By Danny Hermawan
The Covid-19 pandemic has dealt a devastating blow to the activities of micro, small and medium enterprises (SMEs). Large-scale social restrictions to break the domestic chain of Covid-19 transmission undermined SMEs business activity, which is dominated by physical interaction with customers. The typically conventional business models applied by SMEs have made adaptation and survival during the pandemic more difficult.
Inevitably, numerous SMEs have closed after struggling to repay loans, salaries, rental fees and utilities costs. Such vulnerabilities have been exacerbated by low productivity along with limited access to markets and finance. An optimal policy response is required immediately, therefore, to support SMEs during the post-pandemic recovery.
SMEs play a strategic role as the backbone of Indonesia's economy. Based on data issued by the Ministry of Finance in March 2021, SMEs in Indonesia totalled 64.2 million units, contributing more than 61% of gross domestic product (GDP) with a value of Rp8,573.89 trillion. In addition, SMEs absorbed 97% of the total labour force and attracted up to 60% of total investment in Indonesia. Meanwhile, SMEs also contributed 14.37% of total non-oil and gas exports from Indonesia worth Rp293.84 trillion by 2018.
Digitalisation is a viable solution for the SMEs revival. Consequently, Bank Indonesia continuously strives to accelerate inclusive digitalisation by expanding the digital ecosystem to increase SMEs transactions. This program supports SMEs empowerment through the digitalisation of product marketing via digital platforms and marketplaces.
In implementation, however, the SMEs onboarding program continues to face various constraints, primarily affecting SMEs based on the local cultures prevalent in Yogyakarta and Bali. According to research conducted by Mimba et al. (2021), the most binding digitalisation constraints affecting culture-based SMEs are classified into four categories as follows:
- Human intellectual capital. Most SMEs suffer from human resources ill-prepared to effectively utilise information technology. With education in Indonesia dominated by three main groups, namely primary level of education, pre-primary level of education and uneducated, digital literacy among SMEs is a fundamental issue that must be overcome immediately. Without human capital adequately prepared for digitalisation, SMEs will continue to struggle in terms of capital and marketing despite the various opportunities afforded during the pandemic era, particularly in terms of embracing digital transactions.
- Structural capital. Not all SMEs have the requisite infrastructure for digitalisation because of capital limitations, sporadic distribution of digital infrastructure, including internet access, even on the island of Java, and the prohibitive price of smart devices for the working class.
- Relational capital. Relatively few SMEs can take advantage of existing networks, with few realising the importance of networking with fellow entrepreneurs, professional associations, the government and banking industry.
- Social capital. SMEs already have access to internet facilities yet few take advantage of the trove of information available for business growth and advancement. Most internet use focuses on entertainment, thus missing vast digital opportunities.
This research uses qualitative and quantitative data. The quantitative data was sourced from BPS-Statistics Indonesia, as well as data from SMEs and questionnaires completed by SMEs.
The qualitative data was sourced from interviews with SMEs to identify barriers to digitalisation in Bali and Yogyakarta. Primary data originated from surveys based on questionnaires and interviews.
Secondary data was also sourced from BPS-Statistics Indonesia. In total, a sample of 57 SMEs in Bali and 78 in Yogyakarta was used in this research based on purposive sampling targeting SMEs established prior to the beginning of 2020 to explore conditions before and after the start of the pandemic.
The research findings showed that the issues associated with human intellectual capital at culture-based SMEs were triggered by the low number of employees providing maximum effort for the business, a lack of employee satisfaction and the prevalence of uninformed decision-making. Consequently, efforts to accelerate SMEs digitalisation in Bali and Yogyakarta have been impeded.
The research also identified a low level of relational capital at culture-based SMEs, as evidenced by the large number of businesses applying for non-KUR loans with high interest rates disbursed by the banking industry. In fact, relational capital is considered a critical element in the operational success of SMEs by creating good relationships with various stakeholders, including vertical and horizontal linkages with other SMEs, backward and forward supply chains as well as relationships with banks and local government.
