DIGITAL TRANSFORMATION DRIVERS FOR INDONESIAN MSMES

Digital transformation is imperative for Micro, Small, and Medium Enterprises (MSMEs) to endure and thrive within the dynamic contemporary business environment. Despite the Indonesian government’s digital transformation goals for MSMEs, the realization of this goal remains far. This study aims to identify the key factors influencing the digital transformation of Indonesian MSMEs. Drawing from extensive prior research, we investigate the impact of government support, community support, digital orientation, and digital capabilities on MSMEs’ digital transformation, and its effect on financial performance. To achieve this, an online survey was disseminated, capturing responses from 324 participants, and the data was analyzed using the SmartPLS 4. This research found that government support, digital orientation, and digital capabilities significantly influence digital transformation. However, community support shows no significant impact. Furthermore, our research reveals a substantial positive correlation between digital transformation and improved financial performance in Indonesian MSMEs, highlighting the profound business benefits of embracing digitalization. These findings emphasize the need to strengthen internal factors as a critical driver for accelerating digital transformation in Indonesian MSMEs.


INTRODUCTION
Micro, Small, and Medium Enterprises (MSMEs) hold an important role in the Indonesian economy, contributing significantly to job creation, entrepreneurship promotion, and Gross Domestic Product (GDP).According to the Coordinating Ministry for Economic Affairs (Limanseto, 2021) the country boasts 64,2 million MSMEs, contributing 61,07% to the GDP, amounting to 8.573,89 trillion rupiah.MSMEs also are known to employ 97% of the workforce and secure 60,4% of total investment.Additionally, they serve as catalysts for economic growth and development, particularly in rural areas, where they offer employment opportunities and stimulate local economic activity.
The COVID-19 pandemic brought significant challenges to Indonesian MSMEs, causing economic slowdown, supply chain disruptions, and declining consumer confidence.
The UNDP Indonesia and LPEM FEB UI collaboration research in 2020 highlighted adverse effects: difficulty in sourcing raw materials (55%), distribution challenges (81%), decreased product demand (88%), income reduction (77%), profit decline (88%), and asset devaluation (53%).Social distancing policies worsen these issues, leading to income and demand reduction, with some MSMEs left without income (Lutfi et al., 2020).Supply chain problems inflated raw materials and production costs, compelling many MSMEs to pivot to online sales (Stewart et al., 2021).The percentage of MSMEs selling through digital platforms surged from 28% before COVID-19 to 44% during the pandemic (United Nations Development Programme Indonesia & Lembaga Penyelidikan Ekonomi dan Masyarakat Fakultas Ekonomi dan Bisnis Universitas Indonesia, 2020).This transition, while beneficial, presented obstacles.Many MSMEs lacked networks for digital knowledge sharing and needed extensive training for online sales, especially older entrepreneurs unfamiliar with digital technology (Stewart et al., 2021; United Nations Development Programme Indonesia & Lembaga Penyelidikan Ekonomi dan Masyarakat Fakultas Ekonomi dan Bisnis Universitas Indonesia, 2020).Nevertheless, digitalization has shown many benefits.It connected MSMEs with customers, enhanced their competitive edge, and improved crisis response, ultimately bolstering business sustainability (Guo et al., 2020;Subriadi & Kusuma Wardhani, 2022;Teng et al., 2022).The government strongly supported this transition, targeting 30 million MSMEs to join the digital ecosystem by 2024 (Wisnubroto, 2022) H1: Government support has a positive impact on digital transformation.
While existing research lacks a direct connection between community support and digital transformation, we opted to incorporate this factor into our investigation due to our observations.Our observations indicate a notable presence of business communities in Indonesia, and they appear to play a significant role in the advancement of MSMEs.These communities have emerged through grassroots initiatives and have also been facilitated by government and private institutions.
In Indonesia's context, MSME communities serve as channels for businesspeople to express their aspirations to the triple helix entities, (the government, large corporations, and universities) (Noya et al., 2023).Furthermore, these communities function as fountains of innovation and information while offering support to MSMEs in their entrepreneurial journey, whether at the inception stage or during the process of scaling up (Aina et al., 2018).Hence, we formulate the following hypothesis: H2: Community support has a positive impact on digital transformation.
Rupeika-Apoga et al. ( 2022) explain that digital orientation indicates a business's heightened focus on the digital business landscape, encompassing the utilization of digital technology.In this context, the scope of digital technology can be interpreted as an array of digital tools and platforms that empower companies to achieve strategic growth (Kindermann et al., 2021).Beyond the technological dimension, digital orientation also encompasses the strategic initiatives pushing digital transformation and granting competitive advantages.Consequently, companies with a strong digital orientation are more inclined to take part in the path of digital transformation (Rupeika-Apoga, et al., 2022).
Building upon the insights gathered from prior research, the hypothesis can be summarized The relationship between the extent of digital transformation and profit-oriented financial performance exhibits a U-shaped correlation (Guo & Xu, 2021).In addition, a positive correlation has been established between digital transformation and financial performance (Teng et al., 2022).Rupeika-Apoga et al. ( 2022) have highlighted a disparity in the income generation probability between SMEs capable of independently managing digital transformation and those that lack such capability.Furthermore, digital transformation has been acknowledged for its positive influence on company performance, measured by criteria such as profitability, customer retention, return on investment, and sales growth in comparison to direct competitors, as well as the degree of organizational innovation (Osmundsen et al., 2018).Based on the insights obtained from these studies, we promote the following hypotheses: H5: Digital transformation has a positive impact on financial performance.
Hence, the research empirical model (Figure 1) can be visualized as follows:

