Digital economy in Indonesia: challenges and opportunities co-exist
The Digital economy in Indonesia has reached the largest size among Southeast Asian Economies, with about 40% of total digital economy share in Southeast Asian. And the digital economy in Indonesia is expected to grow up to $ 146 billion till 2025.
The digital economy in Indonesia is dominated by e-commerce, transport and online media. E-commerce has been growing more that 50% during pandemic, and there are many SMEs participating in e-commerce particularly in the pandemic era. Because of the restriction on the mobility, they lost their normal way to sale, so they turn to the e-commerce, the digital platform for their marketing. Although slightly decreasing in 2020 due to economic restriction hampering transport sector, transport and food increases 36% in 2021. Online Media rises to $ 6.4 billion or 55% in 2021.
There is the potential for growth of digital economy in Indonesia. Firstly, its younger population：total population of Indonesia is 274.9 million, 191.08 million of which is productive population, and 25.87% of which is Y generation (who were born since 2000). Secondly, increase in internet and mobile connection: the average of daily internet usage is above 8 hours, and internet coverage increased from 150 million users (2019) to 212.35 million (2021). Mobile connections are 345.3 million, which is 125.6% of the population. Thirdly, application of new technology: 5G network, loT, blockchain, AI and cloud computing are generally applied.
But the challenges are still there. The digital economy has the limited contribution on the Indonesia’s GDP (2.9%, 2019), and the infrastructure and regulation are limited, for example, the network penetration (73.7%), broadband, internet speed, and cyber security. With the digital literacy, the MSMS (micro, small, medium-sized enterprises) under-performed in the digital economy. And according to the IMD world digital competitiveness index, Indonesia placed 53 of 64. Digital gap is also the serious problem, and there is the gender gap and regional gap in the internet penetration. And according to a survey conducted by the fintech association, there is a problem in the digital finance usage: 56.7% of all the interviewees haven’t used the mobile banking, 80.2% have never involved in the fintech at all.
MSMEs and digital economy: on the way from awareness to action
MSMEs in Indonesia contributes to 60% of GDP, 97% of Employment, but only 16% to expert. And there is huge potential to narrow this gap by digitalization, which may reduce cost and barrier for MSMEs to participate in export. According to the survey Bain & Co in ERIA (2019), about 75% of MSMEs in ASEAN realize the opportunity in digital economy, but only 16% them utilize digital technologies. And SMEs still face some barriers to enter digital economy, such as：minimal use of digital technology, lack of knowledge about the technology, limited willingness to change business process, and little access to digital talents.
The main factor to affect the level of digital transformation of SMEs is finance. The e-commerce is the main part of digital economy that most of SMEs are involved in, a few of SMEs apply the hi-tech tools such as big data, AI and blockchain or innovative way for their growth, but it depends on their capability to get access to financing. Instead, they are always using low-tech technology tools, such as the digital platforms for the marketing to realize their digital transformation. And digital communication tools are also the main part of some SMEs’ use of digital technologies, such as Facebook, WhatsApp, and etc. so most of the digital transformations of the SMEs are still focusing on the marketing and management, not much related to the production and R&D. The main goals they want to achieve through digital transformation is considered as the effective way to enhance the efficiency and facilitate marketing and management.
Government Support
Presidential regulation No. 74 of 2017 on roadman for the national e-commerce system for 2017-2019: the roadmap provided guidelines for Indonesia’s digital economy sector and regulates digital tech related issues such as logistics, cybersecurity, taxation, human resources development and consumer protection.
OTT draft regulation, released by the ministry of communications and information technology in 2017, requires that OTT players register their taxpayer ID number, principal license from BKPM, types of OTT services that will be provided, and contact information center details. The OTT service provider would also be required to partner with a national telecommunication entity.
The Tax department in April 2017 issued a “Circular letter”, in which foreign OTT services that come within the meaning of permanent establishment will be subject to Indonesia tax.
And the actions from following aspects are important to the development of digital economy in Indonesia.
Improvement in digital infrastructure and connectivity as well as data security and privacy protection.
Advancement in digital skill, productive use of digital technologies through training, increasing local content for digital technologies.
