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SME's Powering Indonesia's Success

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Hasil penelitian (Economic Impact Study) terbaru oleh Google dan Deloitte Access Economics yang berisi temuan dan rekomendasi penting yang bermanfaat bagi pelaku bisnis dan pembuat kebijakan.

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SME's Powering Indonesia's Success

  1. 1. 2015 SMEs powering Indonesia’s success The Connected Archipelago’s Growth Engine
  2. 2. General use restriction This report is prepared solely for Google. This report is not intended to and should not be used or relied upon by anyone else and we accept no duty of care to any other person or entity. The report has been prepared for the purpose of analysing how digital technology is transforming the Indonesian economy. You should not refer to or use our name or the advice for any other purpose.
  3. 3. Contents Executive summary Introduction Indonesia’s economic potential Indonesia’s digital economy Importance of the small business sector The value of digital technologies to Indonesian SMEs Digital trends Adoption levels Digital engagement levels The value propostition and growth opportunity ASEAN Economic Community What is the ASEAN Economic Community? Indonesia’s competitiveness and digital policies Broadband and social media Public policy Policy directions Increasing broadband access Help all SMEs to be digital businesses Expand e-payments Expand access to finance Expand e-government services Appendix A: Data Appendix B: Interpretation Appendix C: Econometrics References Our people 1 7 9 11 12 13 15 17 19 21 25 27 28 29 33 35 36 37 39 40 41 43 44 45 47 49
  4. 4. 1 SMEs powering Indonesia’s success Executive summary Indonesia has great economic potential, with abundant resources, a large young workforce and rapid urbanisation. Indonesia recorded an impressive economic growth rate over the past decade, averaging 5% per year. The country has made tremendous strides in social progress and economic management and is looking to its next target of becoming a middle-income country by 2025. Strengthening the digital economy will play a pivotal role in reaching Indonesia’s full potential. With more small and medium-sized enterprises (SMEs) engaged in the digital economy through broadband, e-commerce, social media, the cloud, and mobile platforms, they can have faster growth in revenue and employment, be more innovative and more competitive in the ASEAN Economic Community. Based on economic modelling for this report and previous World Bank research, we find that doubling broadband penetration rates and lifting digital engagement by SMEs could increase Indonesia’s annual economic growth by 2% – the additional growth it needs to achieve the 7% target required to be a middle-income country by 2025. SMEs in Indonesia are well placed to reap the benefits of digital transformation. They are already using basic forms of technology to achieve similar goals. Government policy can play a significant role in accelerating the benefits of the digital economy – primarily through increasing broadband access and by improving coordination of existing government programs, payments facilities, access to investment and facilitating access to new inexpensive digital tools. Boosting SME digital engagement could increase Indonesia’s annual economic growth by 2% - the jump Indonesia needs to become a middle- income country by 2025. GDP growth rate necessary to reach 2025 middle-income goal Current growth rate Additional growth required Figure: Achieving Indonesia’s economic ambitions will require a serious effort Source: Deloitte Access Economics 7% 5% 2%
  5. 5. 2The Connected Archipelago’s Growth Engine Benefit of digital technology for SMEs In this report, we identify four levels of digital engagement for SMEs based on technology adoption, online presence, social media use and e-commerce capabilities. This is based on the experiences in the Indonesian economy and a new survey of 437 SMEs in Indonesia. SME digital engagement levels 1. Offline business: No access to broadband, no computer or smartphone and did not have a website 2. Basic online business: Broadband access, digital device such as a computer or smartphone and static online presence1 3. Intermediate online business: Immersed in the social media through a combination of integrating websites with social media, live chat or customer threads on websites 4. Advanced online business: Sophisticated connectivity, social media integration and e-commerce capabilities. SMEs that get online, engage in social media and develop e-commerce capabilities enjoy significant business benefits in terms of revenue, employment, innovation and competitiveness. Each step up the digital engagement ladder brings benefits. 1. Basic online presence includes standard website with limited information, listings on online directories and other forms of non- interactive information portals online. It is also important to note that while our engagement ladder focuses on digital technology usage in retail and customer interactions, the benefits of digital technologies extend far beyond that. Digital tools such as cloud computing and data analytics can greatly improve supply chain management and internal communication efficiency. These platforms provide cost effective ways in which businesses can access state of the art technology tools including sales and account management, a way to reach people (workers) or HR management tools and human resources. Cloud technologies also allow businesses make better and faster decisions by streamlining business reporting and displaying real time information. The digital economy is not just about driving business success. It is also a key ingredient to new and innovative business models, which are critical building blocks of the broader economy and the digital ecosystem in the long term. New digital businesses such as software studios, app developers and content creators are not only creating tremendous economic value, they also play an important role in creating Indonesian solutions to solve Indonesian problems. Figure: Distribution of businesses by digital engagement levels 37% Basic online 18% Intermediate online 36% Offline 9% Advanced online Source: Stancombe Research and Planning, Deloitte Access Economics
  6. 6. 3 SMEs powering Indonesia’s success 4 Despite the benefits of engaging with digital technologies, we show that over a third of Indonesian SMEs (36%) remain offline, another third (37%) only have very basic online capabilities, 18% have intermediate online capabilities, and less than one in ten (9%) are advanced online businesses. Digital technologies are helping Indonesian SMEs grow faster and become more competitive internationally. In particular, our econometric modellings show that higher digital engagement levels are strongly associated with higher revenue growth, increase in employment, innovation and export. Advanced online businesses grew their revenue 80% faster than offline business. Applied to the average sized small business in our survey (IDR 1.4 billion revenue p.a.), a business that is currently offline could grow its revenue by as much as IDR 140 million a year if they acquire advanced online capabilities. This is perhaps not surprising – digital technologies such as websites and search engine marketing offer SMEs a cost effective way to reach more customers and quickly scale their operations. Advanced online businesses are also one and half times more likely to increase the number of people they employ when compared to offline businesses, further improving their capacity for growth in the future. Digital technologies are driving business success in different ways in Indonesia. They are helping Indonesian businesses improve communications, operate more efficiently, overcome barriers to access education and financial services, and reach more customers. Some examples are outlined below, with full case studies in the body of the report. Benefit of digital technologies for Indonesian SMEs 1. Up to 80% higher growth in revenue 2. One and half times more likely to increase employment 3. 17 times more likely to be innovative 4. SMEs with higher digital engagement are more competitive internationally. SMEs with digital technologies are more likely to innovate. When asked whether SMEs have reacted to market forces by changing part of their business model, we found that advanced online business are 17 times more likely to make a considerable change in the way they did business than offline businesses. Digitally engaged SMEs are also more competitive internationally. In this research, we show that SMEs with basic online capabilities had 6% more of their revenue derived from international customers than those SMEs offline. There is clear evidence that SMEs can benefit greatly from engaging with digital technologies, in many ways, Indonesian SMEs are already using basic forms of technology to achieve similar goals. For example, many SMEs in rural areas are already using SMS to distribute information, advertise, and socialise, much like social media platforms. Adopting more advanced digital technologies can help improve these interactions, making them more efficient, providing greater coverage and richer content formats. Improved access and affordability to these technologies will likely see their rapid adoption and growth in SMEs’ digital capabilities. Different ways digital technologies are driving business success in Indonesia
  7. 7. 4The Connected Archipelago’s Growth Engine Brodo Footwear: using the digital technologies to drive business growth Brodo Footwear is an Indonesian men’s fashion company founded in 2010 that in just over four years, has grown to employ around 100 people, produces more than 4,000 pairs of shoes a month and generates around US$120,000 in revenue a year. The company expanded from an online-only start up to a retailer across multiple platforms. Brodo is using data analytics to focus its marketing effort and cloud tools to increase business productivity. The company uses Google Analytics and its own sales data to better understand its inventory, customers and online traffic. This helps the business to target specific customers for promotion and build relationships with its customers. More than 80% of Brodo’s sales come from its online store. Brodo’s ambition for the future is to expand internationally into other ASEAN countries. HijUp: growing international through online channels HijUp.com is Indonesia’s first Islamic fashion e-commerce business. It has grown from having two employees managing 14 brands of women’s fashion when it launched in 2011 to having 48 employees and carrying over 140 brands today. Suppliers include a small number of large manufacturers, but most are small businesses themselves. Back in 2011, HijUp launched with a series of ‘how-to’ videos on YouTube teaching women how to get creative with their hijab fashion. Not only was the video series a tremendous success in featuring HijUp’s products, it also generated significant following online and growth in sales. Over the next four years, HijUp worked with other content creators like bloggers, video bloggers and make-up artists to add more tutorials and fashion-related content. The use of online technology allows the business to expand seamlessly overseas. Today, 30% of HijUp’s YouTube traffic is from outside Indonesia and exports to other ASEAN economies account for more than 20% of its revenue. 8Villages: helping rural SMEs overcome barriers to growth 8Villages is an Indonesian business that provides underserved rural communities with LISA, a valuable subscription service that provides quality and localised information about agriculture, finance, advocacy for women and general education. Users typically receive daily SMS tips from 8Villages and trending local user-generated content. They can also ask questions and get answers from 8Villages’ partners and other users. The business boasts over 75,000 subscribers in Indonesia, primarily farmers in remote communities. 8Villages has impacted other SMEs, particular those in rural areas, where businesses are often disadvantaged due to lack of financing and access to reliable information. 8Villages’s LISA platform provides an easy and affordable way for these businesses to communicate and obtain useful information that could help them growth and bridge their knowledge gaps. 8Villages financial literacy programs have helped many rural SMEs to secure the much needed capital to expand their operations and improve their productivity. 8Villages platforms on smartphones and the web provide significantly improved and richer content compared to its SMS services, however these platforms have limited reach due to the lack of broadband access among remote communities.
