Indonesia has a large population of over 280 million and a rapidly growing middle class. However, it faces numerous challenges in sustaining its economic growth and improving the living standards of its people. One crucial area where Indonesia needs to improve is its digital competitiveness.
The East Ventures – Digital Competitiveness Index (EV-DCI) 2022 shows that Indonesia’s digital competitiveness has become even more distributed each year, marked by the EV-DCI median score increases yearly. EV-DCI is a measurement initiated by East Ventures to calculate digital competitiveness among provinces. Nevertheless, Java-based regions still dominate the top positions, leaving the eastern regions behind.
Improving digital competitiveness and closing the gap among the provinces is essential for the country’s economic and environmental sustainability.
According to Google, Temasek, Bain & Co. report, Indonesia’s digital economy has significantly surged, from US$ 41 billion in 2019 to US$ 77 billion in 2022. In 2025, the number is estimated to increase to US$ 130 billion by 2025. The figure can be achieved if we can optimize our resources appropriately.
The digital economy can’t be separated from the role of micro, small, and medium enterprises (MSMEs). MSMEs hold the key to bringing Indonesia to sustainability. The country is home to 65 million MSMEs, which account for over 60% of the country’s GDP and employ around 110 million people. Despite this, only a third of these MSMEs are on digital platforms, and even fewer are based in regions outside major cities.
Many MSMEs need help in terms of access to capital, financing, market access, and most importantly technology utilization. Improving the digital competitiveness of MSMEs is therefore crucial if Indonesia is to achieve sustainability and continue to grow its economy.
Firstly, by increasing the technology utilization among MSMEs, Indonesia can improve the efficiency and competitiveness of these businesses, enabling them to reach new markets and customers. For example, through e-commerce platforms and mobile payments, MSMEs can reach customers across Indonesia and beyond, increasing their revenue and improving their sustainability.
One of our earliest portfolio companies, Tokopedia, has been actively embracing local MSMEs in digitizing their businesses. Today, the firm has onboarded around 12 million sellers into its platform, which are primarily MSMEs. However, it is also a reminder that this would only happen with decent digital infrastructure, which has been improved by the government and local administrators in pursuit of technological betterment.
This includes providing training and support to help businesses adopt new technologies and digital solutions and investing in digital infrastructure to make it easier for MSMEs to access the digital tools they need to grow their businesses.
Another key benefit of improving digital competitiveness among MSMEs is that it can help to increase financial inclusion. Many MSMEs in Indonesia face financial challenges, which can limit their growth and sustainability. However, fintech startups can leverage their digital financial services and close the gap so that MSMEs can improve their access to financing, enabling them to grow their businesses and improve their financial stability.
One of our portfolio companies, Komunal, contributes to resolving this issue. The firm targets rural banks, which are still painfully traditional with fragmented processes yet offer higher, government-guaranteed ceiling deposit rates compared to commercial banks. In 2022, Komunal has channeled US$ 230 million (equivalent to IDR 3.6 trillion) worth of deposits and loans to local BPRs and MSMEs, helping MSMEs manage their finances and capital conveniently and efficiently.
Moreover, improving digital competitiveness can also help increase MSMEs’ transparency, accountability, and reporting, which is crucial for building trust and confidence in these businesses. For example, by using digital platforms to manage their accounts and transactions, MSMEs can have better record-keeping to demonstrate their reliability to potential customers and partners.
Improving digital competitiveness can also enable MSMEs to manage their resources better and reduce their environmental impact. A study by Accenture, in collaboration with the World Economic Forum (WEF), verified that digital adoption could be the key to lowering carbon emissions by up to 20% by 2050 in the three highest-emitting sectors: energy, mobility, and materials. The study also suggests that businesses must prioritize digital inclusion and skills development to ensure the current and future workforce can access new technologies, fostering the necessary skills to scale digital technologies.
By adopting digital tools, MSMEs can reduce their energy consumption, reduce their carbon footprint, and improve their sustainability. For instance, we noted that Gojek and Grab have aspired to gradually shift their transportation methods to two-wheeled Electric Vehicles (2WEV), which are more environmentally friendly.
Regarding food delivery, some online food delivery startups have also encouraged MSMEs to use sustainable packagings, such as wooden cutleries, recyclable bags, and other initiatives.
In a broader way, a digital startup can also help MSMEs and their users to implement sustainable practices within their businesses. In Aruna’s case, the firm is leveraging technology to practice sustainable fishing within Indonesia’s coastal, untouched communities and create a better livelihood for society through fishing practices, supply chains, and education. MSMEs can utilize those kinds of digital initiatives to contribute to a sustainable environment.
In conclusion, digital competitiveness can catalyze Indonesia’s journey toward sustainability. It can bridge the gap between regions, improve digital literacy, and achieve sustainable economic growth. The potential impact on society and the environment cannot be ignored and must be considered while promoting digital adoption in Indonesia. The government and private sector must work together to create a supportive environment that enables MSMEs across the archipelago to take advantage of the digital economy and thrive in today’s global marketplace.
By David Fernando Audy, Operating Partner at East Ventures.
This article has been published on The Jakarta Post, 2 March 2023.