Unintended Consequences of Business Digitalization among MSMEs during the COVID-19 Pandemic: The Case of Indonesia

26 Pages Posted: 3 May 2024

See all articles by Keita Oikawa

Keita Oikawa

Economic Research Institute for ASEAN and East Asia (ERIA)

Fusanori Iwasaki

Economic Research Institute for ASEAN and East Asia (ERIA)

Yasuyuki Sawada

University of Tokyo; Asian Development Bank - Economic Research and Regional Cooperation Department (ERCD)

Shigehiro Shinozaki

Asian Development Bank Institute

Date Written: May 2, 2024

Abstract

The coronavirus disease (COVID-19) pandemic disrupted businesses, economies, and societies worldwide. This study employs unique data from Indonesia to investigate whether and how digitalization of micro, small, and medium-sized enterprises (MSMEs) helped them weather the adverse shocks from the pandemic and resulting lockdowns. The main empirical result is that, in the pandemic’s early phases, digitalized MSMEs disproportionately encountered negative effects on their business outcomes. The seemingly harmful elements of digitalization disappeared during later stages. Moreover, COVID-19 restrictions initially had a “positive” impact on the business environment. This is counterintuitive. But when considering the panic buying at the onset of restrictions and large share held by the essential sector in our dataset, particularly the wholesale and retail sectors, the positive impact from the restrictions is not unreasonable. These findings suggest that the digital transformation had not yet been stably established among MSMEs by the start of the pandemic. Our findings provide critical implications for industrial and competition policies related to MSMEs during the COVID-19 recovery process.

Keywords: digitalization, digital financial services, access to finance, SME development, SME policy, Indonesia

JEL Classification: D22, G20, L20, L50

Suggested Citation

Oikawa, Keita and Iwasaki, Fusanori and Sawada, Yasuyuki and Shinozaki, Shigehiro, Unintended Consequences of Business Digitalization among MSMEs during the COVID-19 Pandemic: The Case of Indonesia (May 2, 2024). Asian Development Bank Economics Working Paper Series No. 725, Available at SSRN: https://ssrn.com/abstract=4814620 or http://dx.doi.org/10.2139/ssrn.4814620

Keita Oikawa (Contact Author)

Economic Research Institute for ASEAN and East Asia (ERIA) ( email )

Sentral Senayan II, 5th & 6th Floor, Jalan Asia Af
Jakarta, 10270
Indonesia

Fusanori Iwasaki

Economic Research Institute for ASEAN and East Asia (ERIA) ( email )

Sentral Senayan II, 5th & 6th Floor, Jalan Asia Af
Jakarta, 10270
Indonesia

Yasuyuki Sawada

University of Tokyo ( email )

Yayoi 1-1-1
Bunkyo-ku
Tokyo, Tokyo 113-8657
Japan

Asian Development Bank - Economic Research and Regional Cooperation Department (ERCD) ( email )

Philippines

Shigehiro Shinozaki

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F 3-2-5
Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

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