Role of the digital economy in formalizing MSMEs

Digitalization enables enterprises of all sizes and individuals to participate more cost-effectively in the global economy with speed and scale. Consequently, manufacturing, the provision of services, and capital will evolve. Furthermore, digitalization will also transform the way factories operate, the supply chains that enterprises participate in, and the creation and delivery of products and services. This will drive industries towards greater productivity and higher value-add. Yet, MSMEs are still lagging in terms of digitalization as compared to other key economic players such as large firms and companies based in urban areas.

Information and communications technology (ICT) which is the core of digitalization, play a critical role to play towards the achievement of the SDGs, particularly SDG8 (decent work and economic growth), SDG9 (industry, innovation and infrastructure) and SDG17 (partnerships for the goals), among others. As a sustainable development enabler, broadband-enabled technologies support critical public goods that can improve populations' economic and social well-being in rural and urban areas. With broadband in place, MSMEs can, for example, offer more innovative mobile and online services and accelerate the path towards achieving the SDGs. ICT also plays a critical role in advancing the digital economy, including modernizing logistics and marketing to develop digital banking solutions for financial inclusion. The main components of the digital economy are as follows:²³⁰

• E-commerce: the buying and selling of goods and services on the Internet or other computer network. Thus, for an MSME, such can be undertaken from home.
• E-business: broader than e-commerce, including transaction-based e-commerce businesses and those who run traditional businesses but cater to online activities. An e-business can run any portion of its internal processes online, including inventory management, risk management, finance, human resources, among others. Such can reduce costs for fledgling MSMEs.
• E-business infrastructure: the share of total economic infrastructure used to support e- business processes and conduct e-commerce transactions. It includes hardware, software, telecommunication networks, support services, and human capital employed in e-business and e- commerce.

This technological transition offers opportunities for inclusive engagement in economic activities. For example, financial technology provides new solutions for financial inclusion. In contrast, e-commerce provides opportunities for broader engagement of MSMEs and blockchain technology reduces costs and increases the efficiency of trading across borders. However, this wave of optimism about the transformative potential of digital technologies is tempered by the growing acknowledgement that the digital divide is widening.

However, developing countries, including small island developing states (SIDS), face numerous obstacles to developing the digital economy in the Asia-Pacific region. Inadequate access to the latest technology, sophisticated telecommunications infrastructure, low computer literacy, and countless cultural and socio-economic factors are just some of the challenges that developing countries face. In various studies, UNESCAP has highlighted the widening digital divide between and within the countries in the region. Out of 26 Asia-Pacific countries with special needs for which data are available, 14 have a fixed-broadband penetration rate of less than 2 per cent of the total population.  For example, on infrastructure, undersea telecommunications cables do not connect all the inhabited small islands scattered throughout the Pacific. Many of these island communities rely on more expensive services provided by telecommunication satellites. Even with undersea cables laid, such infrastructure can be damaged and time-consuming to repair. Affordability is a crucial driver for expanding broadband access to the unconnected population in the region. Mobile broadband, which has become more accessible at lower prices, is still above the affordability threshold in low- and lower-middle-income countries.

Internet connectivity only reached 50 per cent of the global population in 2018.²³¹ This gap between and within countries with complex digital infrastructures, connectivity and access, and those without, is conceptualized as the “digital divide”.²³² Further research into conceptualizing the digital divide is necessary due to the social ramifications of the gap between high-income and low-income countries. The detrimental impacts of the digital divide can perpetuate the effects of poverty, gender inequality and marginalization. Conversely, even the primary forms of digitalization, such as access and connectivity, provide significant opportunities for social development and the generation of knowledge economies. The widening digital divide undermines the development of inclusive digital economies. There is evidence that growth in Internet users is slowing, with billions of people remaining offline. Furthermore, reaching the unconnected and developing emerging technologies and business models is more costly and complex. Additionally, there are huge uncertainties about what this means for the future of work.

In the face of emerging challenges and the need to strengthen global outreach, it has become imperative for the MSME sector to demonstrate greater competitiveness and position themselves strategically along the value chain. To highlight the imperatives of becoming a part of the global value chain and the opportunities to align operations and processes of MSMEs with the value chain. Today, it is not individual enterprises that compete against each other, but global value chains primarily compete worldwide. This makes it imperative for MSMEs to evolve more innovative offerings and offer more excellent value to their partners to achieve the most competitive and mutually beneficial outcomes. For instance, to achieve the objective of becoming a preferred supplier in the global value chain, MSMEs would have to enhance adherence to international standards and norms. Here, ICT solutions can aid MSMEs to become more effective and efficient and help take them to the next level. Box 10 illustrates how the Malaysian government-assisted smallholder farmers in accelerating digital technology adoption for farming.

MSMEs that introduce ICT as part of their core business demonstrated an innovation capability as measured by establishing a new division, acquiring new machinery, improving existing machinery, acquiring production knowledge, and introducing new products. They have also demonstrated a positive attitude toward risk and were willing to adopt a new business strategy.²³³ Those MSMEs that had moved up into higher value-added production tiers had the following statistically significant characteristics: higher labour productivity, significant foreign ownership share, and ICT as a core part of their business activity.