  8. 8. 5 SMEs powering Indonesia’s success Holycow Steakhouse: innovation enabled by digital technologies Holycow Steakhouse is a chain of restaurants offering a range of premium food such as Wagyu beef. The business started in 2010 as a small street vendor and quickly grew to a large chain with 12 locations throughout Indonesia. It is a story of a business that has used the internet to build its profile, attract new customers, and communicate across locations and its supply chain. In July 2012, Holycow launched its logo campaign on social media and in its stores – a short laptop video inviting customers to vote and submit their design of the Holycow logo went viral on social media. The campaign received more than 58 million impressions, nearly 10,000 related tweets and 700 ballots submitted in its store. The innovative online campaign delivered massive gains in sales and brand recognition for the business and yet its costs are minimal when compared to traditional advertising channels with similar impact.
  9. 9. 6The Connected Archipelago’s Growth Engine Government needs to help lift GDP growth through digital SMEs To reach middle income country status by 2025 Indonesia needs to boost its economic growth by an additional 2%. This could be achieved by accelerating the growth of Indonesia’s digital economy, particularly among the SMEs. Indonesian SMEs are well placed to reap the benefits of the digital economy. Government policy, particularly in areas such as infrastructure provision, digital regulation, investment restrictions, could play a huge role in further expanding and accelerating this growth by reducing barriers to access and regulatory restrictions on use. In this research, we identified five key areas of policy focus for government to improve SME digital engagement: Increasing broadband access is essential. Existing internet access in Indonesia remains relatively expensive and slow. Increasing broadband access and the quality of service will encourage digital technology adoption by SMEs and will improve performance of existing technologies. Broadband infrastructure developments need to be balanced and open to innovative alternative technologies. For example, while fixed infrastructure deployment can be used to relieve network congestion and increase access speed, mobile networks can help improve mobility and coverage. Innovative technologies such as Wi-Fi access points could be employed to offload existing traffic from mobile networks to help increase capacity. The government should ensure that regulatory frameworks are flexible and open to these innovative technologies, and, at same time, facilitate an efficient and competitive environment. Help all SMEs to be digital businesses. Many government agencies provide SME support programs, including those targeted at increasing SME digital engagement. They are often overlapping and limited in scale. Government needs to improve the coordination of these SME programs between various agencies. A strong partnership with the private sector will help. Innovative online businesses such as HijUp and 8Villages, and Google’s support for Gapura, which brings digitally engaged SMEs together to share information and solutions, are a good example of private sector engagement. Expand e-payments. Improving trust in e-commerce payment platforms, increasing bankability of Indonesian consumers and businesses and expanding alternative payment systems will increase the volume of digital transactions in Indonesia. The focus for government should be to ensure that e-payment systems are accessible, reliable and secure. This will build greater consumer confidence and increase use. Expand access to finance. Digital SMEs need a mix of domestic and international sources of finance, barriers to that will reduce their potential for growth. Investment policies need to be open to all sources and types of capital. Indonesian SMEs will benefit from greater access to online micro-financing tools. Expand e-government services. Government services delivered through online platforms are more cost effective and efficient. More online government services would build consumer confidence in online activities and services over time. If the government builds on its existing efforts to help lift the number of SMEs that are online, engaged with social media and participating in e-commerce, more SMEs will move up the engagement ladder, from offline to online businesses and from basic to intermediate and advanced businesses. These transformative changes will deliver the improved business performance needed for Indonesia to fully utilise its economic potential and reach middle- income status by 2025.
  10. 10. Google commissioned Deloitte Access Economics to prepare a report on the value of internet-savvy entrepreneurs to Indonesia. It builds on previous report commissioned by Google on the value of the internet to the Indonesian economy. The aim of this report is to go beyond the national statistics and trends and understand the day-to-day impact of the internet and digital technologies on business, with a focus on micro, small and medium enterprises (SME). What are the current trends in the use of the internet and digital technologies? If SMEs do successfully use the latest tools, what is the value proposition in terms of increased revenue, sustainability and employment creation? This report also explores the changing economy within which Indonesian SMEs operate. How do such businesses compare with their counterparts across the ASEAN region? How will the advent of the ASEAN economic community affect the competitive landscape for Indonesian SMEs – how can they compete and grow? The primary audience for this report is the Indonesian business community – SMEs, industry representatives, and larger businesses that work with this important sector of the economy. By increasing engagement with the digital economy, SMEs can be better businesses. 1 Introduction This report also recognises that the economic and technology policy landscape is also important for the future success of the Indonesian economy. The report describes digital policies in Indonesia and compares them to other countries in the region. It discusses ways in which the government and departments can more effectively play a role in Indonesia’s emerging digital economy. Framework for analysis This report is based on a review of existing literature, a new survey of over 400 business owners and managers across Indonesia, targeted consultations with business leaders and government officials, and an analysis of publicly available data from across the ASEAN region. We synthesised the results of these findings to analyse the role and value of the internet and digital technologies to SMEs in Indonesia, how this compares in the region and the role of policy settings for economic and technology development. The framework for analysis is summarised in Figure 1.1.
  11. 11. 8The Connected Archipelago’s Growth Engine Chapter 2 outlines the economic challenges facing Indonesia and the importance of SMEs in the Indonesian economy. It looks at recent changes in the competitive landscape. Chapter 3 examines digital trends in Indonesia and provides an assessment of levels of digital engagement across SMEs. This chapter quantifies the value proposition and growth opportunity from digital technologies. Chapter 4 discusses the ASEAN economic community – how do Indonesian SMEs compare with their regional counterparts? It examines the possible impact of the ASEAN economic community in Indonesia and the role of digital technologies in providing opportunities for growth. Chapter 5 shifts the focus to a broader industry and government policy lens. It describes the social web policy landscape in Indonesia and across ASEAN, identifying the issues and barriers in this area. It concludes with directions for the future – specific actions government can take to lift digital engagement. The report concludes with appendices that annotate methodology used in this report. Figure 1.1: SME’s powering Indonesia’s success SME’s powering Indonesia’s success Indonesia’s economic potential The value of digital technologies to Indonesian SMEs ASEAN Economic Community Public policy
  12. 12. 2 Indonesia’s economic potential Indonesia is a country with great economic potential. It has abundant resources, a large young workforce and is undergoing rapid urbanisation. Indonesia recorded one of the most impressive economic growth rates in the world over the past decade, averaging 5% per year. The country has made tremendous strides in social progress and economic management, and is looking to its next target of becoming a middle-income country by 2025. To meet this ambitious target, Indonesia must lift its economic growth to 7% per year. Improving the use of digital technologies, particularly among SMEs, can give Indonesia the needed 2% boost.
  13. 13. 10The Connected Archipelago’s Growth Engine CURRENT GROWTH RATE GDP GROWTH TARGET 5% 7%ADDITIONAL GROWTH HELPED POWERED BY DIGITAL SMEs 2%
  14. 14. 11 SMEs powering Indonesia’s success Indonesia, along with other emerging Asian economies, has a fast growing middle-class consumer base in the world. It is estimated that the Asian middle-class will double in size, from two billion today to 4.9 billion in 2030, representing 66% of the global middle-class and accounting for over 40% of global middle-class consumption (Kharas & Gertz, 2010). The transition of millions of Indonesians out of poverty into the consuming classs will be a big part of Indonesia’s growth. The Indonesian government has committed to transforming Indonesia into a middle income country by 2025 in its policy whitepaper – The Master Plan for the Acceleration and Expansion of Economic Development of Indonesia (MP3EI). This will require a real economic growth at least 7% per year, 2% above the average historical growth rate. While achievable, there are significant economic challenges to realising Indonesia’s full growth potential. For example, stagnant productivity growth; low participation in the labour force, particularly among women; lack of a skilled workforce; uneven distribution of economic prosperity across regions; and inadequate infrastructure continues to constrain Indonesia’s economic development. Strengthening the digital economy will play a pivotal role in overcoming these barriers. With more SMEs using broadband and smartphones to reach customers and operate more efficiently resulting in faster revenue growth, higher employment as well as greater innovation and a better competitive position in the ASEA Economic Community. Indonesia’s digital economy Indonesia’s future prosperity will be significantly determined by the success of its digital economy. Development of the digital economy will improve connectivity between businesses and consumers, lift efficiency and productivity, and create new markets for businesses. In 2011, Deloitte Access Economics forecasted the value of the internet to the Indonesian economy at IDR 115 trillion or 1.6% of GDP (Deloitte, 2011). In addition to the direct economic contribution of digital technologies, the study also highlighted the importance of these technologies in overcoming unique challenges for Indonesia, including topology, congestion, education and communication. Since then, the digital economy in Indonesia has grown rapidly. New and innovative digital technologies such as mobile apps, cloud and data analytics have grown rapidly in Indonesia’s digital landscape. Improved affordability of digital technologies, such as smartphones and broadband, has seen significant increases in the number of consumers and businesses engaging in digital activities. Building on this platform, digital technologies are going beyond basic communication and social networks; they are starting to transform the archipelago economy. Beginning with how consumers are interacting with businesses, digital technologies are changing Indonesia’s workplaces, how supply chains are organised and how businesses are managed. This growth trajectory is likely to continue in Indonesia. Ongoing infrastructure investments in broadband networks and an expected rise in national income are likely to further drive improvements in Indonesia’s internet speed, breadth of broadband coverage and affordability of digital technologies over time. 2 Indonesia’s economic potential 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% GDP growth rate needed to meet middle income goal Current growth rate Additional growth required Figure: Achieving Indonesia’s goals will require a serious effort 7.0% 5.0% 2.0%Growth gap Source: MP3EI, Deloitte Access Economics.