Accelerate the legislation process of the Personal Data Protection Bill to ensure the security of consumer privacy and e-commerce transactions.
Policies to maintain competitiveness between digital platforms, to eliminate the possibility of monopoly.
Collaboration within government agencies and between government and digital platform.
Government attached much importance to promote SMEs to get involved in the digital economy. the pandemic caused the shocks in the economy in the past three years, SMEs confronted very tough situation, so they want to survive, they need to promote their products with digital tools, it is a chance for them to make the change they didn’t do before, the survival of SMEs is related to the whole economy and the employment, because the SMEs create the 96% jobs in Indonesia.
Before the pandemic, the Ministry of SMEs, regional government organize the exhibition in Indonesia, promote the product of SMEs, to the larger they can promote the partnering. And then the government have the program like the digital entrepreneurship academy that is from the Ministry of Technology, Information and communication, they are gathering the resource to promote the digitalization and digital entrepreneurship. Many agencies have their own program, but not connecting with each other.
The Indonesian government has issued a lot of policies to support SMEs especially during the pandemic, which include the subsidies to the credit, the SMEs can get lower interests’ rate. In terms of financing as well, the banks have been asked to allocate the credit for SMEs, 20% till 2022, increasing to 25 percent next year, and 30 percent in 2024. if the bank couldn’t fulfil this, they will get some punishment. The government also reduced the tax for SMEs with the sales under 50 billion Rubia. In terms of digitalization, many government agencies involved in, for example, the Ministry of SMEs, Ministry of Information and Technology has their own programs to support the SMEs digitalization and the regional governments have their own programs to support SMEs to go digital, for example, they are promoting how to do the business by simplifying the business procedure for their online business, they are having training and coaching for SMEs to go digital. Other than government, the business sector is having the training and the skill to upgrade the SMEs to participate in the digital economy, for example the bigger digital ecommerce platform, like Shoppy, Tokupalia, they have their program to attract more SMEs to participate in digital and to use the platform, in order to expand their user groups. Universities also play an important role to promote the SMEs to go digital. The ministry of SMEs has partnered with some universities in Indonesia. The Universities of Indonesia have set up their SMEs centers, the technology institutes in Mando, have the incubators, cooperated with the government, to help SMEs to grow, promote the export of SMEs, trade promotion program.
In Indonesia, 70% of the incubation business are done by the government and the rest of them are universities and private sector. So, the government need to cooperate more with private sector, the universities in doing the incubation of entrepreneurship. 1001 digital startup movement is the national move to promote the digital entrepreneurship, which is the follow-up program to “1000 startup movement”. There is the mobile app for the movement, so entrepreneurs who are willing to join it can apply for it through mobile. Until 2020 the movement graduates thousands of businesses in Indonesia.
Entrepreneurship Culture
The entrepreneurial culture is not very well indeed in Indonesia, the Ministry of SMEs has mentioned that it is only 3.7% entrepreneurship rate in Indonesia, they are hoping that by partnering with the university they can promote more entrepreneurs, young entrepreneurs with competitiveness. In the past, most of the university graduates would like to work in the government and big enterprises, but now, there is some change in nowadays young generation, specifically those graduating from overseas, the world-famous universities, more willing to start up their own business, they are qualified to get access to financing from the angel and VC. Ruangguru, an Indonesian education online platform, is the largest education technology company in Southeast Asia with over 22 million users in Indonesia, Vietnam, and Thailand. During the pandemic, Ruangguru has grown and expanded rapidly, and one of its founders, Muhamad Iman Usman, graduated from Harvard University. There are some role models of entrepreneurship, the founder of digital platform for ecommerce and online education, they are well-educated, which reach a good growth with the outbreak of pandemic. They may be impacting somewhat the entrepreneurship culture.
The Institute for Development of Economic and Finance (INDEF) is an independent and autonomous research and policy studies institution established in August 1995 in Jakarta, Indonesia. Its main activities are carrying out research and policy studies on a wide-range economic and finance issues, to generate policy debates and public participation, and to enhance public awareness in decision making process for search for viable solution to Indonesia’s complex social and economic problems.