The Development of the Digital Economy in Micro, Small and

Medium Enterprises Business in the Regional Economy

Imam Mukhlis

, Sugeng Hadi Utomo, Ermita Yusida, Mutiara Sani

Faculty of Economics, State University of Malang

Keywords : Digital Economy, Micro Small, and Medium Enterprises, Regional Economy, Information Technology

Abstract : This study aims to describe the development of Micro, Small and Medium Enterprises (MSMEs) business

based on the digital economy in the regional economy. The object of this study is the business sector of

MSMEs. Meanwhile, the research location includes; Kediri City, Ponorogo Regency, Malang City, and

Batu City East Java Province, Indonesia. The research sample was taken in March-July 2018. The sampling

method was carried out by using a purposive random sampling method. The analytical method used is

descriptive. The results of the study conclude that the media used in the utilization of information

technology are: SMS, WA, Facebook, Internet, Twitter, and Instagram. The type of business carried out

includes fields; fashion, food, beverages, crafts, agribusiness, cosmetics, health and beauty equipment,

online motorcycle taxi, tour and travel, electronic repair, and electronic equipment. Digital economy-based

MSME businesses have been able to create new types of businesses that are able to encourage the

development of regional economic activities more dynamically. In relation to the development of MSME

business based on digital economy in the region, a policy is needed in strengthening business

competitiveness, providing infrastructure, business capital assistance and improving the quality of human

resources.

1 INTRODUCTION

The growing development of the digital economy

can encourage the efficiency and productivity of

economic activities. This certainly can encourage the

expansion of economic activities and economic

performance in the aggregate. The advancement of

internet-based digital technology can be applied

more broadly to economic activities. The application

can occur in economic transactions through the

payment system, ordering, and shipping of goods.

Digital economic activity extends from the concept

of business-to-business (B2B) to business-to-

consumer (B2C). Digital economic instruments in

national payment systems can be in the form of e-

money and e-commerce. Based on the available data,

there are significant developments in the use of e-

money and e-commerce in community economic

activities.

In the context of regional economic development,

developments in the digital economy can provide

acceleration in achieving regional economic

performance. The era of implementing the Law on

Regional Autonomy since 2000 has implications for

regional independence in carrying out various

breakthroughs in improving regional economic

performance. However, because it is faced with the

external conditions of the global economy that are

increasingly transparent and limited regional

financial capacity, not all development programs can

be implemented properly. In this case, the regional

government is required to be able to develop its local

economic potential in improving its economic

performance. In relation to the use of IT in economic

activities, the regional government together with

economic actors can work together in their activities.

The existence of a digital economy can provide a

multiplier effect and also a spillover effect in

regional economic development.

The development of human civilization is

marked by the use of technology in meeting the

needs of the community. Globalization becomes a

new civilization that demands adjustments in the

system of public relations both individually and

Mukhlis, I., Utomo, S., Yusida, E. and Sani, M.

The Development of the Digital Economy in Micro, Small and Medium Enterprises Business in the Regional Economy.

DOI: 10.5220/0008785001650171

In Proceedings of the 2nd International Research Conference on Economics and Business (IRCEB 2018), pages 165-171

ISBN: 978-989-758-428-2

165

nationally and stately. The community produced

from the globalization era is a society with a rational

consumptive type.

In the development of the national economy,

there has been a significant development in

anticipating global developments. In this case, the

growing business sector shifts to a type of creative

economic business based on the use of information

technology. The digital economy phenomenon has

been well implemented in the creative industry,

which can be seen from the number of entrepreneurs

who have used computers and the internet. Based on

the available data, it shows that in 2015 in Indonesia,

the Creative Economy business (Ekraf) which uses

computers (devices) was 64.24%. The Ekraf

business that owns (website) 30.39% and Ekraf

Enterprises that use the internet (network) 68.83%

(www.bekraf.go.id).

East Java Province of Indonesia, is one of the

provinces with increasingly dynamic economic

activities. Regional economic development in East

Java Province is driven by the manufacturing sector,

trade, services, construction, transportation, and the

agricultural sector. The economy of East Java based

on the amount of Gross Regional Domestic Product

(GDP) at current prices in 2017 reached Rp 2,019.2

trillion and on the basis of constant 2010 prices

reached Rp 1,482.15 trillion. The economic structure

of East Java, according to the business field in 2017,

is dominated by three main business fields that are

the processing industry with a contribution of 29.03

percent followed by the agriculture, forestry and

fisheries sector at 12.80 percent and wholesale-retail

and car-motorcycle repair 18.18 percent.