  15. 15. 12The Connected Archipelago’s Growth Engine While access to digital technologies remain difficult for some, many already using other basic forms of technology to achieve similar goal. This means that Indonesia is well placed to take advantage of improvements in digital access and availability of new digital tools. Based on economic modelling for this report and previous World Bank research, we find that doubling broadband penetration rates and lifting digital engagement by SMEs could increase Indonesia’s annual economic growth by 2% – the additional growth it needs to achieve the 7% target required to be a middle- income country by 2025. Importance of the small business sector SMEs are the dominant form of business organisation in Indonesia and play a significant role in its economy. Collectively SMEs represent more than 99% of the total number of firms in Indonesia, 97% of employment and 57% of Indonesia’s annual GDP (OECD, 2012). SMEs have an important role to play in accelerating Indonesia’s economic growth, especially in absorbing the rapidly growing labour force and driving productivity improvements. There are 55 million SMEs in Indonesia, employing 108 million people and contributing 57% of Indonesia’s annual GDP. Yet SMEs suffer productivity levels less than 4% that of their large business counterparts (OECD, 2012). The productivity gap between SMEs and larger enterprises has widened since then (OECD, 2012), mainly due to the manual production processes often employed in smaller businesses and the lack of access to skilled workers, machines, IT infrastructure and the propensity to improve methods of production. While these economic attributes are common among developing countries, it remains one of the largest economic growth gap for Indonesia. The ability to boost productivity performance in the SME sector will be essential to Indonesia in reaching its growth targets in the future. The economic significance of broadband Broadband can fundamentally restructure how an economy organises and have a significant positive impact on economic growth, particularly in lifting productivity, job creation, and fostering innovation. In developing countries, adoption of broadband was responsible for significant improvements in existing markets by reducing information gaps and creating a range of economic opportunities across communities. The World Bank (2009) estimated that for every 10 percentage point increase in fixed broadband penetration leads to a 1.38 percentage point acceleration in economic growth for developing countries. It is worth noting that the figure is estimated for fixed broadband in 2009, we expect the impact of broadband to be much higher now given the rapid growth of mobile broadband since then. For Indonesia, this means that increasing access to broadband infrastructure could be key to reach its real GDP growth target of 7% from the historical growth rate of 5%, and would see Indonesia become a middle income country by 2025. What are SMEs? According to the Ministry of SMEs and Cooperatives and Bank Indonesia: • Micro business is defined as businesses with net assets less than IDR 50 million and less than IDR 300 million in total annual sales • Small businesses are businesses with net assets between IDR 50 million to IDR 500 million, or with total annual sales from IDR 300 million to 2.5 billion • Medium businesses are those with net assets from IDR $500 million to 10 billion or total annual sales from IDR 2.5 to 50 billion. Furthermore, Indonesian SME performance is becoming increasingly important as the country integrate with other ASEAN economies beyond 2015. This new regional economic paradigm will likely see a shift in the competitive landscape for Indonesian SMEs. They will be likely to face intensified competition in the domestic market, but also increased opportunities overseas.
  16. 16. 3 The value of digital technologies to Indonesian SMEs 9% 36% ADVANCED ONLINE BUSINESS OFFLINE BUSINESS
  17. 17. Distribution of businesses according to digital engagement levels 37% 18% BASIC ONLINE BUSINESS INTERMEDIATE ONLINE BUSINESS
  18. 18. 15 SMEs powering Indonesia’s success In this chapter, we explore the value of digital technologies to Indonesian SMEs. We begin by outlining overall digital trends and then quantify trends based on data from a specially designed survey of over 400 SMEs conducted in 2015. We define a ladder of digital engagement and present economic modellings that show how higher levels of engagement are associated with a range of improved business performance metrics including revenue growth, employment, innovation and more. Technology has been an important driver of business productivity for decades – computers in the 1980s, user- friendly software in the 1990s and the internet in the 2000s. Today, emerging digital technologies including the cloud, smartphones, apps and data analytics are having huge impacts on consumers and businesses around the world. For consumers, emerging technologies such as social apps provide platforms that facilitate the exchange of knowledge and content. For businesses, these applications extend the traditional business capabilities allowing them to tap into new markets, increase efficiency of sales and marketing and improve business operations. Bernoff and Li (2008) noted, ‘... with the increase in social participation among consumers and the growing sophistication of the underlying technologies, it’s now possible to put social applications on an equal footing with other business projects…’ Indeed, empowered consumers are spending more time online, and making decisions based on digital content, including user reviews and product descriptions on websites. The ability to capture this opportunity for businesses will be an important factor for growth of the digital economy. Digital trends Indonesia is at the centre of this digital trend. In 2012, Jakarta was ranked as the most active city in the world on Twitter (Semiocast, 2012). Twitter users in Jakarta accounted for 2.4% of the 10.6 billion tweets posted daily around the world. Today, Indonesia has the fourth largest active Facebook user base and the fifth largest Twitter user base. Indonesia also has heavy usage of online messaging platforms including WhatsApp, LINE and BBM, with some 97% of mobile phone users accessing messaging platforms multiple times daily, most Indonesian have multiple messaging application installed on their devices (Inmobi, 2014). Businesses in Indonesia are also becoming increasingly aware of the power of the internet and digital tools. In our survey, 38% of owners and managers identified having a website as critical to the success of their business when engaging with customers, while 32% and 23% said the same about social media and mobile messaging platforms. In comparison to social media, email is an even more improtant tool, over 67% of respondents said email was critical. This result is not surprising, as email is likely to be the most accessible form of digital communication in Indonesia.
  19. 19. 16The Connected Archipelago’s Growth Engine Brodo Footwear: using the social web to drive business growth Brodo Footwear is an Indonesian men’s fashion company founded in 2010 that in just four years, has grown to employ around 100 people, produces more than 4,000 pairs of shoes a month and generates around US$120,000 in revenue a year. The company expanded from an online-only start up to a retailer across multiple platforms. ‘The business started as something less serious, as a lifestyle side-project when we were at university,’ according to Brodo co-founder Yukka Harlanda. ‘We started the business to make custom shoes for friends and family. The business evolved when we took it online, especially on social media. We started seeing a large demand for our product, and it was a huge opportunity for us.’ The cost-effective marketing power offered by large social media networks allowed the company to quickly build its brand and customer base with very little cost. ‘Different social media platforms offer different advantages. For example, we are using Facebook to promote sales, while Twitter allows us to gather product feedback. We are also using Tumblr and Instagram to help build the brand, while using Google+ to provide information and adwords to market our products. We are also starting to use LinkedIn to help recruit talent,’ said Yukka. Brodo is increasingly using data analytics and other cloud tools to focus its marketing effort and increase business productivity. The company uses platforms such as Google Analytics and its own sales data to better understand its inventory, customers and online traffic. This helps the business to target specific customers for promotion and build relationships. ‘It seems our customers are likely to be young males who like politics and travel sites,’ Yukka jokingly said. ‘The more we know about our customers, the more effective we can be in reaching them and satisfying their needs.’ Knowing who the customers are and what they like has significantly influenced how Brodo designs its products and builds its brand, much of this knowledge is only available online. Although Brodo has been successful as an online-only business in Indonesia, its ambition for the future is to expand internationally and strengthening its physical retail stores. ‘Something we haven’t realised before is that some of our customers like to physically interact with our product before their first purchase.’ The two Brodo shopfronts that started as extra storage now represent more than 20% of sales, with the other 80% coming from its online store.
  20. 20. 17 SMEs powering Indonesia’s success There are many indicators of engagement with digital technologies, including purchasing devices, connecting to services, and use of the web and apps. Below we present some of the key findings. Technology adoption Technology adoption among Indonesia SMEs is substantial. More than 96% of those surveyed had access to a computer, 84% said they had a smartphone and 73% had access to the internet through fixed or mobile broadband connection. Adoption levels Survey data Our findings are primarily based on the data from a survey of over 400 SMEs in Indonesia conducted in 2015. The survey had approximately 40 questions fielded using a combination of panel (internet) questions and face-to-face interviews. The face-to-face interviews were conducted in six cities across Indonesia: Jakarta, Bandung, Semarang, Surabaya, Medan and Makassar. Further background to the survey methodology is provided in the appendix. The results are broadly representative of the broader SME sector in the Indonesian economy. However, the survey sample focused on industry and services businesses and under-represents the agriculture sector that comprises around 49% of the Indonesian SME sector. Second, we sampled a mix of micro, small and medium-sized businesses and where appropriate we present the results separately. A strictly representative sample of SMEs would involve only a handful of medium-sized businesses and reduce the quality of the results. Of course, this means care needs to be taken when interpreting the aggregate results. 50% 58% 77% 58% 79% 86% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Rural area Regional town Major city Micro Small Medium Figure 3.1: Broadband access by location and size, 2015 Source: Stancombe Research & Planning, Deloitte Access Economics 96% computer 84% smartphone 73% fixed/mobile broadband While there are no major differences in adoption of smartphone and computer across business size and type, broadband take-up clearly remains limited for some businesses. Figure 3.1 shows, businesses in rural or regional locations, and smaller businesses are likely to have a much lower adoption rate for broadband.