RESEARCH METHOD
In this study, a survey methodology was employed to gather primary data for subsequent empirical analysis.The targeted respondents were owners of Micro, Small, and Medium Enterprises (MSMEs) who were over 17 years of age and operated online shops on various digital platforms, which involved e-commerce, social media platforms such as Facebook, Instagram, and TikTok, as well as instant messaging applications like WhatsApp.The research focused on MSMEs in Indonesia, and the chosen sampling technique was nonprobability sampling using a voluntary sampling method.
To compile primary data, questionnaires were disseminated to MSME owners through social media channels, specifically Instagram, and instant messaging applications, such as WhatsApp.All constructs were quantified using Likert-type scales that featured a five-point response format spreading from "strongly disagree" to "strongly agree".Consequently, when the primary breadwinner is typically male, women often engage in side businesses, leveraging the flexibility of online platforms.
Figure 1.Empirical Model skill to identify new digital opportunies DC2 I am able to respond to digital transformation DC3 I have the skill to master the state-of-the-art digital technologies DC4 I have the skill to develop innovative products using digital technology DC5 My company emphasizes the use of digital technology in its business activities DT1 Fachrunnisa et al. (2020) My company summarizes some of its business processes because it switches to the use of digital technology DT2 My company increases the mastery of digital technology in its business This study's respondents were predominantly women, with 232 women (71,6%) participating.This demographic alignment is consistent with data from the Ministry of Cooperatives and Small and Medium Enterprises in 2022, which reported that 64% of MSME participants in Indonesia are women (Office of Assistant to Deputy Cabinet Secretary for State Documents & Translation, 2023).Additionally, in the Indonesian context, MSMEs frequently serve as a way for families to increase their income.
illustrates the proposed structural model, including constructs such as government support, community support, digital orientation, digital capability, digital transformation, Figure 2. SEM Model Showing Coefficients the relationships among the variables within the proposed model, revealing the following: 1) Government support had a positive impact on digital transformation, substantiating H1; 2) Community support did not exhibit a positive effect on digital transformation, leading to the rejection of H2; 3) Digital orientation had a positive impact on digital transformation, validating H3; 4) Digital capability demonstrated a positive influence on digital transformation, confirming H4; and 5) Digital transformation was positively impacted financial performance, thus supporting H5.
. Several programs were launched to support this, such as Bank Indonesia's (the central bank) five MSME digitalization