Cumulatively in 2017, East Java's economy grew by

5.45 percent higher than the national growth of 5.07

percent. Positive growth occurs in all business fields

(www.bps.jatim.go).

Regional economic development in the province

of East Java cannot be separated from the role of the

Micro, Small and Medium Enterprises Sector

(MSMEs). This sector is able to provide

employment and new types of businesses that are

developing in various regions. Quantitatively, the

contribution of MSMEs to the economy of East Java

has increased. As stated by the Governor of East

Java Province, in 2012 MSMEs contributed to the

Gross Regional Domestic Product (GRDP) of

54.98%. With the assumption of ceteris paribus, the

contribution of MSMEs to East Java GRDP in 2016

rose to 57.52% (https://ekbis.sindonews.com).

The development of the digital economy in

relation to MSME business in various regions in

East Java Province has considerable potential. This

is because regions that have prominent economic

potential such as Malang City, Batu City, Kediri

City, and Ponorogo Regency. Economic potential in

these areas such as agriculture, tourism, marine,

manufacturing industries and service industries that

can play a role in supporting regional economies in

the ongoing construction process. The development

of the regional economic potential provides

considerable opportunities in the development of

MSME business based on the digital economy.

Based on this background, this study aims to

describe digital economic development in supporting

regional development.

2 LITERATURE REVIEW

Development is basically a multidimensional

process that includes various policies both economic

policies and non-economic policies. In this case,

economic policy has a very broad space in relation

to the achievement of a country's development goals.

According to Todaro and Smith (2009:28)

development targets basically include: increased

availability and expansion of the distribution of

various basic necessities of life - such as food,

clothing, shelter, health, security protection;

improvement of living standards not only in the

form of increasing income, but also includes

increasing employment, improving the quality of

education, and increasing attention to cultural and

humanitarian values, all of which are only to

improve material welfare, but also to foster self-

esteem and the nation concerned; the expansion of

economic and social choices for each individual and

nation as a whole, namely by freeing them from

entanglement of servitude and dependence not only

on people or other nation-states, but also on every

force that has the potential to humble their human

values.

In relation to improving living standards and

expanding economic/social choices, the existence of

a digital economy is the answer to the dynamics that

occur in the development process. In this case,

according to Goldfarb and Tucker (2017), the digital

economy can develop massively because it is

supported by the presence of digital technology.

Therefore, digital technology represents the

information in bits. According to him, understanding

the effects of digital technology does not require a

fundamentally new economic theory. Nevertheless,

it still requires different emphases. Studying the

digital economy starts with what questions are

different? Which one is easier to do when

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166

information is represented in the form of bits or

atoms? Digital technology is related to costs that

limit economic activity. Therefore, basically, the

digital economy explores how the standard

economic model changes the economic costs can be

substantially decreased and even close to zero.

Relevant economic costs are; search costs,

replication costs, transportation costs, tracking costs,

and verification costs. Thus, according to Kray

(2002); MacKie-Mason and Varian (1994); Mukhlis

(2015) the development of globalization has led to

fundamental changes in the development process of

the State.

Another view is expressed by Sharma (2005)

mentioned that digital economics is a process of

convergence of communication, computerization,

and information. Then, the new economy is basically

coordination, innovation, selection and learning

(Gärdin, 2002). In this case, a combination of

computer networks and new business models creates

new markets, industries, businesses, and work

practices today into a form of digital economy.

According to Rogers (1995), the existence of

Diffusion of Innovation (DOI) can explain the role

of technological progress in encouraging the

expansion of economic activities. Through his

theory, Rogers emphasized that technology diffusion

can facilitate public access in utilizing existing IT

developments. While Brynjolfsson and McAfee

(2011) explicitly underlined that the digital economy

with various IT uses in economic activities will be

able to boost the economic performance of a country.

Furthermore, according to Gardin (2002), there

are essential elements in the digital economy that is;

a. digitalization and intensive use of information

and communication technologies (ICT);

b. codification of knowledge;

c. transformation of information into commodities;

and;

d. new ways of organizing work and production.