  21. 21. 18The Connected Archipelago’s Growth Engine 18How digital technologies are transforming the Australian economy Figure 3.2: SMEs e-commerce capabilities, 2015 Figure 3.3: Digital marketing spend growth in the next three years, 2015 Source: Stancombe Research & Planning, Deloitte Access Economics Source: Stancombe Research & Planning, Deloitte Access Economics 2. Assumed exchange rate of IDR12,535 to USD$1 as of 29 January 2015. 22% 10% 12% 56% Online orders and payments Online orders Basic information % of total marketing spend No online presence In three yearsNow 35% 37% 39% 41% 43% 45% 47% 49% 51% 53% 55% Micro Small Medium 47% 52% 51% 41% 46% 45% We also found that technology take-up among businesses in the agriculture; livestock, forestry and fishery was generally below average. For example, with only 59% using broadband compared to an average of 73%. We note that the figures reported in our survey on broadband access are comparatively higher than other sources. We note that in addition to being a self-reported figure (with some possibility of overestimation), it does refer to access to broadband, instead of subscriptions, and hence includes Wi-Fi, smartphones and communal internet. This is less restrictive than data that measures subscription rate of fixed internet access. Websites, social media and e-commerce Despite substantial adoption rates in broadband among SMEs, e-commerce capabilities and social web integrations remain low. In our survey, 12% businesses described themselves as having basic e-commerce capabilities (customers can order goods and services), another 10% said they also had online payment systems. SMEs had higher social integration, with 41% reporting their website as having functionalities that could interact with users through social platforms. Remaining SMEs either did not have an online presence, but had very basic information on their website such as contact details, address or opening hours. Digital marketing expenditure Indonesian SMEs in our survey are spending a substantial proportion of their marketing budget on digital advertising channels such as websites, search engine marketing and online directory listings. On average, SMEs spend around IDR15 million (USD$1,2002 ) on marketing annually, of which 45% is spent on digital advertising. We did not find any major differences in digital marketing expenditure across different business groups, with the average digital proportion of marketing budget ranging from 42% to 47% between micro and medium businesses. According to our results, marketing through digital channels is expected to grow over the next three years. Figure 3.3 shows that digital marketing spend across all business sizes is expected to increase by at least 4% of the total marketing budget. 18How the internet is powering small businesses in Indonesia
  22. 22. 19 SMEs powering Indonesia’s success We identify four levels of digital engagement for SMEs based on technology adoption, online presence, social media use and e-commerce capabilities. This is based on the experiences in the Indonesian economy and a new survey of 437 SMEs in Indonesia. Digital technology and internet access in Indonesia are generally limited for SMEs, especially for smaller businesses operating in rural areas. For the purposes of this report, we surveyed a mixture of businesses including some advanced online businesses to provide greater insights into the benefits of higher digital engagement. It is also important to note that while our engagement ladder focuses on digital technology usage in retail and customer interactions, the benefits of digital technologies extend far beyond that. Digital tools such as cloud computing and data analytics can greatly improve supply chain management and internal communication efficiency. Offline businesses Based on analysis of the data, offline businesses are defined as those who do not have access to broadband, do not have a computer or smartphone and do not have a website. Basic online businesses Basic online businesses have broadband access and a digital device such as a computer or smartphone and have a website. However, the businesses are not involved in social media (only email) and do not have e-commerce capabilities for ordering or payment. Intermediate online businesses Intermediate online businesses have digital connectivity and were also immersed in social media by integrating websites with social media, live chat or customer threads. These businesses do not have full e-commerce capabilities. Advanced online businesses Advanced online businesses have connectivity, social web integration and e-commerce capabilities. We note that beyond this level of digital engagement, there are many other ways in which businesses can embrace digital technology but these are not a focus of this research. Digital engagement levels Figure 3.5: Distribution of businesses according to digital engagement levels Source: Stancombe Research & Planning, Deloitte Access Economics Intermediate online business Basic online business Offline business Advanced online business 18% 36% 37% 9%
  23. 23. 20The Connected Archipelago’s Growth Engine The trajectory of digital engagement The vast majority of SMEs are not fully engaged with digital technologies, with many SMEs remain offline. Figure 3.5 shows that over a third of Indonesian SMEs are offline, not using broadband, digital devices or having an online presence. They are using the most basic forms of technology to do business and communicate with their customers, including landlines and feature phones. The lion’s share of SMEs in the lowest digital engagement levels are micro businesses (58%) earning less than IDR 300 million (US$24,000), with some small (27%) and medium businesses (14%). In comparison, advanced online businesses are those that are connected to the internet, have a strong online presence through social media integration and e-commerce capabilities. By definition, all advanced online businesses have online ordering and payment facilities. Between these two extremes of digital engagement are basic online businesses that are connected at an elementary level, with some online presence, but not using e-commerce capabilities of the internet. Figure 3.6: Digital engagement by business size, % of businesses Source: Stancombe Research & Planning, Deloitte Access Economics Small Micro Medium Intermediate online businesses have very similar levels of social media integration to advanced online businesses (interacting through two or more social media functions). However, these businesses do not have e-commerce capabilities, including ordering and payment through their website. Digital leaders and laggards In general, we found that smaller businesses and those in rural areas are less likely to be digitally engaged. Figure 3.6 shows less than 15% of those with advanced online capabilities are micro businesses. By contrast, close to 58% of those offline are micro businesses. Over half of businesses in rural areas are offline, compared to only a third in major cities. Furthermore, our analysis also shows that primary industries including agriculture, livestock, forestry and fishery remain the least digitally engaged in Indonesia, with more than two thirds of the sector offline and less than 6% with advanced online capabilities. In contrast, construction, transport and communication, and manufacturing sectors have the highest level of digital engagement, with more than a third of respondent identifying that their business has social web integration or e-commerce capabilities. 58% 28% 21% 15% 27% 43% 42% 44% 14% 30% 37% 41% 0% 20% 40% 60% 80% 100% Offline business Basic online business Intermediate online business Advanced online business
  24. 24. 21 SMEs powering Indonesia’s success Intuitively, the adoption of digital technologies will improve business performance. SME owners and managers have purchased devices, connected to the internet, built websites and developed strategies for a range of reasons – to improve efficiency, reduce costs and reach new customers. However, it is unlikely that most businesses, especially in the SME sector, will have prepared a business case for technology adoption. Most will probably have followed business trends with the general belief that they need to adopt new technologies to keep up with competitors. In this section, we take a closer look at just how digital engagement is adding value to SMEs in Indonesia. Business expectations Businesses know digital technologies will improve access to new customers, mainly in Indonesia. Over 50% ranked access to new customers within Indonesia as the primary benefit of digital technologies, followed by increasing sales and access to overseas market. Figure 3.7 shows the top five benefits identified by businesses in our survey. Higher revenue growth Our results show higher digital engagement is associated with higher revenue growth. We undertook econometric analysis involving a linear regression of reported revenue growth against digital engagement and a number of control variables including business size, industry, location and number of employees. Figure 3.8 shows average annual growth for the past year for offline businesses was 13% while for advanced online businesses it is 80% higher (23% p.a). The regression results suggest that basic online connectivity contributed 31% to this higher growth. While intermediate online connectivity and advanced online capabilities contributed 15% and 31% respectively. For to the average-sized small business in our survey (IDR 1.4 billion revenue p.a.), offline business can expect IDR 140 million additional revenue if they became a advanced online business (US$4,500 to US$11,200). The value proposition and growth opportunity Figure 3.7: Perceived benefit of digital technologies by SMEs Figure 3.8: Expected revenue growth by digital engagement, % increase in growth rate Source: Stancombe Research & Planning, Deloitte Access Economics Basic online business Intermediate online business Advanced online business+31% +15% +31% 80% 11.2% 27.7% 33.7% 35.5% 50.2% 0% 10% 20% 30% 40% 50% 60% Cheaper advertising/ marketing cost per sale Allows for easier transactions with customers and suppliers Access to new markets Overseas Increases sales and revenue Access to new customers in Indonesia
  25. 25. 22The Connected Archipelago’s Growth Engine Holycow Steakhouse Holycow Steakhouse is a chain of restaurants in Indonesia offering a range of premium food such as Wagyu beef. The business started in 2010 as a small street vendor and quickly grew to a large chain with 12 locations throughout Indonesia. It’s a story of a business that has used the internet to build its profile, attract new customers, and communicate across locations and its supply chain. ‘We started very small, with only about 7 million Rupiah start-up funding. We had no permanent location and very limited inventory,’ according to co-founder and chief marketing officer Lucy Wiryono. Like many small businesses, the initial task was to build customer awareness. Holycow turned to social media. ‘Social media platforms came naturally to us. It was an affordable and flexible solution to get our message out, which allowed us to update our location and stock very quickly for our customers.’ Social media quickly became an important tool for Holycow to connect with its customers and manage their expectations. As the business established itself in more permanent locations, being present on Google Search and Maps became essential for customers to be able to find their business location and information online. As the company grew, its digital strategy has also transformed. Instead of simply promoting its products, Holycow analysed customer demographics and their online behaviours and tailored its online content to deliver much more contextualised messages to its customers. For example, its tweets about how to make a good coffee and what’s a good way to start Monday are geared towards regular day-time workers. It is a great way to keep customers engaged and tuned in to Holycow’s online activities. In July 2012, Holycow launched its logo campaign on social media and in its stores – a short video created by Lucy on her laptop inviting customers to vote and submit their design of the Holycow logo went viral on social media. The campaign received more than 58 million impressions, nearly 10,000 related tweets and 700 ballots submitted in its store. The innovative online campaign delivered massive gains in sales and brand recognition for the business and yet its costs were minimal when compared to traditional advertising channels with similar impact. Messaging platforms are also very important for Holycow. Holycow uses the Whatsapp to communicate between its various stores, minimising unnecessary travel through heavy traffic. The fast and social nature of the platform allows managers to share real time information about what’s happening in their stores and if there are any issues relating to customers and inventory. ‘I get constant updates of all the stores. ‘All I have to do is check my phone to know what was happening’ according to Wiryono. Digital technologies and social apps are deeply entrenched in nearly all aspects of Holycow’s operation, it has significantly increased its businesss efficieincy, and connectivity with its customers and suppliers. 8Villages platforms on smartphones and the web provide significantly improved and richer content compared to its SMS services, however these platforms have limited reach due to the lack of broadband access among remote communities.
