Issue Briefs

Empowering SMEs through digitalization: Closing the digital gap

In the aftermath of Covid-19, acceleration of digitalization in an unequal manner is likely to have exacerbated existing gaps in adoption of digital technologies among businesses, including the gap between developed and developing countries, between large and small businesses, between rural and urban users, and between different sections of society.

According to the International Telecommunications Union (ITU), the number of internet users overall went up from 4.1 billion worldwide in 2019 to 5.4 billion in 2023, with the penetration rate going up from 54% to 67%. The penetration rate in a country is largely determined by its level of development. While in developed economies, 93% of people use the internet, the figure in low-income countries comes to 27% for 2023, reflecting a glaring gap among economies.

Starting from a low base, developing economies are witnessing a rapid growth in the number of internet users, which increased by over 44% between 2020 and 2023. However, there are large disparities in internet usage among least developed economies where 720 million people, or 64%, are offline. In African LDCs, internet use was an average of 28%, while LDCs in Asia and the Pacific displayed an average of 43% in 2022. The deprived population faces both lack of access to fixed or mobile broadband networks as well as gaps in affordability and skills.

This divide is reflected strongly when it comes to firms as well. As per OECD, SMEs and larger firms even in developed economies differ in their adoption of digital tools and technologies. There is also a gap in access to quality digital infrastructure among SMEs in urban and rural areas, where presence of infrastructure facilities such as 5G and satellite internet differs. This results in disparities in operations due to broadband speed, lack of digital skills and cost of usage.

An OECD survey assessed the diffusion rate of different technologies among small, medium and large firms for 2023 which are critical to their digital transformation.

• •Business-government interactions
• • Electronic invoicing
• • Radio frequency identification
• • Internet of Things
• • E-commerce
• • Artificial intelligence
• • Social media
• • Supplier-customer management
• • Customer relationship management
• • Cloud computing
• • Big data

It found that the gap between large and small enterprises is lower when it comes to digital interaction with governments, options for customers to order online and in RFID. However, in areas such as ERP, CRM, SCM, and other business processes, SME adoption of tools like big data analytics and cloud computing lags that of larger firms.

Gains from digital adoption

The benefits of digital adoption by businesses are globally recognized as they offer gains across operations including finance, shopfloor, marketing, customer satisfaction, quality enhancement, vendor management, and governmental requirements, among others.

• •Digital tools help SMEs to access new customers and manage them more efficiently, thereby expanding their markets. Through customer relationship management programs, the right solutions can be provided to clients at the right time, improving service delivery. Digital marketing and use of social media can also serve to reach out to a larger customer base.
• • SMEs are able to manage their operational processes with digital tools which facilitates their productivity enhancement and better management of resources. Automation, people management, inventory efficiency and machine maintenance can be addressed through digital technologies.
• • A key benefit of digitalization is enhancement of quality. The use of AI in quality management helps lower defects and provides data for reducing errors, thereby minimizing returns.
• • In financial management, technologies such as tokenized assets and distributed ledger technology can provide more financial products to SMEs.
• • World Bank indicates that fintech solutions such as digital loans, supply chain finance platforms, P2P/marketplace lending and secured revolving lines of credit can provide solutions for SME’s access to finance.
• • The e-commerce avenue offers rich dividends to SMEs which emanate from use of digital technologies. Aggregator platforms not only provide key marketplaces but also help SMEs to engage on these to reach a wider set of customers.
• • Logistics is a critical issue for SMEs, and this can be facilitated through digital technologies. Managing the flows of inputs and final products through digital tools reduces costs and enhances time use.

While SMEs may recognize the benefits of technology use, they are usually deterred by the cost of acquiring the requisite tools which can be substantive for initialization. Further, the return on investment is not immediately clear and the gains in productivity and efficiency are often not quantifiable.

Digital tools need to be supported by management’s understanding of the potential uses of the technologies. Often, these are sophisticated packages that owners or managers do not fully comprehend, meaning that they are unable to fully leverage technologies, even after acquiring them. Basic digital skills such as using computers, spreadsheets and online tools are particularly a gap facing SMEs in developing economies, lowering their ability to manage businesses efficiently.

The operation of the technologies further requires qualified personnel. SMEs face challenges in finding and hiring talent that can converge the requirements of the organization with the technologies deployed. Team members must be able to understand both the business as well as the digital tools to optimally use the technology and this is a challenge.

Training and upskilling could be a solution, but this has its own cost, given that technologies are changing. Managers also need to have the capabilities to analyze data regarding sales patterns and website traffic.

In particular, small businesses find it difficult to address markets online. Digital platforms have a large number of sellers for the same products, and it is a challenge to stand out. This can also be a problem due to a lack of digital marketing skills such as email marketing, social media promotions, and search engine optimization.

A key issue is cybersecurity especially when it comes to privacy related issues of customers and vendors. Hacking, cyberfraud, cyber attacks, and payment related issues could leave a small business extremely vulnerable without attention to cybersecurity.

The role of stakeholders

There is much that governments can do to support SME digital adoption. For example, Italy has set up 50 innovation centres for technology transfer which offer training and mentoring programs. It has also instituted ‘Transition 5.0’ which offers enterprises tax credits for digitalization of industrial processes. It is also working to raise awareness on the benefits of new technologies and the support provided by the government.

Similarly, India has set up the Open National Digital Commerce (ONDC) platform that brings together different service providers along with SMEs to support their market expansion. Hundreds of thousands of SMEs are on-boarded on this platform.

In the UK and Australia, digital strategies for skill development and other aspects are in place to support businesses in addressing challenges and building capabilities of workers and society at large.

The private sector also supports SMEs in digitalization. Amazon helps enterprises to better leverage its e-commerce platform for logistics, marketing and exports. Google provides cloud services for SMEs that can boost productivity and scale operations across diverse sectors.

An initiative by an Indian industry association is working on digital transformation of SME by providing training and awareness on marketing, financing, logistics and other areas. It has successfully enabled over 30,000 small businesses to incorporate digital transformation tools.

To conclude, SMEs are central players in any economy and their empowerment and productivity helps nations to build their growth forces, create jobs and scale up incomes. It is absolutely critical to support them in adopting digital tools that can enable them to incorporate digital tools into their business process and provide them with the access to digital infrastructure, access to finance and access to training and capacity building as well as digital-ready talent that can help them in digital transformation.

Importantly, digitalization of SMEs can help reduce inequalities and gaps between countries as well as between enterprises and rural-urban areas.

Small businesses too need to explore the benefits of digitalization and assess the gains to them in acquiring new technologies and skills. An effort would be required for investments in new tools and hiring capable workers that will help them capture the advantages of digitalization and scale up.

Technology and entrepreneurship are well converged by startups, many of which are working on addressing developmental challenges. For example, startups in edtech and agritech are innovating solutions leveraging digital technologies. B2B startups are providing tech support through software as a service (SaaS) to small businesses in many countries.

Such solutions must be prioritized for developing economies that will help small businesses in these countries to acquire digital technologies in their operations at low costs.