In this case according to Mossberger, et al.,

(2008); Weill and Woerner, (2013) the

transformation of business activities, government

services, and mass communication in the global

economy. Digital economy data contributes to

economic growth (Brynjolfsson and McAfee, 2011).

While Anvari and Norouzi (2016) in their research

concluded that the use of e-commerce and Research

and Development activities (R and D) had a positive

effect on GDP per capita and at the same time could

encourage the development of economic activities.

The results of research by Sharma (2005) also yield

the conclusion that transactions through e-commerce

can increase wider opportunities in business

activities and ultimately can affect the social

conditions and economic growth of a nation.

3 METHODS

In accordance with the scope of the study, this type

of research is quantitative. The purpose of

quantitative research is to develop and use

mathematical models, theories and/or hypotheses

relating to various phenomena (Goertzen, 2017).

While the approach taken is explorative. This

approach is carried out in order to obtain as much

information as possible on objects that are unique

and not yet much information about the developing

phenomenon. The research location includes the area

of Malang City, Batu City, Kediri City, and

Ponorogo Regency East Java Province. The location

selection was based on consideration of the diversity

of economic activities and regional representation in

the southern part of East Java Propinsi. Research

activities will be carried out in the period March-

June 2018. While the objects in this study are

business actors engaged in the digital economy.

The population used in this study are economic

actors in 4 districts/cities in East Java Province and

samples taken using purposive random sampling

technique. This technique is done by identifying

samples based on certain criteria set by the

researchers. These criteria are like; type of business,

business turnover, business form, and business

location. In relation to this research, relevant area-

based sampling techniques for use in sampling. This

is because the object to be studied is very broad

which involves the population of a district. To

determine which population will be used as a data

source, the sampling is based on the predetermined

population area. Data obtained through;

questionnaire distribution, Focus Group Discussion

(FGD), observation, survey, independent interview

and document analysis. While the data analysis

method used in this research is descriptive. This

method is carried out by presenting data and facts

based on certain characters. The data presented is

then illustrated and developed in more detail in order

to obtain more valid information regarding digital

economic conditions and regional economic

performance.

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4 RESULTS

MSME business development based on digital

economy in various regions shows the

diversification of the types of products produced. In

addition, it also shows the use of information and

communication technology media in various forms.

Various businesses are developed using the existing

main platform, such as; e-commerce, m-commerce,

and social commerce. The three main platforms play

an important role in the communication carried out

among economic actors. The complete picture of the

type of MSME business based on digital economy in

various districts/cities in East Java Province is as

follows on the table 1.

Table 1: Types of MSME Businesses Based on Digital

Economy in Regions

Regency/

City

Number

Business

Actors

Business Type

Communica

tion Media

Ponorogo

Regency

Boutique,

Health and

Beauty

Products,

Fashion

WA, FB,

Instagram,

Twitter,

Telegram,

Online

Kediri City

Worship

Paraphernalia

(prayer), hijab,

makeup,

cosmetics,

watches,

Tupperware,

clothing,

contact lenses,

bag

accessories,

party planner,

food, and

drinks

WA, FB,

Instagram,

Twitter,

Telegram,

Online

Malang

City

197

Online

motorcycle

taxi, mobile

repair, internet

cafe,

motorcycle

accessories,

hoods,

headscarves,

fashion, bags,

shoes, sandals,

travel, tours

and travel,

food, and

drinks

WA, FB,

Instagram,

Twitter,

Telegram,

Online

Batu City

Hijab,

Cosmetics, Cut

Flowers, Plant

Seeds,

Agribusiness,

Videography,

Bag Wallets,

Crafts, Cactus

Plants, Food

and Drink,

Tour and

Travel,

WA, FB,

Instagram,

Twitter,

Telegram,

Online

Tourism

Total

272

Source: Observation of MSME Business Actors, July 2018

The results showed that the four regions in East

Java which were the research locations that are

Ponorogo Regency, Kediri City, Malang City, and

Batu City had several differences related to digital

economic forms which included the potential of IT-

based businesses in their respective regions. The

following is a description of the business conditio ns

of MSMEs based on digital economy in various

regions:

4.1 Ponorogo Regency

The digital economy brings fresh air to the regional

economy. Through IT-based businesses, the digital

economy is expected to continue to grow. First is the

location of the business. The majority of IT-based

businesses in Ponorogo Regency choose business

locations in their own homes. However, business

turnover has increased by 30% from the previous

one that did not utilize IT. This happened because of

the increasing number of media used to market their

products through the web, facebook, WA, twitter,

Instagram, and in reality they were seen opening a

business at home. Whereas if we examine from

some respondents their business age is still relatively

early, namely 1-3 years, but the digital economy can

be explored well so that their business can grow

faster. The most widely traded product type is about

fashion. These entrepreneurs use more IT to market

their products and by using IT management their

business management is more efficient. One of the

main goals of using IT is to get more consumers

because they can make transactions easier. Some of

the obstacles faced by one of the most prominent are

consumers who still have difficulty using IT and

lack of trust in the goods or services sold.

Unfortunately, the development of the digital

economy era in Ponorogo Regency is not balanced

with the support of several related parties, namely

the regional government and banks, so that the

development is not sufficiently capable. But on the

other hand, this certainly has a positive impact,

consumers feel they can ease their work when doing

transactions and get the ease of service with the

presence of IT in the digital economy era.

4.2 Kediri City

The same thing happens with Ponorogo Regency, in

Kediri City, the majority of business people choose

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business locations such as their own homes. While

for business turnover, there is still a 20% increase

from before using IT even though their business age

is still young. The media used to market their

products are web and Instagram. The reason for

using IT in addition to marketing is to build a

business network and also facilitate business

management. One of the benefits obtained by

business people is that they do not need an offline

store because they have enough time to scroll the

handphone. All transaction activities can run

smoothly. In addition to the benefits, there are

several obstacles faced by IT-based businesses in the

city of Kediri because more and more are using IT,

competitors are also increasing, and tend to be prone

to fake accounts. So far, these constraints are still

able to be overcome independently by these business

actors because until now the support from the local

government, as well as material moral assistance

they have not received. At least between sellers and

buyers, a harmonious relationship is established

because with this transaction using IT, time

efficiency can be obtained both sellers and buyers

and prices tend to be cheaper if sold through an

online shop.

4.3 Malang City

On average, IT-based businesses in Malang are

migrants, so the business locations they choose are

boarding houses or rented houses. The use of IT

makes their turnover increase by 50%. Most

consumers are students along with the many

migrants to study in Malang City. Even though they

are boarding or rented, they do not have offline

stores because all of their business management

through IT, marketing is also the same, through WA,

Instagram, FB, web. Products sold are very diverse

and all sectors exist so that the profits obtained are

very large and evenly distributed. Most of these

businesses use IT as a promotional medium. IT

makes them able to minimize rental costs for offline

stores, even promotions can be right on target. Some

of the obstacles faced by businesses in Malang City

are frequent hit and run cases by customers, this can

increase losses for businesses. Sometimes

consumers also don't explore social media and

ultimately the products they want to introduce are

not delivered. In Malang City, support for

developing the potential of the existing digital

economy such as training or ease of credit assistance

from the Bank. Yet, this training tends to be still

basic only in relation to “What” and hasn't led to

“How”. Therefore, it must be further improved, and

if necessary bring in more competent speakers

regarding IT from all fields because this digital

economy gets a very good response from the

community, it's good to continue to be developed.

4.4 Batu City

Batu City that is known as tourism city has an

important contribution to the development of the

digital economy. Among the four locations in this

study, Batu tends to be more potential to be

developed. The reason is, Batu has guaranteed

access that is very easy especially if it is reviewed

more deeply the perpetrators of economic activities

not only in the city, and even penetrated abroad.

Indeed, the type of business pursued in Batu City is

not as diverse as in Malang City, from manual

systems to using IT still survive on gifts and plants,

there are also travel, but only still in a pioneering

stage. Research shows that businesses in Batu City

choose business locations at home because they are

fixated on the products produced by them. These

products are better processed at home and to get

consumers is very easy with IT. They simply operate

IT from home while taking care of business.