  26. 26. 23 SMEs powering Indonesia’s success Greater employment opportunities We asked businesses how the number of employees had changed in their business in the past 12 months. We then examined the relationship between digital engagement levels and businesses that reported they had either employed more, less or the same number of employees over the past 12 month. We undertook econometric analysis involving a multi- nominal logistic regression of employment changes in the past 12 months against digital engagement and a number of control variables including business size, industry, location and number of employees. Offline businesses had a baseline 20% chance of increasing the number workers they employed. Basic online connectivity would see at least a 9% increase in the likelihood to increase employment, while intermediate and advanced online businesses are 23% and 150% more likely to have increased employment compared to offline businesses. More innovation and exports Businesses with advanced online capabilities are nearly 17 times more likely to be innovative (i.e. experienced a considerable change in the way they did business in the last year) than offline businesses. Businesses with basic connectivity and Intermediate connectivity are around 7 and 12 times more innovative respectively. SMEs often lack the skills to expand into international markets due to limited scale and resources; they have limited knowledge about the foreign language, culture and business environment, as well as the bureaucratic process involved in participating in export markets and production networks (OECD, 2014). We learned that digitally engaged SMEs tend to have greater diversification of their revenue across different markets. Businesses that have basic online capabilities had a 6% more of their revenue will come from international customers than those who were offline (4% higher in ASEAN, 2% higher in other international markets). Figure 3.9: Customer base breakdown comparison Offline businesses Basic online businesses 16.1% 38.5% 0.9% 0.4% 25.8% 26.8% 44% 38.4% 5.9% 2.5% Rest of Indonesia International marketOwn city Neighbourhood ASEAN markets Source: Stancombe Research & Planning, Deloitte Access Economics SMEs that get online, engage in social media and develop e-commerce capabilities enjoy significant business benefits in terms of revenue, employment, innovation and competitiveness. Each step up the digital engagement ladder brings benefits. Benefit of digital technologies for Indonesian SMEs 1. Up to 80% higher growth in revenue 2. One and half times more likely to increase employment 3. 17 times more likely to be innovative 4. SMEs with higher digital engagement are more competitive internationally.
  27. 27. 24The Connected Archipelago’s Growth Engine 8Villages: helping SMEs overcome barriers to digital engagement 8Villages is an Indonesian business that provides underserved rural communities with LISA, a valuable subscription service which provides quality localised information about agriculture, finance, advocacy for women and general education. Users typically receive daily SMS tips from 8Villages and trending local user-generated content. They can also ask questions and get answers from 8Villages’ partners and other users. The business boasts over 75,000 subscribers in Indonesia, primarily farmers in remote communities. ‘We started the business because we realised that rural communities, especially farmers, were disadvantaged by lack of access to information, the lack of knowledge regarding potential markets, pricing and distribution channels. It was preventing these communities from reaching their full potential. We see 8Villages as an opportunity to address these issues,’ said chief technology officer Sanny Gaddafi. Some 53% of Indonesia’s population live in rural areas, where access to services such as finance and agricultural education is often difficult and costly. 8villages offers an affordable platform through which communities can obtain valuable information to help them grow their business, such as how to use fertilisers, how to increase crop yield and how to apply for loans. Gaddafi noted, ‘we are constantly partnering with leading universities, private institutions and government agencies to engage with these communities and deliver the best information we can to help them succeed.’ Communities have benefited greatly from 8Villages’s program with many reporting increased productivity and closure of funding gaps. The availability of technology is a key challenge for 8Villages. Access to internet or digital devices can be expensive and limited in these communiities. That’s why 8Villages chose SMS as their primary platform in delivering its content. ‘By using our platform over SMS, we are bringing the conversation to a much more comfortable and convenient setting for the farmers. This encourages farmers to network with extension workers, to ask the tough questions and build a relationship with the service providers,’ says Gaddafi. 8villages see a huge growth opportunity in the future. ‘There are some 26 million farmers in Indonesia alone, and large agricultural sectors across the Asia-Pacific region. They are all potential users of our product and can benefit from it.’ Gaddafi notes that if accessibility of digital technologies continues to expand, 8Villages can significant increase the coverage of its web and smartphone platforms which provide richer content and interactive experience to its users. This will allow more rural communities to take advantage of its services, growth their businesses and be more successful.
  28. 28. 4 ASEAN Economic Community The development of the digital economy and SME sector in Indonesia remain behind some of its ASEAN neighbours. The percentage of the individuals accessing the internet 2013, selected countries 38%World average Source: The Broadband Commission – The state of broadband (2014): broadband for all.
  29. 29. 73% 16% 67% 29% 65% 44% 6% 13% 1% 37% SINGAPORE INDONESIA MALAYSIA THAILAND BRUNEI VIETNAM CAMBODIA LAOS MYANMAR PHILLIPINES
  30. 30. 27 SMEs powering Indonesia’s success What is the ASEAN Economic Community? The ASEAN Economic Community (AEC) comes into effect in 2015 bringing about unique opportunities and challenges for Indonesia. This chapter explores how the new regional paradigm will shift the competitive landscape for Indonesian SMEs and how Indonesia compares with its ASEAN neighbours. The AEC can be traced back to 1997, when ASEAN leaders collectively decided to transform ASEAN into a stable, prosperous, and highly competitive region with equitable economic development which reduced poverty and socioeconomic disparities. Originally envisioned for 2020, the regional integration was accelerated to 2015 with the adoption of the ASEAN Economic Blueprint in 2007. The Blueprint outlines key initiatives for ASEAN integration by 2015, including free trade between ASEAN members as well as changes to competition policy, infrastructure development and SME development. The Blueprint has been a strong force for economic reform within the region, with more than 70% of intra-ASEAN trade now conducted at zero most-favoured nation tariff rates, and less than 5% are subjected to tariffs above 10% (WTO, 2011). AEC’s self-assessment scorecard reported that 77% of its targets had been met by March 2013. Indonesia is the largest economy in ASEAN, representing 36% of its GDP (ASEAN, 2013). As Indonesia’s most significant market segment, SMEs play an important role in the country’s economy and the upcoming regional economic integration. The economic integration of ASEAN economies and regional trade agreements will likely see significant disruption in the competitive landscape of Indonesia’s domestic market. Traditional domestic-focused SMEs are likely to encounter increased competition within Indonesia from overseas businesses. At the same time, SMEs capable of extending to international markets will see new opportunities within the ASEAN economies and other international markets. In both cases, the ability to lift the competitiveness of Indonesian SMEs will be a key determinant in the success of the regional economic integration, and Indonesia’s future economic prosperity.
