Internet-based ICT and MSEs’ attitudes towards participating in international transactions

Micro and small enterprises (MSEs) play a major role in the Indonesian economy. In 2016, there were more than 26 million MSEs in various sectors, generating employment for more than 53 million people –  approximately 76 per cent of the total labour force for that year (BPS, 2017). The majority of these MSEs are suspected of operating with relatively small profit margins and are informal business activities. Hence, firstly, households participating in MSEs are relatively poor, or at least not rich enough for the government to tax them.

In the past decade, there seems to have been an increasing trend for MSEs to engage in international transactions; i.e. conducting export-import activities and participating in international trade networks.  This development has been seen to benefit Indonesian MSEs and their international partners. However, it is not yet clear which MSEs tend to participate in international transactions and which do not. One argument is that MSEs adopting internet-based information and communication technology (ICT) will have the opportunity to engage in international transactions. Studies have shown ICT has enabled firms to reshape business processes, to improve productivity, to achieve faster communication and to reach new clients (Bresnahan and Trajtenberg, 1995; Clarke, Qiang and Xu, 2015).

The main focus of this project was to observe whether or not internet-based ICT changed micro and small-sized enterprises’ attitudes toward participating in international transactions, including with Australian counterparts.

In January 2017, researchers carried out interviews with approximately 500 MSEs in Yogyakarta province, particularly in Bantul district and Yogyakarta city, to reveal their attitudes towards the adoption of ICT for their business activities. It sought to explore whether or not adopting ICT encourages them to participate in international transactions, such as exporting products, the provision of services for customers abroad, and importing intermediary inputs; in particular with Australian counterparts. Bantul district and Yogyakarta city in the Yogyakarta province were randomly selected based on the number of MSEs in the district relative to the total province figure.

Findings

We found that internet use among MSEs was still in the early stages. While more than 61.8 per cent of our samples accessed the internet, most used smartphones to connect to the internet (95.2 per cent) and used it for communication purposes (94.7 per cent). This finding is in contradiction to the situation in developed countries, where mostly desktop computers are used to access the internet for beyond-communicational purposes (Pangestu and Grace, 2017).

It appeared that the top three reasons for not accessing the internet were the lack of know-how, the lack of need and the lack of capability; while cellular signal strength is not a main concern. This is not surprising given that Yogyakarta is more developed compared to other provinces in Indonesia. The data revealed a divide in terms of revenue and education between those MSEs adopting internet-based ICT and those that do not. Similarly, the entrepreneur of the internet-connected MSE usually holds a higher educational qualification, while that of the non-connected MSE graduated from primary and secondary education.

The study found that in most cases use of the internet for business activities was limited to social media, such as to communicate with customers and suppliers, and to promote products and services. In contrast, the proportion of those with websites or e-commerce platforms was very low.

Nonetheless, internet-based ICT has enabled MSEs to engage in the digital economy and improved their productivity. We found that the internet uptake was positively correlated with export and import performance, and labour productivity.

MSEs export products either directly or through domestic distributors. The top two destinations were the United States (33.1 per cent) and Australia (31.5 per cent). Among those exporters, approximately 89.8 per cent used ICT, while ICT use among non-exporters was approximately 53.9 per cent.

MSEs also directly (26.3 per cent) or through domestic distributors (73.7 per cent) import materials for their activities.  The top country of origin was China (35.1 per cent), with only 9.7 per cent coming from Australia. Among those MSEs importing materials for their activities, approximately 77.2 per cent used ICT, while for non-importers ICT usage was 58 per cent.

Regarding labour productivity, we found it was higher among MSEs utilising ICT compared to that of those that did not. The average revenue per worker of MSEs adopting ICT was IDR10.1 million, while the figure for those not connected to the internet was only IDR 3.8million. In terms of profit per worker, the former earned IDR4.2 million and the latter only IDR1.9 million.

Recommendations

This project concluded that ICT uptake is positively correlated with MSEs’ export and import performance and labour productivity. In general, it observed that those who use ICT have a higher probability of conducting export-import activities as well as the ability to attain higher labour productivity than those who do not.

This project, hence, supports the argument that the digital economy, represented by access to and the use of ICT, has significant potential to contribute to development and inclusiveness by expanding trade opportunities and encouraging financial inclusion.

These gains justify public policies aimed at fostering firms’ use of the internet. If the internet is to support firms’ exports and productivity, then complementary policies aimed at building a firm’s capability matter. Hence, the government needs not only to provide ICT infrastructure but also to increase the readiness of MSE entrepreneurs to benefit from the technology.