The Influence of the Digital Economy on the Transformation of SMEs
in the Manufacturing Industry
Ziyue Yuan
School of Public Finance and Public Administration, Jiangxi University of Finance and Economics,
Nanchang, Jiangxi, China
Keywords: Digital Transformation, Digital Economy, Manufacturing, SMEs.
Abstract: With the deepening execution of the ‘fourteenth Five-Year Plan’, the digital transformation of manufacturing
small and medium-sized enterprises, which is also called SMEs, has reached a new peak in development.
Within the framework of the digital economy, embracing digitalization has become a necessary means of
survival for SMEs. This paper focuses on the manufacturing sector, outlining the challenges faced during the
transformation of these enterprises. It highlights the benefits and risks posed by the digital economy in this
process and proposes solutions in three key areas: technology, strategy and talent, which offer theoretical
support and guidance for the digital transformation and sustainable growth of SMEs in China’s manufacturing
industry.
1 INTRODUCTION
1.1 Research Background
As an important engine of development in the new
era, the digital economy has flourished globally and
become the backbone of promoting the intelligent
development of society. China's digital economy has
seen continuous expansion, hitting 53.9 trillion yuan
in 2023, which represents 42.8% of the country's
GDP. This underscores the critical role the digital
economy plays in the national economy. The scope of
influence of the digital economy is not only limited to
the rise of new industries, but it significantly affects
the way traditional industries operate, how they
produce goods, and how their value chains are
organized. The core of the digital economy lies in
data, which is regarded as a key production factor,
and the deep integration of digital technology and the
real economy is realised through modern information
networks. This integration drives the development
and change of production and lifestyle towards
unprecedented areas, and becomes a powerful driving
force for stable social development.
The manufacturing sector has emerged as a new
avenue for development for manufacturing
enterprises as a result of the rapid advancement and
widespread application of information technology,
including big data, cloud computing, the Internet of
Things, and artificial intelligence. Since China's
economic opening and reform, the manufacturing
sector has grown exponentially, serving as the
backbone of the country's economy and playing a
crucial role. However, with the weakening of the
demographic dividend advantage, rising resource
costs, coupled with the intensification of international
competition, resulting in China’s traditional
manufacturing industry’s living space has been
squeezed. In this environment, enterprises urgently
need to seek new production dynamics and
development paths.
The Chinese government and
businesses are implementing a number of initiatives
to encourage the digital transformation of the
industrial sector in order to address this challenge.
The Chinese government has clearly proposed in the
strategic plan of Made in China 2025 to focus on
building a green manufacturing system, placing
innovation at the core of the overall development of
the manufacturing industry, and leveraging the
advantages of the digital economy in order to
optimise the upgrading of the manufacturing
structure, which is not only a strategic need to create
a new competitive advantage for the digital
manufacturing industry, but also an important issue
for the realisation of the country’s high-quality
development.
360
Yuan, Z.
The Influence of the Digital Economy on the Transformation of SMEs in the Manufacturing Industry.
DOI: 10.5220/0013230800004568
In Proceedings of the 1st International Conference on E-commerce and Artificial Intelligence (ECAI 2024), pages 360-367
ISBN: 978-989-758-726-9
Copyright © 2025 by Paper published under CC license (CC BY-NC-ND 4.0)
1.2 Research Significance and
Research Method
Even while the digital economy offers manufacturing
companies a favorable environment in which to
undergo digital transformation, SMEs continue to
face numerous risks and obstacles in their quest for
digital transformation. SMEs are important and
irreplaceable in the economic system, and thanks to
their large number and wide coverage, they are an
important source of economic vitality. Due to their
smaller size, manufacturing SMEs tend to be more
flexible and responsive than larger firms. Therefore,
studying the innovation and transformation of
manufacturing SMEs can not only quickly identify
and solve problems, but also promote the overall
progress of the manufacturing industry and drive the
development of the whole industry. Future research
must focus on one of the main problems: how to
encourage businesses to become digital while making
sure SMEs profit and participate fairly?
