How to Help 80 Percent of MSMEs to Become More Digitally Engaged

Governments can convene different players in an economy to support SMEs. In particular, private-sector companies can lend their expertise and provide access to larger clients and investors. These partnerships can also help SMEs develop their capacity. Ultimately, these partnerships can lead to increased innovation and improved economic development.

Focus on Southeast Asia

The digitalization of MSMEs is an integral part of inclusive transformation. While the region has a large number of internet users, the rate of digitalization among small businesses is still low. More than 80% of tourism businesses are MSMEs, but only one-third are digitally engaged. These businesses face challenges related to affordability, digital skills, and access to information. It is, therefore, critical to develop targeted policies to support the growth of these businesses.

Connectivity is critical for MSMEs, particularly in emerging markets. Most operate in rural areas where digital infrastructure is either lacking or suboptimal. Unequal digital access limits the potential of MSMEs to contribute to the economy. Therefore, investments in digital infrastructure are essential.

Southeast Asia’s growing digital divide hinders the regional economy’s efforts to achieve full economic integration. Regional data from the Economic Research Institute for ASEAN & East Asia shows that only 10 % of MSMEs use advanced digital tools and services. Another 20 % use online-to-offline platforms. The report also notes that in 2021, 69% of regional consumers will make purchases online. As such, digitalization should be at the core of rural development initiatives.

The digital economy is at a critical inflection point. While e-commerce and consumer fintech have seen rapid growth in the region, the SME sector has remained stuck with traditional business methods. To bridge this digital skills gap, the private and public sectors need to work together to create an atmosphere that encourages the adoption of digital technologies. Fintech solutions in the area of payments and credit should also be promoted. This will help SME owners unlock their full potential and speed up recovery. Furthermore, bringing SME development to the forefront of government policy will boost inclusive growth across the region.

SMEs are the backbone of the global economy. In most regions, small and medium-sized enterprises comprise over 80 percent of the private sector. In Sub-Saharan Africa, they provide 80 percent of all jobs. There are currently 44 million MSMEs in the region. The challenge they face is access to capital. More than half of these companies lack access to finance.

Policy mix

Access to finance is the primary constraint for MSMEs. Developing countries and emerging markets are most affected by a lack of finance. The Government needs to improve access to finance for MSMEs and create a more conducive environment for their growth. This policy must address the issues affecting access to finance for MSMEs.

In addition to funding, SMEs need access to capital. Few firms in sub-Saharan Africa are ready to take out loans on commercial terms, but grant funding provides an initial seed capital. In addition, grant funding does not come with ownership or repayment obligations. Equity financing is another option for growing MSMEs. It involves a partial sale of the firm’s ownership but offers excellent potential returns.

The Regional MSME Ecommerce and Digital Policy Index has many dimensions and can guide policymakers to promote digital economies. It is more comprehensive than the UNCTAD B2C Ecommerce Index and covers a much wider range of sizes. It is also more inclusive than the World Bank’s mapping of data privacy rules. It is also different from the OECD’s Digital Services Trade Restrictiveness Index.

As more countries adopt digital regulations, they should consider training programs, financing initiatives, and the development of FinTech regulatory sandboxes. These programs allow a country to test and deploy innovative payment and financial products. They are especially beneficial for MSMEs that are engaged in ecommerce.

SMEs are critical and essential to society as a key source of employment and economic growth. Yet many face challenges that could hamper their growth and thrive. Governments need to take action to ensure they thrive through this pandemic.

FinTech regulatory sandboxes

FinTech regulatory sandboxes can help build capacity in regulatory institutions and provide a structured process for engagement with the industry. However, they should not be seen as a silver bullet or a substitute for permanent regulatory frameworks. A sandbox should serve a purpose and must be designed to meet the local market’s demand. It should also be able to accommodate foreign fintechs if necessary. This is why feasibility assessments are a crucial first step.

Regulatory sandboxes have many benefits, including reducing information asymmetries and reducing the costs of regulation. However, it isn’t easy to translate these goals into measurable metrics. For example, regulators might use thematic sandboxes to advance financial inclusion policy. In such a case, the regulatory sandbox must address the regulatory barrier that excludes the market from accessing funds.

Sandboxes have also proven to be an effective tool for gauging the effects of innovations. However, they need to be carefully designed and monitored. Until then, they will not be of much help in guiding policymakers.

Regulatory sandboxes enable a more comprehensive range of innovative FinTech products and services. Regulatory sandboxes can also help accelerate the digital transformation of the banking sector. This approach can also improve access to essential financial services.

Countries are implementing basic regulatory frameworks for FinTech, but there is still a need for sophisticated digital regulations. However, most countries have adopted basic policies for online transactions and digital compliance and still do not have comprehensive regulatory frameworks for MSMEs. As a result, MSMEs must contend with multiple national regulations to stay compliant.

Local governments

Creating a digitally dynamic ecosystem for SMEs requires that local governments support various sectors. They can support SMEs by creating an enabling environment for them to thrive. This can involve bringing together different economic players, including private-sector companies that can offer business support and access to more prominent investors and clients. They can also support SMEs by building their capacity and awareness.

Recognizing that SMEs are vital actors in economies and societies is essential. They make disproportionate contributions to GDP, employment, and livelihoods. However, they are also vulnerable to increasing threats threatening their growth and competitiveness. To support the development of SMEs, governments can apply lessons from their National Champion Programmes.

Local governments can help them become more specific and compelling technology users by providing better hand-holding to MSMEs. This is crucial in facilitating the adoption of digital technology and integration into the economy. Several government institutions have devised Digital MSME schemes to promote digital integration and awareness among SMEs. One such example is the Government E-Marketplace.

Investing in local institutions is a must for the sustainable growth of African SMEs. Investment facilitation infrastructure must be robust and backed by effective regulation. However, the initial investment and development approach must be flexible. Too many investors still have traditional mindsets and are unwilling to invest in African institutions.

Chambers of commerce

Government agencies are encouraging small businesses to be more digitally engaged in growing their businesses. The government aims to have 30 million MSMEs involved in the digital ecosystem by 2024. It hopes to achieve this target by lowering barriers to digital trade and offering tailored training opportunities to help MSMEs become more digitally engaged.

One of the critical challenges for MSMEs is the lack of awareness about digital opportunities. Without this awareness, MSMEs are unable to develop an effective digitalization strategy. Furthermore, they often lack the skills to identify technology options and assess ROI. To overcome these challenges, governments must provide additional support and infrastructure to help MSMEs become more digitally engaged.

Local governments play a vital role in MSME ecommerce development and digitization. In developing countries, local governments are increasingly interested in enabling ecommerce and bridging regional disparities within their country. One such initiative is the Mayors for eTrade, a program that supports local leaders in developing countries to make their cities more digitally engaged.

For example, Arthur D. Little surveyed approaches taken by governments to support the digitalization of MSMEs. The survey covered thirty countries and included measures such as government spending on MSMEs as a percentage of GDP and how many loans are given to MSMEs. Other examples of innovative government support for MSMEs include France’s digital dashboard, which makes it easier for MSMEs to understand their different financial options. Another example is Canada’s agricultural hotline service, which provides access to financial advice for farmers and informs them about public financial support.

Government initiatives have supported the industry’s growth, focusing on facilitating digital business through improved infrastructure and increasing the size of the MSME sector. Other measures have focused on accelerating digital adoption and creating consumer demand for new technologies.

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