Arguably, the products are less diverse but the

turnover obtained is far greater than the three areas

discussed earlier. It can even reach 300% of those

who previously did not use IT. Consumers come

from the general population ranging from young to

elderly. Most marketings are done through FB and

Instagram. They use IT as a promotional medium

and build networks. In addition, the reason they use

IT is to expand the market, simplify business

management, and keep up with the increasingly

advanced times with IT so they can continue to

compete while increasing profits. While there is no

support from the regional government in terms of

materiality, but for SME counseling and training on

existing crops, although still minimal. A digital

economy with the development of IT-based

businesses provides benefits for consumers who are

always facilitated in the matter of buying and selling

goods or services anytime and anywhere.

5 DISCUSSION

Various types of digital economic businesses carried

out by MSME entrepreneurs in various regions in

East Java have their own uniqueness and strength.

The uniqueness and strength are generated from the

influence of culture, local wisdom, the structure of

economic activities, income levels and also local

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169

government policies. The spread of economic

activities in regions with various types of products

produced shows that the potential for business

development of MSMEs based on the digital

economy is growing well. This is certainly a

business opportunity that can be developed in a

more systematic manner regarding the policy and the

provision of supporting infrastructure.

This is as stated by Mossberger, et al., (2008);

Weill and Woerner, (2013) transformation in

business activities, government services, and mass

communication needs to be done in the global

economy. This is necessary so that existing business

entities and businesses can find innovative ideas that

can encourage the diffusion of innovations to

various regions. According to Rogers (1995), the

process of diffusion of innovation that occurs must

be precisely commenced from time to time through

networks among members of existing social systems.

Because of the development of information and

communication technology, there needs to be full

support from stakeholders in the region. This is

important because according to Terzi (2011) the

existence of the internet and e-commerce can

encourage better efficiency, asset utilization, better

and faster in the market, reduction in total order

fulfillment times, and improved customer service.

East Java Province is known for all its economic

potential, both in a macro conducive manner in the

development of MSME business based on the digital

economy. The average level of economic growth

above national economic growth has become a

major force in the flow of digital economic

development in various districts/cities in East Java.

This is also supported by the existence of a very

large population and location of the area which is

supported by the existence of port facilities, airports,

terminals, and transportation systems that have been

integrated between regions and between modes of

transportation to support regional economic

development. In this case, the digital economy as a

new trend in regional development requires a lot of

infrastructures and large capital availability.

Integration of infrastructure and the development of

quality human resources is the key to success in the

development of MSME-based digital economy

businesses. In Sharma's view (2005) digital

economics is basically a process of convergence of

communication, computerization, and information.

In this case, the new economy created is the result of

coordination, innovation, selection and learning

(Gärdin, 2002). Economic actors carry out these

functions to find installed capacity and satisfaction

maximization combined with profit maximization in

economic interaction. In relation to the development

of digital economic enterprises in the region, a

combination of computer networks and new

business models is needed that can create new

markets, industries, businesses, types of businesses

and work practices based on the digital economy.

The regional economic development of East Java

which is supported by the processing industry sector

with a contribution of 29.03 percent of GRDP can

create even greater market share when supported by

the existence of MSMEs based on digital

economy.time

6 CONCLUSION AND

RECOMMENDATION

The digital economy based MSME sector business

activities in Ponorogo Regency, Kediri City, Malang

City, and Batu City of East Java Province in

Indonesia consist of food, beverages, and fashion

business. The use of the internet is done through

Android phones, PC and laptop computers through

various applications such as WA, FB, Instagram,

Twitter, and the Web. Various existing social and

web media are used to facilitate business transaction

processes in e-commerce activities. MSME business

actors based on the digital economy are mostly done

by housewives and also teenagers (students and high

school age) with a different business turnover. The

market scope itself has reached local, regional and

national. Government support is still limited to

training and there is not enough capital support for

MSME business development. In developing its

business, business actors are faced with the

constraints of limited capital for business

development and internet network management both

for the supply of raw materials, market expansion,

and financial transactions.

Based on the results of this study, it is necessary

to have a sustainable policy design in various

regions so that the development of MSME business

based on the digital economy can be competitive in

the global era. This can be initiated by the

government by cooperating with third parties in the

formulation of the design of digital economic

development policies for MSME entrepreneurs in

the regions. Besides that, in order to overcome the

limitations of human resources in business

management, training and business assistance based

on the digital economy are needed. This can be done

by forming an MSME business forum based on

digital economy in various regions. The banking

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sector also needs to provide support in financing the

MSME business based on the digital economy,

especially in terms of easier business loan

application requirements.

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