Based on this, this paper summarises the current
demand for transformation of manufacturing
enterprises through literature combing and the driving
benefit mechanism brought by the digital economy,
explores the positive effect of digital economy
development planning on the transformation of
manufacturing SMEs, highlights the essential
elements of the digital economy that support
businesses' transformation processes, and deeply
analyses the risks existing in the process of digital
transformation, and explores relevant
countermeasures and recommendations, to encourage
the evolution of the manufacturing sector and
sustainable development by providing theoretical
support, and to draw attention to China's digital
economy background of small and medium-sized
manufacturing enterprises transformation related
research.
2 TRANSFORMATION NEEDS
OF MANUFACTURING
ENTERPRISES AND DRIVING
EFFECTS OF THE DIGITAL
ECONOMY
2.1 Dilemma and Innovation of
Manufacturing Enterprises
Studies have shown that R&D expenditures of
enterprises should account for at least 2 to 4 per cent
of turnover in order to ensure sustainable
development and market competitiveness. However,
many enterprises in China currently spend less than 1
per cent of their turnover on R&D, a phenomenon that
severely hampers innovation and limits their market
adaptability. The total amount of R&D funding at the
national level is also insufficient, further limiting the
innovation capacity of manufacturing enterprises. In
addition, Chinese enterprises have a relatively single
source of funding structure, relying mainly on
internal inputs and credit funds, while venture capital
and stock market funds account for a small
proportion. The limitations of this funding structure
can lead to a lack of flexibility and diversity in the
introduction of innovative technologies, which can
easily lead to the loss of the opportunity to enhance
innovation capacity due to a lack of funds, or the
conservative performance of R & D investment,
which can be hampered in the process of long-term
development. At the same time, Chinese
manufacturing enterprises also face problems such as
insufficient investment in technology level and aging
production equipment, which further reduces
production efficiency, raises operating costs, and
further erodes product quality and competitiveness,
diminishing the marketability of companies.
To solve this dilemma, several alternatives to the
enterprise innovation strategy have been proposed by
domestic and international academics. Noni Ngisau
and Nurhani Aba Ibrahim (2020), from Malaysian
manufacturing enterprises, found that government
support can regulate the promotion of enterprise
innovation. Jing et al. (2021), on the other hand, used
fsQCA analysis to prove that lean digitisation in the
Jing et al. (2021) used fsQCA analysis to demonstrate
that the differentiated implementation paths of Lean
digitalisation in the ‘point, line, surface and body’
phases can help firms to allocate and utilise resources
in a more rational way.
2.2 Driving Mechanisms of Digital
Transformation
The change of digital technology not only promotes
the intelligent change of manufacturing enterprises,
but also promotes the significant improvement of
enterprises in terms of operational efficiency.
Academic research on digital drivers mainly focuses
on the economic and technical dimensions, but in
recent years, scholars have gradually explored the
influencing factors of digital transformation and its
driving mechanism from multiple dimensions. Jun Jin
et al. (2020) discuss cases from the technological
dimension, organisational dimension and
The Influence of the Digital Economy on the Transformation of SMEs in the Manufacturing Industry
361
environmental dimension, and propose a synergistic
evolutionary relationship between them and digital
transformation. While Stentoft et al. (2020) showed
in their study that policy support can help firms to
improve the level of awareness and thus enhance the
recognition of opportunities due to technology
facilitation. Zhao Qingqing and Li Siqi (2023) argued
that digital transformation evolves synergistically
with corporate strategy and organisational model in a
dual-path dynamic that provides a power source for
corporate innovation. From the strategy of ‘smart
change and digital transformation’, Peng, Yan (2023)
provided a dual internal and external driving
mechanism and clarified the fundamental connection
between digital transformation and intelligent
transformation of SMEs.
The digital transformation of industrial firms is
being propelled by a multitude of intricate elements.
Manufacturing companies' ability to adapt quickly to
changes in the market in a highly competitive
environment is made possible by the interplay of
organizational change, policy support, technological
advancement, and other factors. These factors
collectively propel the process of digital
transformation in manufacturing companies.
