Digital adoption, business performance, and financial literacy in ultra-micro, micro, and small enterprises in Indonesia

This study investigates the factors affecting digital adoption by ultra-micro, micro, and small enterprises (UMSEs) based on a survey of 5035 UMSEs in 17 major provinces in Indonesia. We use the survey data to construct a digital adoption index to evaluate the variations in digital adoption in the five business processes of e-procurement, POS, e-marketing, e-commerce, and digital payment. This index not only identifies whether a firm has adopted digital technology but also considers the dimensions of use to measure the level of adoption more precisely. Using the primary data, we employ a simple regression model, and the results demonstrate that owner demographic characteristics, firm-specific factors, business environment, connectivity infrastructure quality, and culture are associated with disparities in digital adoption by UMSEs. Our findings also reveal a positive and significant correlation between digital adoption on business performance. Based on a two-stage least squares (2SLS) model, we found strong evidence of the impact of digital adoption on UMSE owners’ level of financial literacy. The latter result suggests that improving digital adoption among UMSEs could enhance their financial literacy. Overall, these findings confirm the vital role of digital transformation for UMSEs to achieve growth and competitiveness in the global market, which requires robust support from policymakers.