  31. 31. 28The Connected Archipelago’s Growth Engine In the global economy, it is important that countries build a strong foundation of national competitiveness. That is, a set of institutions, policies, and frameworks that will allow the country to be more productive and sustain growth over time. Digital policy settings will also be important for helping SMEs make the most of the opportunities brought by the AEC. Competitiveness Overall, Indonesia has a range of competitive strengths and weaknesses. According to the World Economic Forum, Indonesia was 34th out of 144 countries in its Global Competitiveness Index (GCI, 2014–15), behind Singapore (2nd), Malaysia (20th) and Thailand (31st). One area where Indonesia does not perform well is Ease of Doing Business, which according to a World Bank index, Indonesia ranked 114th out of 189 in 2015. The index ranks economies based on 10 basic elements of doing business, including acess to credit, paying taxes, trading across borders and enforcing contracts. There are significant opportunities for improvement in Indonesia, especially in areas such as ease of starting a business, dealing with construction permits, enforcing contracts and paying taxes. Digital policies Overall, Indonesia’s digital policies are similar to or even slightly behind those of other ASEAN economies. In some areas such as SME policy and digital economy support Indonesia performs reasonably well, but is behind in broadband access, and e-government sophistication. There are many broadband policies across ASEAN economies, including the National Implementation plan in Malaysia, the Philippine Digital Plan and National Broadband Policy in Thailand. While Indonesia’s recent announcements are promising by most current measures of fixed or mobile access, Indonesia is behind most ASEAN-6 economies in take-up. E-government is an important part of government digital activity because it affects how businesses and consumers can use technology to interact with government. According to the World Bank, e-government sophistication in Indonesia was about average for ASEAN economies. Its index score of 0.50 was above Cambodia, Laos, Myanmar, and Vietnam, but below Singapore, Malaysia, and Thailand. It was the same as the Philippines. All ASEAN economies have some form of digital promotion policy. For example, Digital Malaysia is a roadmap to 2020 with a focus on social media; Intelligent Nation is Singapore’s roadmap with a focus on convergence and social media; Smarter Philippines focus on regions. So while Indonesia has made efforts to improve its digital promotion policies, other countries are doing the same. Indonesia’s competitiveness and digital policies
  32. 32. 29 SMEs powering Indonesia’s success Broadband and social media Indonesia’s digital infrasucture developments remain behind comparable economies in the ASEAN region. Its broadband network is one of slowest and most expensive, which is a barrier preventing greater digital economy growth in Indonesia. However, there is also evidence that compared with other economies, Indonesians have been sophisticated users of the internet, with high rates of social media use despite the lack of internet access. Broadband Broadband access is one of the most common prerequisite for businesses and consumers to engage and interact with the digital economy. In 2014, the Gobal Competitiveness Index reported that just 15.8% of the population in Indonesia had broadband access; well below the global average of 38% and the ASEAN average of 35% (shown in Figure 4.2. By comparison, Singapore and Malaysia widely recognised as two of the most developed digital economies in the region, have well over 60% of their population accessing the internet. Indonesia remains in the bottom half of the world in terms of connection speed. In 2014, Akamai reported an average connection speed of 3.7 Mbps in Indonesia, slightly below the global average of 4.5 Mbps. In contrast, rival economies, Singapore and Malaysia scored 12.2 Mbps and 4.1 Mbps respectively (shown in Table 4.3). Figure 4.2: The percentage of the population accessing the internet 2013, selected countries Source: The Broadband Commission – The state of broadband (2014): broadband for all. 73.0% 67.0% 64.5% 43.9% 37.9% 37.0% 28.9% 15.8% 12.5% 6.0% 1.2% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% Singapore Malaysia Brunei Vietnam World Philippines Thailand Indonesia Laos Cambodia Myanmar
  33. 33. 30The Connected Archipelago’s Growth Engine Broadband adoption is another challenge for Indonesia. Figure 4.4 shows that Indonesian broadband is one of the least affordable, with fixed broadband subscriptions costing around 5.6% of Gross National Income per capita, above the affordability benchmark of 5% set by the global body the Broadband Commission for Digital Development. Although we note Indonesia’s mobile affordability is much better in comparison, at just 0.8% GNI, it is more affordable than Malaysia. This is likely a key driver in the country’s large mobile use per population. Table 4.3: Average connection speed in Asia Pacific, Q3 2014 Figure 4.4: Fixed broadband price as % of Gross National Income per capita, 2013 Source: Akamai (2014), the state of the internet Source: ITU Measuring the Information Society 2014. Note: Mobile broadband affordability is measured by price of prepaid mobile broadband subscription. Rank Country Q3 ‘14 Average peak speed (Mbps) Year on year improvement 1 South Korea 25.3 14% 2 Hong Kong 16.3 29% 3 Japan 15.0 9.3% 10 Singapore 12.2 57% 27 Taiwan 9.5 16% 42 New Zealand 7.0 37% 44 Australia 6.9 25% 48 Thailand 6.6 39% 71 Malaysia 4.1 27% 75 China 3.8 32% 77 Indonesia 3.7 149% 101 Vietnam 2.5 22% 105 Philippines 2.5 39% 115 India 2.0 29% Fixed broadband Mobile broadband
  34. 34. 31 SMEs powering Indonesia’s success Social media and online shopping Indonesia is rapidly emerging as the biggest digital market in South East Asia, with close to 73 million social media users, and is projected to surpass 100 million in just three years (Statistia, 2013). Facebook is by far the most popular online social platform in the region, ranging from 66% to 92% engagement from all active web users, with Indonesia somewhere in the middle at 80% (ComScore, 2013). Indonesia leads the region in Twitter engagement, with 26% of active web users having a Twitter account, ahead of Philippines at 20% and Malaysia at 16%. In addition to social media, the region is also known for its market for smartphone messaging applications. Popular messaging apps such as BBM, WhatsApp, Line, and WeChat boast millions of active users in the region. Beyond connectivity for consumers, social media is also emerging as a key platform for businesses. Figure 4.5 shows that an average of 62% of active social media users across the ASEAN would use social media sites to inform their purchase decisions. Figure 4.5: % would use social media sites to make purchase decisions, 2013 Source: Nielsen (2012), changing Asian media landscape 81% 69% 64% 62% 52% 44% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Vietnam Thailand Philippines Indonesia Malaysia Singapore
  35. 35. 32The Connected Archipelago’s Growth Engine HijUp: growing through digital sales HijUp.com is Indonesia’s first Islamic fashion e-commerce business. It has grown from having two employees and supplying 14 brands of women’s fashion when it launched in 2011 to 48 employees and carrying over 140 brands today. Suppliers include a small number of large manufacturers, but most are small businesses themselves. According to Managing Director Diajeng Lestari, digital technologies played a pivot role in helping the business grow. Back in 2011, HijUp launched with a series of ‘how-to’ videos on YouTube teaching women how to get creative with their hijab fashion. Not only was the video series a tremendou sucess in featuring HijUp’s products, it also generated significant following online. Over the next four years, HijUp worked with other content creators like bloggers, vloggers and make-up artists to add more tutorials and fashion-related content. Today, the YouTube channel boasts nearly 130,000 subscribers, and with over 16 million combined views is attracting brands like Unilever and telco provider, XL, who are interested in collaborating on video production. HijUp’s sucess in using social media had a huge impact on sales growth. Some 20% of its website traffic are driven from HiJup’s youtube videos. The site now has over 50,000 registered users and over 10,000 regular buyers. Payments are mostly electronic, made through automatic teller machines, this has helped HijUp to compete with traditional retailers that have much more costly operating models. While HijUp’s focus is on the Indonesian market, there are challenges to growth. Unreliable broadband coverage outside of cities restricts HijUp’s access to consumer in less developed areas. Slow broadband in Jakarta makes managing video and image content for its website time consuming and costly. ‘It’s not just Indonesians watching HiJup.com’s YouTube videos’ — more than 30% of Hijup’s YouTube viewers are from outside Indonesia, with thousands watching in Malaysia, Dubai and Morocco. Accroding to Diajeng, one benefit of online technology is its ability to seemlessly reach international markets, ‘HijUp is a good opportunity to showcase the Indonesian culture to other countries in ASEAN’ Diajeng said. Around 20% of HijUp’s revenue are from exports to other ASEAN economies.
  36. 36. 5 Public policy Increased broadband access Help all businesses to be digital businesses
  37. 37. KEY AREAS WHERE GOVERNMENT CAN DRIVE ECONOMY ENGAGEMENT IN SME SECTOR Access to e-payments Expand access to finance Expand e-government services 5
  38. 38. 35 SMEs powering Indonesia’s success Government needs to help lift GDP growth through digital SMEs To reach middle income country status by 2025 Indonesia needs to boost its economic growth by an additional 2%. This could be achieved by accelerating the growth of Indonesia’s digital economy, particularly among the SMEs. Indonesian SMEs are well placed to reap the benefits of the digital economy. Government policy, particularly in areas such as infrastructure provision, digital regulation, investment restrictions, could play a huge role in further expanding and accelerating this growth by reducing barriers to access and regulatory restrictions on use. In this research, we identified five key areas of policy focus for government to improve SME digital engagement: Increasing broadband access is essential. Existing internet access in Indonesia remains relatively expensive and slow. Increasing broadband access and the quality of service will encourage digital technology adoption by SMEs and will improve performance of existing technologies. Broadband infrastructure developments need to be balanced and open to innovative alternative technologies. For example, while fixed infrastructure deployment can be used to relieve network congestion and increase access speed, mobile networks can help improve mobility and coverage. Innovative technologies such as Wi-Fi access points could be employed to offload existing traffic from mobile networks to help increase capacity. The government should ensure that regulatory frameworks are flexible and open to these innovative technologies, and, at same time, facilitate an efficient and competitive environment. Help all SMEs to be digital businesses. Many government agencies provide SME support programs, including those targeted at increasing SME digital engagement. They are often overlapping and limited in scale. Government needs to improve the coordination of these SME programs between various agencies. A strong partnership with the private sector will help. Innovative online businesses such as HijUp and 8Villages, and Google’s support for Gapura, which brings digitally engaged SMEs together to share information and solutions, are a good example of private sector engagement. Expand e-payments. Improving trust in e-commerce payment platforms, increasing bankability of Indonesian consumers and businesses and expanding alternative payment systems will increase the volume of digital transactions in Indonesia. The focus for government should be to ensure that e-payment systems are accessible, reliable and secure. This will build greater consumer confidence and increase use. Expand access to finance. Digital SMEs need a mix of domestic and international sources of finance, barriers to that will reduce their potential for growth. Investment policies need to be open to all sources and types of capital. Indonesian SMEs will benefit from greater access to online micro-financing tools. Expand e-government services. Government services delivered through online platforms are more cost effective and efficient. More online government services would build consumer confidence in online activities and services over time. If the government builds on its existing efforts to help lift the number of SMEs that are online, engaged with social media and participating in e-commerce, more SMEs will move up the engagement ladder, from offline to online businesses and from basic to intermediate and advanced businesses. These transformative changes will deliver the improved business performance needed for Indonesia to fully utilise its economic potential and reach middle- income status by 2025. Our findings come from our research, consultations with businesses, business survey, and consultations with Indonesian government departments and institutions. Descriptions and comments on government policies are the views of Deloitte. Policy directions