2.3 Enabling Role of the Digital
Economy
According to the data released by the ‘Analysis
Report on the Status of Digital Transformation of
China’s Micro, Small and Medium-sized
Enterprises’, after launching digital transformation,
enterprises saw a significant increase in production or
operational efficiency as well as business revenue.
Among them, 85.24% of the enterprises in the sample
saw their production or operational efficiency
increase by more than 5% after undergoing digital
transformation; 68.28% of the enterprises in the
sample saw their revenue increase by more than 5%
during the same period. This shows that accelerating
digital transformation is an inevitable choice for
MSMEs to get rid of difficulties and enhance
competitiveness. The relevant data can be seen in
Figure 1.
It is easy to see that the development and
deployment of artificial intelligence plays a crucial
role in helping businesses achieve digital
transformation in the real-world application of the
digital economy. The digital economy provides a
strong enabling role for manufacturing enterprises,
through big data, industrial Internet of Things and
other advanced technologies, to promote the
enterprise in decision-making, production efficiency,
market adaptability of the three aspects of the
improvement. Vice versa, the manufacturing
environment provides a huge opportunity to make
better decisions using AI technologies (Sharma et al,
2021), according to McKinsey, 40% of all potential
value that can be created by today’s businesses
Data from: China Association of Small and Medium Enterprises
Figure 1: Production or operational efficiency and revenue growth after digital transformation.
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comes from AI and machine learning technologies,
which shows the key role of AI in business innovation
and value creation. Rai et al. (2021) proposed the
Industrial Internet of Things (IoT) as a key enabler in
the manufacturing environment, facilitating AI to
utilise big data for real-time monitoring applications.
The digital economy enables firms to effectively
utilise data-driven decision support systems (Sahu et
al,2021), which can lessen the negative effects of
market volatility and boost firm resilience by
assisting businesses in adapting swiftly to changes in
the market.
The digital economy provides manufacturing
firms with a wealth of tools to help improve
productivity and resource efficiency, which enhances
firm competitiveness while promoting sustainable
development. Henfridsson et al. (2018) suggest that
for SMEs, digital infrastructure facilitates the optimal
allocation of digital resources and the creation of new
value by integrating software and hardware
components. Liu et al. (2023), on the other hand,
explored that digital tools can significantly enhance
SMEs’ digital capabilities, reduce associated costs,
and play an important role in improving productivity.
Huang Hao et al. (2023) study the digital platform
capability of manufacturing SMEs, and propose to
combine the current resources of enterprises with new
digital technologies, so as to optimise the hardware
configuration of enterprises and fully release the
facilitating effect of digitalisation on innovation
output.
3 RISKS AND CHALLENGES OF
DIGITAL TRANSFORMATION
IN MANUFACTURING SMES
For manufacturing SMEs looking to increase their
competitiveness and achieve sustainable
development, digital transformation has emerged as a
critical route. However, according to the findings of
China SME Digital Transformation Report 2024, it is
not difficult to find that although the vast majority of
SMEs have started digital transformation, they are
still in the early stage of development and face many
risks and challenges. The data shows that 98.8% of
SMEs have started digital transformation, of which
about 32.8% have only tried digital applications in a
single scenario; about 30.6% have carried out partial
digital construction within the value chain; and the
proportion of SMEs with a higher level of
digitisation, driven by intelligence, is only 3.2%. As
shown in Figure 2.
Data from: 36 Krypton Research Institute
Figure 2 Digital transformation process in SMEs.
The Influence of the Digital Economy on the Transformation of SMEs in the Manufacturing Industry
363
With the rapid development of intelligence, the
current Chinese SMEs have a strong willingness to
digital transformation, but still 60% of enterprises are
still in the early stage of development. In terms of
industry distribution, compared with the Internet,
finance and other industries with better infrastructure,
the manufacturing sector is undergoing a slower and
more difficult digital transition. Overall, the digital
transformation of SMEs is still in the exploration
stage, and there are still certain risks and challenges.
