Bajo do not have adequate digital skills to utilize digital technology for other purposes. Another problem is the absence of a supporting ecosystem that could nurture collaboration and creative innovation.   Similar concerns were also raised by students of   El-Bajo Polytechnic, who also mentioned that they found it challenging to navigate the digital world.

Simplification is The Key

To solve the various challenges explained above, a comprehensive strategy is needed to boost MSMEs’ digital literacy, especially for MSMEs outside the Java-Bali region. The strategy that needs to be taken should be easy to understand, follow, and accessible by MSMEs from various demographics and digital literacy levels Hence, the strategy should be made as simple as possible.

One example of what can be done is introducing MSMEs to simple, yet powerful digital tools that cater to their needs. Meta for Business, which consists of WhatsApp Business, Instagram for Business, and Facebook Business Pages, serves as a good example. Meta for Bussines is powered by Meta, which owns social media and messaging platforms widely used in Indonesia. The available features on Meta Bussines are varied and do not require sophisticated digital literacy skills to operate.  Through Instagram Business, MSMEs could create a marketing campaign with a boarder market audience. With a Facebook Business page, MSMEs could build an engaging community with customers and prospective customers.  Meanwhile, by utilizing WhatsApp Business, MSMEs could improve their customer care and communicate with their customer base in a secure and safe medium.

Author: Amelinda Pandu Kusumaningtyas
Editor: Trevilliana Eka Putri

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[1] Kemenperin: Menperin Optimis Kembangkan potensi Ekonomi digital di Indonesia (2022) Kementerian Perindustrian. Available at: https://kemenperin.go.id/artikel/23480/Menperin-Optimis-Kembangkan-Potensi-Ekonomi-Digital-di-Indonesia#:~:text=Berdasarkan%20hasil%20riset%20dari%20Google,atau%20terbesar%20di%20Asia%20Tenggara. (Accessed: August 13, 2022).

[2] Setyowati, D. (2022) Transaksi e-commerce Indonesia naik 23% jadi RP 108,5 T Pada Kuartal I, Katadata.co.id. Available at: https://katadata.co.id/desysetyowati/digital/62ea3370922ea/transaksi-e-commerce-indonesia-naik-23-jadi-rp-108-5-t-pada-kuartal-i (Accessed: August 13, 2022).

[3] Putri, M.S. (2022) Indonesia pimpin pasar E-commerce di asia tenggara, Media Indonesia. Available at: https://mediaindonesia.com/ekonomi/502960/indonesia-pimpin-pasar-e-commerce-di-asia-tenggara (Accessed: August 13, 2022).

[4] Pengembangan UMKM Menjadi Necessary Condition untuk Mendorong Pertumbuhan Ekonomi (2022) ekon.go.id. Available at: https://www.ekon.go.id/publikasi/detail/4136/pengembangan-umkm-menjadi-necessary-condition-untuk-mendorong-pertumbuhan-ekonomi (Accessed: August 13, 2022).

[5]Intan, G. (2022) Jokowi Targetkan 30 Juta UMKM go Digital pada 2024, VOA Indonesia. VOA Indonesia | Berita AS, Dunia, Indonesia, Diaspora Indonesia di AS. Available at: https://www.voaindonesia.com/a/jokowi-targetkan-30-juta-umkm-go-digital-pada-2024/6504633.html (Accessed: August 13, 2022).

[6] Hidayat, A. (ed.) (2022) Pengguna Qris Capai 20,6 juta, 90 Persennya UMKM, Tempo. TEMPO.CO. Available at: https://bisnis.tempo.co/read/1611585/pengguna-qris-capai-206-juta-90-persennya-umkm (Accessed: August 13, 2022).

[7]Priyono., Moin,A., and Putri, V. (2020). Identifying Digital Transformation Paths In The Business Model of SMEs During The Covid-19 Pandemic. Journal of Open Innovation: Technology, Market, and Complexity 6(4): 1–22.

[8]Setyowati, D. (2022) Riset Kic-Amartha: UMKM RI Kurang maksimalkan Aplikasi Untuk Raup Cuan, Katadata.co.id. Available at: https://katadata.co.id/desysetyowati/digital/6256b1aee6ab1/riset-kic-amartha-umkm-ri-kurang-maksimalkan-aplikasi-untuk-raup-cuan (Accessed: August 13, 2022).