  39. 39. 36The Connected Archipelago’s Growth Engine The lack of broadband access in Indonesia should be a top priority for government to address. Just 15.8% of Indonesians have access to the internet and the connection speed is the fourth slowest among ASEAN countries. The state of broadband access in Indonesia is likely to prevent or restrict SMEs from using new and innovative digital technologies. This is a key barrier for further development of the SME sector and the growth of the digital economy more broadly. This issue is well recognised by the Indonesian government. Indonesia Broadband Plan (IBP), a national plan to boost broadband infrastructure development, is a key component of the broader strategy to develop the digital economy in Indonesia. The plan was a mandate given by Komite Percepatan dan Perluasan Pembangunan Ekonomi Indonesia 2011 – 2015 under the Connectivity Working Group, a part of the master plan of development acceleration (MP3EI). According to the Presidential Decree (PP No.28, 2008), broadband not only is an important growth driver of the ICT sector, it is also a significant enabler for broader socioeconomical development. Therefore, the development of broadband infrastructure is a top priority for Indonesia. This will involve significant efforts in infrastructure development and regulatory reforms in the telecommunications sector. Existing broadband infrastructure development needs to be accelerated to expand coverage, relieve network congestion, and increase speed and affordability. Restrictive regulatory settings will need to allow the adoption of innovative technologies and solutions. Broadband development in Indonesia is geographically challenging. With more than 17,000 islands, the need to balance between fixed and wireless broadband infrastructure is critical. While terrestrial wireless broadband could be an effective way of expanding coverage, it is easily congested and has limited capacity without a strong fixed backhaul network support. The issue is further complicated by the need for extensive submarine cable roll-out. Existing efforts in broadband development are led by the Ministry for Communications and Information Technology. Indonesia is aiming to expand broadband access to 71% of households in urban areas (connected to at least 20 mbps) and mobile access to the entire urban population by 2019. The Ministry noted that stronger backbone infrastructure links between regions is a priority for broadband development, as well as coordinating with local governments the provision of mobile broadband (land access, towers, commercial PTS). Future broadband rollout should build on these efforts and focus on both increasing coverage, ensuring that all SMEs have unrestricted access to high-speed broadband and digital tools. This means improving performance of existing networks to deliver a better and more robust experience to digital SMEs. Innovative private sector solutions could play an important role in helping the government to deliver on these improvements. Innovative technologies such as Wi-Fi access points are helping to offload excessive traffic from mobile networks relieving congestion, wireless broadband technologies such as balloon or drone transmission of wireless signal (Loon and Titan) could help overcome high deployment costs across remote regions. Regulatory regimes should remain open and conducive to these innovative market solutions. Furthermore, government needs to ensure that the telecommunications market in Indonesia remains competitive among private operators. Regulatory policies should be targeted at removing existing bottlenecks in access, and be supportive of infrastructure investment and public-private partnerships. Policy initiatives such as greater spectrum allocation and incentives for infrastructure development could encourage greater mobile network deployments. In addition, broadband deployment targets should keep pace with regional and global trends. For example, other countries in the region are targeting much larger increases in national broadband penetration (i.e. Korea 93%, Singapore 87% and Malaysia 73%), significantly higher than Indonesia’s target of 30%. Increasing broadband access
  40. 40. 37 SMEs powering Indonesia’s success Government have an important role to play in lifting SMEs’ digital engagement levels. Government support in the form of technnical assistance, resource and information provision is crucial in encouraging SMEs to take advantage of digital technologies. Overly restrictive regulatory regimes such as data centre localisation could have a negative impact on Indonesia’s access to innovative technologies. The Indonesian government is actively providing technical assistance to SMEs in order to improve their digital engagement levels. These programs include support relating to human resources, production, general management, quality control, technology, industrial clusters and SME innovation centres. These policy initiatives in Indonesia have experienced moderate success, with some program constrained by lack of legal framework (OECD, 2014). However, the rest of Government digital support policies for SMEs in the past have been largely ineffective due to the lack of coordination between government institutions. According to the UKM centre, some 26 government agencies were identified as stakeholder in the SME sector, yet there is no clear collaboration framework between the agencies to coordinate efforts. Further, the large number of SMEs (55 million in 2014) in the Indonesian economy meant that direct government policies often lack the necessary scalability to reach the vast majority of businesses. For example, the UKM Centre, Indonesia University provides educational workshops for SMEs on topics including marketing, accounting, tax and finance. The Centre also directly helps SMEs to apply for credit by recommending SMEs to state owned corporations. However, the centre lacks the necessary scale, only helping around 400 businesses a year. Future government initiatives should look to more innovative solutions utilising the benefits of digital technologies. Private sector examples such as HijUp and 8Villages alone have helped hundreds of SMEs across Indonesia through facilitating online education, and proving online sales platforms. Government initiatives taking advantage of digital technologies such as the internet could significantly improve the scale and reach of existing programs. As an example, in Singapore, a wealth of government information and e-services can be access through a single EnterpriseOne portal, which includes industry guides, how to guides and case studies. SMEs can access this information through their smart phones or dedicated hotlines, some 22,400 SMEs are said to have benefited from the portal in 2014 alone (EnterpriseOne, 2014). Beyond improving basic access to digital technologies, public policy should also focus on encouraging SMEs to take advantage of the benefits these technologies could bring to their businesses. Incentives for SMEs to use ICT to modernise basic business systems (including accounting, payroll, and supply-chain management) could greatly improve business performance and labour productivity. Special ICT development zones and funding to encourage the development of innovative technology applications for Indonesian SMEs will also improve SME performance (McKinsey, 2015). As the ASEAN Economic Community continues to take shape in 2015, there will be significant export opportunities for Indonesian SMEs. According to the OECD report in 2014, SMEs in Indonesia often lack the skills in dealing with both domestic and international customers; they have limited knowledge about the foreign language, culture, and business environment, as well as the bureaucratic processes involve in participating in export markets and production networks. Initiatives such as UKM Centre’s web portal, which provides food and goods standard in other ASEAN economies, if extended, could be useful in assisting more SMEs exporting overseas. Help all SMEs to be digital businesses
  41. 41. 38The Connected Archipelago’s Growth Engine In addition, despite significant improvements over the past decade, business registration and start-up process in Indonesia remain cumbersome and costly. While there is no official fee to start a business, there is usually, an unofficial indirect administrative fee charged, ranging from 400–500 thousand IDR for small businesses. Registration time is also longer than stipulated in relevant regulations, averaging around 47 working days (OECD, 2014). Government initiatives such as establishment of one- stop shops (OSS) otherwise known as Pusat Pelayanan Terpadu Satu Pintu (PTSP), which reduce the needs for SME to obtain permits from multiple local governments, are important steps towards resolving administrative issues. Future government policies need to build on these efforts and continue to formalise (registered with the government) the SME sector and improve their access to key government support programs. Finally, in the past few years, there has been a proliferation of regulations on the internet, particularly around data. In Indonesia, Regulation 82 of 2012, article 17(2) says, ‘Electronic System Operator for the public service is obligated to put the data centre and disaster recovery centre in Indonesian territory for the purpose of law enforcement, protection, and enforcement of national sovereignty to the data of its citizens.’ Data centres in the business sector need to be located based on economic and other efficiencies. There may be economic or reliability benefits from hosting data overseas or in multiple locations. A study by ECIPE in 2014 shows that mandatory business data centre localisation in Indonesia could cost Indonesia as much as IDR 6 billion a year (or 0.7% of GDP). The research argues that key sectors of the economy including manufacturing and exports are heavily dependent on a broad range of services at a competitive price – such as logistics, retail distribution, finance or professional services – which in turn are dependent on secure, cost-efficient and real-time access to data across borders.
  42. 42. 39 SMEs powering Indonesia’s success The growth of the digital economy and e-commerce are important opportunities for Indonesia. In order to facilitate this growth, Indonesia needs a stronger platform in banking and financial services to facilitate online transactions. This could be addressed through more branchless banking and settlement of transactions using online payment systems. From a consumer and a business perspective, the most significant issue for engaging with online transactions is the lack of trust in online payments and limitations of payment channels. With majority of SME and consumers not having bank accounts or credit cards, there is a greater reliance on cash-on-delivery or other forms of physical payments. This is likely to constrain the efficiency and up-take of online transactions. There are many types of e-payment systems, examples include: • Direct carrier billing • Stored value cards • Ali-pay, Paypal models • Credit and debit cards. Online consumer transactions in Indonesia remain well below the regional average. In 2014, credit card penetration in Indonesia was around 6%, much lower than Singapore and South Korea which have 3.3 and 5 credit cards per person respectively (UBS, 2014). Payment security concerns are holding back development of e-payment systems. While there are a range of alternative solutions currently used by Indonesians, including cash on delivery and ATM transfers, they each have their limitations and are less efficient than direct online payments. Improving e-payment systems will help increase online transactions and help the emerging e-commerce sector grow. E-commerce marketplaces are also a good starting point for Government to raise digital engagement of SMEs that lack financial resources and have limited access to digital talent. E-commerce platforms such as eBay, Lazada and Rakuten allow SMEs to sell online without the need for significant capital investment. To spur growth, some initiatives have been launched across the region, including the Lifting-the-Barriers roundtable at the ASEAN Business Club Forum (2014). The forum highlighted some specific actions to lift e-commerce in ASEAN economies including: • Support the emergence of local players: improving access to finance for small and medium enterprises, fostering the integration of digital talent into businesses, and promoting awareness of e-commerce marketplaces • Reinforce online security: increasing information sharing and bilateral assistance, harmonising existing legislative frameworks, and creating a regional online dispute-resolution facility • Promote e-payment: encouraging non-cash transactions, establishing e-payment-specific regulations, and harmonizing e-payment regulations regionally • Improve logistics and trade efficiency: encouraging the development of online retail logistics services, facilitating e-retailers and logistics partnerships, accelerating the integration of logistics systems, and ensuring full implementation of the ASEAN Single Window. If Indonesia adopts a stronger plan e-payment systems and broader actions it can help spur the growth of e-commerce. Expand e-payments
  43. 43. 40The Connected Archipelago’s Growth Engine Expand access to finance A key barrier restricting Indonesian SMEs’ participation in the digital economy is their lack of access to financing options. SMEs account for just 20% of loans and 27% bank accounts in Indonesia (Bank Indonesia, 2014), well below their contribution to employment and GDP. There are also restrictions to accessing foreign finance that are discussed here. Lack of access to finance is most often due to SMEs’ lack of collateral (and often legal recognition of land rights). Despite the Banking Act specifies that business activity is itself collateral and that owners can use land as collateral for loans, the lack of financial record keeping often prevents SMEs from providing adequate evidence to qualify for load schemes. There are some load programs for SMEs, including: • Kredit Investasi Kecil (KIK), Kredit Modal Kerja Permanen (KMKP), Kredit Usaha Kecil (KUK) provide micro funding schemes are designed to give SMEs the capital they need to grow and expand • The Ministry of Justice administers a collateral registry for movable collateral such as motor vehicles to help overcome collateral related issues • Bank Indonesia and OJK (Financial Services Authority) have developed SMEs micro-sites that provide information on loans, SMEs success stories, and relevant SME research. As with other SME support programs, most policy initiative is limited in scale and reach. Indonesian SMEs largely remain financially isolated. Innovative market solution can help private sector financial assistance and literacy programs epidomised by Koperasi Kasih Indonesia (KKI) and 8Villages can be effective ways of expanding government efforts. Government policy should be flexible and adaptive to these private sector solutions, and be open to emerging trends in the digital economy. Another way for businesses to overcome inadequate finance is access to foreign investment. However, Indonesian e-commerce businesses have restricted access to this type of financing due to the inclusion of e-commerce in Indonesia’s negative investment list (presidential Decree No.39 in 2014). This is intended to protect homegrown e-commerce businesses from foreign competitive pressures, but may have the opposite effects. The negative investment list is unlikely to prevent foreign firms from accessing the Indonesian market. Foreign e-commerce businesses can easily facilitate online transaction in the Indonesian market without physically located in the country. In such a scenario, the Indonesian economy simply does not gain from the local employment or tax revenue it would otherwise receive if the business was set up domestically. The effectiveness of the negative investment list, especially in regards to e-commerce needs to be re-assessed.