3.1 Digital Divide and Technology Gap
In the digital economy, there are significant
differences between SMEs and large manufacturing
enterprises in terms of their access to technology,
their ability to apply it, and the benefits of digitisation,
creating a ‘digital divide’. Large manufacturing
enterprises are more likely to succeed in digital
transformation due to their strong financial and
technological resources, and they invest in new
technologies to achieve digital innovation to maintain
their competitiveness in the market in a changing
economic environment, while SMEs encounter more
obstacles in the transformation. Due to limited
financial resources, SMEs lack sufficient capital to
bear the high costs of technology investments and
upgrades.
Digital transformation requires a large amount of
initial capital to upgrade existing equipment,
introduce new technologies, and set up information
systems, and these investments may not immediately
improve business performance or generate direct
returns in the short term. This investment risk is huge
for SMEs, and if digital transformation fails to deliver
the expected returns, the enterprise may experience
greater financial pressure or even affect normal
business operations. The lack of ability of SMEs to
innovate results in a greater challenge for them to stay
ahead of the curve in the digital economy. This
widens the gap between SMEs and large corporations
and hinders the digital transformation of the
manufacturing sector in general.
3.2 Insufficient Pool of Digitisation-
Related Talent
Successful digital transformation relies not only on
technology, but also requires talent with digital
technology and data analytics skills. However, many
SMEs have significant deficiencies in digital talent
pool and retention, which seriously affects the
effectiveness of digital transformation. In the
manufacturing sector, the digitalisation process is
usually led by middle managers who do not possess
digital skills, and there is a lack of digital talent
capable of leading the change, leading to blind spots
and shortcomings in the process of strategy
development and implementation, essentially
creating a clear disconnect with digital change. This
shortage of talent leaves companies with more than
they can handle in the digital transformation process.
In addition, due to limited resources, SMEs are
usually unable to offer salary packages, training
opportunities and career paths comparable to those
offered by large enterprises, making it difficult to
retain digital talent for long periods of time, even if
they are able to recruit it. This turnover of talent
increases the time and capital costs of business
transformation, undermining its long-term
sustainability.
3.3 Lack of a Complete Digital
Transformation Strategy and
Framework Support
The primary obstacle to an enterprise's ability to
undergo digital transformation is that it ‘does not
have the support of complete digital transformation
strategies and frameworks’, according to the 2023
China Association of Small and Medium Enterprises
(CASME) publication, ‘Analysis Report on the
Digital Transformation Status of China's Micro,
Small and Medium Enterprises’, which means that
SMEs often lack a clear direction and systematic
planning when they formulate and implement their
digital transformation strategies. Clear direction and
systematic planning. In the face of a fast-changing
market, they are often prone to strategic
shortsightedness.
From an internal governance perspective,
businesses are unable to closely align their digital
transformation strategy with their long-term
development plan because they do not have a
thorough understanding of the meaning and
implications of digital transformation; limited by the
cognitive limitations of the management and the
shortage of internal resources, it is difficult for SMEs
to form a logical and clear framework for the
implementation of digital transformation, which leads
to the irrational allocation of resources and weak
implementation when implementing the strategy.
This leads to irrational allocation of resources and
ineffective implementation.
The complexity of the manufacturing industry's
transformation, the non-replicability of the successful
cases that have already been established, and the
external environment's perspective all contribute to
SMEs' lack of forward-looking macro-environmental
prediction and their inability to make timely
adjustments to the strategic direction of digital
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transformation. This tendency of SMEs to prioritize
the short-term results of the fast digital strategy
severely limits the sustainability of the transformation.
4 COUNTERMEASURE
SUGGESTIONS FOR THE
TRANSFORMATION OF
MANUFACTURING SMES
4.1 Bridging the Technology Gap
In response to the lack of technical resources, SMEs
can adopt flexible and low-cost digitalisation tools. In
this way, they can reduce the investment cost in the
early stage of transformation, shorten the
implementation cycle, and enable enterprises to
achieve rapid transformation in the early stage of
transformation, so as to accumulate digital experience
and gradually enhance the depth of digital
transformation. In addition, SMEs should make full
use of the current government support policies at the
financial level, such as loan subsidies, loan
guarantees, risk compensation and other services,
increase investment in the technical level, actively
apply for special government funds, and take
advantage of the policy advantage to reduce the cost
of digital transformation investment and improve risk
response capabilities, so as to bridge the existing
technological disadvantages.
4.2 Optimise Talent Introduction and
Training Mechanisms
SMEs should pay attention to the cultivation of
internal talents, enhance the quality of existing
employees through regular training, and improve the
digital ability of employees; at the same time, they
should maintain friendly relations with scientific
research institutes and high efficiency, and through
the signing of university-enterprise cooperation
agreements, while realising the interaction of human
resources, they should combine the job requirements
of enterprises with the objectives of talent cultivation
in universities, so as to achieve the effect of seamless
connection between the cultivation of talents in
universities and the demand of talents in enterprises,
and to convey the Fresh digital talents.
In terms of compensation system, in the case of
insufficient internal resources, the company has set
up equity incentive mechanism for high-end technical
talents, and at the same time, provided clear career
promotion paths to enhance the sense of belonging of
talents, and to a certain extent, reduced the turnover
rate of talents.
4.3 Clarify Strategic Planning for
Digital Transformation
In order to achieve the dual goals of improving
internal efficiency and adapting to the external
environment, companies should think about strategic
planning from two dimensions, internal and external,
respectively, so as to better formulate and implement
digital transformation strategies. As shown in figure
3.
Figure 3 Internal and external strategic planning.
The Influence of the Digital Economy on the Transformation of SMEs in the Manufacturing Industry
365
SMEs conduct a comprehensive diagnosis from
the internal level, assess the existing level of
digitization, identify the strengths and shortcomings
of the enterprise, set milestones based on the actual
situation of the enterprise, and specify the resource
allocation and implementation steps for each stage,
while introducing digital tools and management
platforms to improve the level of management and
push the enterprise towards a data-driven intelligent
operation mode. At the external level, SMEs should
actively seek the support of external technology
providers, scientific research institutions and industry
alliances through technology introduction, resource
sharing and joint research and development. Enhance
their own technology development level, shorten the
transformation cycle, and gradually establish
enterprise ecosystems through cooperation with
friends to promote resource integration and enterprise
win-win.
5 CONCLUSIONS
The results of the study show that the digital economy
provides unprecedented opportunities for the survival
and development of SMEs, especially in improving
productivity, optimizing resource allocation and
enhancing enterprise resilience, but at the same time,
the lack of resources in terms of technology and
capital restricts the equal competition with large
enterprises in the process of digital transformation.
This paper identifies and analyzes the risks that may
be encountered in the digital transformation of SMEs,
and puts forward targeted recommendations to
provide transformation ideas for manufacturing
SMEs from three dimensions: bridging the
technology gap, optimizing the talent cultivation
mechanism, and clarifying the strategic plan to help
narrow the gap between SMEs and large-scale
enterprises, which to a certain extent solves the
problem of SMEs' fair participation in the market
competition. However, as this paper mainly
researches through literature combing and case study
analysis, lacking field investigation and empirical
analysis, there are certain limitations in the
universality of research conclusions; in addition, this
paper focuses on exploring Chinese manufacturing
SMEs, and has not yet analyzed in-depth the
differences between SMEs in different countries and
regions in terms of digital transformation.
Based on this, future research can start from the
data and construct relevant empirical analysis models,
so as to more comprehensively identify and analyze
potential risks and countermeasures, and guide more
manufacturing SMEs on the path of digital
transformation. In addition, drawing on successful
cases of digital transformation around the world, the
formation of a cross-country comparative research
framework for the digital transformation path of
China's manufacturing enterprises has an excellent
guiding role, and better help enterprises to develop
transformation strategies in accordance with local
conditions and time. Digital transformation is a
strategic move toward sustainable development as
well as a crucial tool for businesses to increase their
competitiveness. It affects not just the growth and
survival of certain businesses but also significantly
influences societal stability and economic expansion.
Future research should focus on how to ensure that
businesses in the digital economy are fairly able to
benefit from technological advancements.
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