  44. 44. 41 SMEs powering Indonesia’s success Expanding e-government services in Indonesia not only offers opportunities for more efficient service delivery of public services. It may also play a role in raising consumer and business confidence in using digital tools and have a positive demonstration effect on Indonesia’s digital economy. Examples of e-government service delivery include general services like online forms and mobile apps and specific SME services such as online registration. Digital technologies are an effective way for government to improve its own efficiency in delivering public services. There are several e-government services already active in Indonesia, including the National Single Window (NSW), a nationally integrated electronic system of 18 government institutions that provide export/import-related services, an e-procurement system, and the registration for a Tax File Number. Expanding these e-government service platforms could significantly boost the efficiency and quality of government services. The Department of Industry created a web portal for SMEs to advertise their products, and educational workshops for business owners to understand how to use digital technologies. There are also a number of apps commissioned by the Department that specifically support SMEs in the manufacturing sector, particularly in food and beverage, handicraft, and metals and machinery manufacturing sectors. If extended, these programs can have a significant and positive impact on the public perception of digital tools and encourage usage of digital technologies among SMEs. There are a range of challenges to expand e-government services. A key concern in the short term is internet accessibility for the public, without which these services will not be accessible. Finally, existing online portals do not allow SMEs to communicate interactively on issues relating to rules and procedures, a feature that could further enhance their effectiveness (OECD, 2014). The Indonesian government is undertaking a number of initiatives to address these challenges. For example, the Ministry of Communications and Information Technology administers computer access points and national IT volunteering programs. These programs aim to improve the accessibility of the internet to the broader Indonesian population and communicate its value to consumers and businesses. These programs need to be expanded and scaled to reach a much broader population. Expand e-government services
  45. 45. 42The Connected Archipelago’s Growth Engine
  46. 46. 43 SMEs powering Indonesia’s success Sample specification The sample comprised owners or managers of small to medium businesses, defined as having 1–250 employees. In sampling, a spread of business industries was targeted in order to compare differences by industries, as well as a spread of business sizes and owner/manager demographics. Questionnaire The questionnaire was translated from English into Bahasa Indonesia, then back, as a quality control measure. The questionnaire was then put online and conducted by interviewers using iPads. Collection A mixed methodological approach was taken in order to capture as broad a range of business respondents as possible. This included a face-to-face, interviewer-led survey component and an online, self-complete survey component. The face-to-face survey was conducted in six cities across Indonesia: Jakarta, Bandung, Semarang, Surabaya, Medan and Makassar. The sample was focused on urban centres for two reasons: first it allowed a greater variety of industries and business types to be represented within the sample; second, the practical challenges of face-to-face interviewing in rural locations. A random sampling approach was used, targeting small businesses within pre-determined locations within each city. Up to six attempts were made to contact and recruit the business owner or manager once selected, in order to limit non-response bias. Interviewers conducted the survey face to face, using iPads to complete the survey. Appendix A: Data The online survey used an online research panel to draw sample and administer the questionnaire. The panel comprises individuals who have opted in to participate in surveys and has over 60,000 active members. The online survey allowed a broad sample to be reached – both in terms of demography and geography. Younger age groups (16–35 years) tend to be over-represented on Indonesian panels, making this an effective way to reach this particular segment of the business owner/manager population, though making it unsuitable as a sole data collection methodology. A random sample of panel members were invited by email to take part in the survey, and were first screened to identify people who matched the sample specifications. Upon completion of the survey, a small monetary reward is credited to panellist’s accounts, which they can later redeem as a gift voucher.
  47. 47. 44The Connected Archipelago’s Growth Engine Appendix B: Interpretation Causality It is important to note the general issue of causality. It is possible that higher levels of revenue growth drives more digital engagement if strongly performing businesses had more time or resources to undertake digital take-up. Equally, given the ways in which engagement helps growth – through employment, exports and innovation (as described below) and based on the evidence of our case studies, the most common story is one of digitising businesses reaping benefits. Interpretation The reported results are the marginal impacts after controlling for other business characteristics, including size, location and industry, which means that individual experiences with rising digital engagement are likely to vary. Statistical significance Revenue growth T-tests performed on regression coefficients show different levels of statistical significance: p-value <5% for the advanced online business coefficient, p-value<10% for Intermediate online businesses and not statistically significant for basic online businesses. This means that while all results here are of a scale that matter economically, they are not all precisely estimated. Employment T-tests performed on regression coefficients show different levels of statistical significance: p-value <5% for the advanced online business coefficient, not statistically significant for basic online businesses or Intermediate online businesses. This means that while all results here are of a scale that matter economically, they are not all precisely estimated. Innovation and export T-tests performed on innovation regression coefficients show statistical significance: p-value <0.1% for all coefficients. This means that while results here are of a scale that matter economically and are statistically precisely estimated. T-tests performed on export regression coefficients show significance: p-value <0.1% for basic online businesses on exporting to ASEAN markets and not statistically significant for international markets. This means that while results here are of a scale that matter economically, but are not all statistically precisely estimated.
  48. 48. 45 SMEs powering Indonesia’s success Appendix C: Econometrics Econometric modelling is used to identify the relationships between SME digital engagement and business performance. The econometric model estimates the impact of digital engagement on revenue growth, employment, innovation and export activities. Digital engagement levels are measured by technology take-up among Indonesian SMEs, including social web integration and e-commerce capabilities. Our modelling approach is primarily driven by the underlying characteristics of the data. While some variables, including innovation and employment are categorical in nature (i.e. Respondent identified one of four possible options, including revenue growth and export activities are continuous integer variables by nature. In this research, we applied a combination of linear and multinomial logistic regression framework to measure the statistical relationship between the variables. Note that normalisation of one alternative is required for identification of coefficients in MNL. In this research, we have chosen ‘no change’ as a general rule of thumb for selecting base alternatives. The MNL model setup is as follows: We are aware that MNL naturally assumes the ‘Independence of Irrelevant Alternative (IIA)’ condition; this implies that the alternatives exhibit proportional substitution. In a more practical sense, this meant that the odds ratio between alternatives is irrelevant to the availability and characteristics of other alternatives. In our case, IIA is unlikely to hold (except for those that said ‘don’t know’); this is because the alternatives are ordinal in nature, and defined in such a way that they are mutually exclusive. Therefore, we would expect a disproportional substitution into closest substitutes (i.e. If completely transform were removed, the majority of respondents will choose the next closest option which is considerable change). We formally test the existence for such property using the Hausman test. The Hausman test checks if the coefficients of the restricted model are significantly different from the full model, our results reveal no significant deviation from the original estimates. In addition to digital engagement, other explanatory variables include: • Size of the business • Current employment levels • Industry • Location. Linear regression framework Simply Ordinary Least Squared (OLS) regression models are applied on continuous variables, including the revenue growth rates and share of export. Multinomial logistic regression framework Multinomial logistic regression (MNL) is a nonlinear model designed to cater for categorical dependent variables. For example, outcomes of innovation can be categorised below. Business innovation: Has your company changed the way it operate in the past 12 months No Change Don’t knowIncremental Change Considerable Change Complete Transformation Where ßi represents the coefficient of the variable x’i , Pj is the probability of the outcome j. Alternatives: Pr(Y=j|xi )=Pj= 1+∑ exp(x’i ßi )j-1 i=1 exp(x’i ßi ) Base alternative: Pr(Y=0|xi )=P0 = 1+∑ exp(x’i ßi )j-1 i=1 1

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