Bulletin of Indonesian Economic Studies

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Digitalisation and the Performance of Micro and

Small Enterprises in Yogyakarta, Indonesia

Anna T. Falentina, Budy P. Resosudarmo, Danang Darmawan & Eny

Sulistyaningrum

To cite this article: Anna T. Falentina, Budy P. Resosudarmo, Danang Darmawan & Eny
Sulistyaningrum (2021) Digitalisation and the Performance of Micro and Small Enterprises
in Yogyakarta, Indonesia, Bulletin of Indonesian Economic Studies, 57:3, 343-369, DOI:
10.1080/00074918.2020.1803210

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 Bulletin of Indonesian Economic Studies, Vol. 57, No. 3, 2021: 343–369

DIGITALISATION AND THE PERFORMANCE OF MICRO

AND SMALL ENTERPRISES IN YOGYAKARTA, INDONESIA

Anna T. Falentina* Budy P. Resosudarmo

Statistics Indonesia (BPS) The Australian National University

Danang Darmawan, Eny Sulistyaningrum

Gadjah Mada University

This study examines the effects of internet use, as part of digitalisation, on the per-
formance of micro and small enterprises (MSEs) in Yogyakarta province. Using
primary data on MSEs in Yogyakarta, the paper exploits conceivably exogenous
variations in the cellular signal strength that MSEs receive to connect to the internet,
once number of local cellular transmitters, location topography, local building and
infrastructure development and sectoral characteristics are controlled. The findings
show that internet use has enabled MSEs to engage in the digital economy and has
improved labour productivity and exports. The associated monetary benefit due to
internet use is substantial for local people.

Keywords: digitalisation, export, ICT, internet, micro and small enterprises, productivity
JEL classifications: H54, L53, L96

INTRODUCTION
Micro and small enterprises (MSEs) are a significant source of income and employ-
ment in many developing countries (Berry and Mazumdar 1991; Berry, Rodriguez
and Sandee 2001; Korde-Nayak 2017; Tambunan 2009). Banerjee and Duflo (2011)
showed that small and medium enterprises (SMEs) have generated most of the new
non-farm jobs in India, Indonesia and China. Small enterprises also play a role in
exporting and in supplying products and services to larger enterprises (ADB 2015;
Sato 2000). In some cases, MSEs function as an important informal social safety
net by providing a source of employment for those affected by external shocks
(Resosudarmo, Sugiyanto and Kuncoro 2012). Nevertheless, the productivity of
MSEs remains low compared with that of large firms (Hill 2001; Little, Mazumdar
and Page Jr. 1989; Mead and Liedholm 1998; OECD 2015; Tybout 2000).
Since the mid-1990s, there has been a global upsurge, including for MSEs, in
digitalisation—defined as the move towards using digital technology, such as
the internet and smartphones, for business. The main driver of this upsurge has

* Corresponding author. Email: falentina@bps.go.id

ISSN 0007-4918 print/ISSN 1472-7234 online/18/000343-369 © 2021 ANU Indonesia Project

http://dx.doi.org/10.1080/00074918.2020.1803210
344 A. T. Falentina, B. P. Resosudarmo, D. Darmawan and E. Sulistyaningrum

been the fast development and distribution of this digital technology. Globally,
more than 40% of people have internet access, and this figure is still rising (ITU
2020). In 2019, about 42 billion devices were connected to the internet; this number
is predicted to increase to more than 50 billion in 2022 (Juniper Research 2021).
Digitalisation is considered the basis of the fourth industrial revolution, in which
technologies are transforming almost every aspect of life, including ways of doing
business (Das et al. 2016; Bartel, Ichniowski and Shaw 2007).
The benefit of digitalisation to the performance of larger firms is well docu-
mented (Kneller and Timmis 2016; Bertschek and Niebel 2016; Fernandes et al.
2019). Studies have found that the use of the internet by various larger firms is
associated with higher labour productivity and firm growth (Clarke, Qiang and
Xu 2015). Moreover, it is not only larger firms but also smaller firms with disad-
vantaged socio-economic backgrounds that are expected to benefit from the use of
digital technologies in all areas of business. The adoption of the internet by SMEs
has been predicted to help them achieve higher exports (Lal 2004; Hagsten and
Kotnik 2017), and to be more competitive (Setiawan, Indiastuti and Destevanie
2015). Similarly, it has been argued that the internet has become a facilitator of
innovation among small businesses across several nations (Paunov and Rollo 2016).
Nonetheless, few studies show a causal impact of digitalisation on firm productiv-
ity among MSEs (Colombo, Croce and Grilli 2013; Díaz-Chao, Sainz-González and
Torrent-Sellens 2015).
This paper is among the few to provide evidence on the causal impact of digi-
talisation on the productivity of MSEs in developing countries. Using MSEs in
Yogyakarta province as a case study, this paper investigates the causal impact of
internet use, as part of digitalisation, on the performance of MSEs. Yogyakarta
is a suitable place to study MSEs in Indonesia. With nearly 470 MSEs per 1,000
households in 2016 (BPS 2017a), Yogyakarta has the densest MSE population in
Java, and most of Indonesia’s internet users are in Java (Jurriëns and Tapsell 2017).1
This paper’s primary identification strategy centres on the following: once we
control for the number of local cellular transmitters, location topography, local
building development and local infrastructure and sectoral characteristics, we can
assume that the strength of the cellular signal that MSEs in various areas can use
to connect to the internet is exogenous and random (Farré and Fasani 2013; Olken
2009; Yanagizawa-Drott 2014).
This paper begins with a brief review of current studies on digitalisation and
firm performance, followed by a discussion of MSEs in the context of digitalisa-
tion in Indonesia. After this, we discuss the data and descriptive statistics derived
from the survey. The subsequent section outlines the empirical framework and the
results of the empirical analysis. The paper concludes by deliberating on the wider
implications of the findings for researchers and policymakers.

DIGITALISATION AND FIRM PERFORMANCE

Digital technology can greatly lower the cost of economic and social transactions
for firms, individuals and the public sector by reducing information costs. Several
mechanisms show how this technology promotes development (World Bank 2016).

1. Surveying MSEs is also less costly in Yogyakarta than in other Indonesian regions.
Digitalisation and the Performance of Micro and Small Enterprises in Yogyakarta 345

Firstly, the internet enables automation and coordination, thereby promoting

efficiency. Secondly, the internet enables almost frictionless communication and
collaboration, thereby supporting new delivery modes of goods and services
produced, encouraging collective action and accelerating innovation through
technology platforms and economies of scale. For instance, the internet enables
enterprises to cooperate and organise at a distance, and it encourages the develop-
ment of websites that customers can visit to access the products or services of firms
(Fernandes et al. 2019; Kneller and Timmis 2016). Thirdly, the internet can play
a role in expanding trade, creating jobs and increasing access to public services,
thereby promoting inclusion.
In the context of MSEs, the second and the third mechanisms seem the most
important. MSEs can engage in the digital economy, for instance, by establishing
their own websites, by selling their products on online platforms, and by sourcing
their input materials online. In addition, entrepreneurs may use the internet to
acquire new skills or knowledge on more efficient production processes or busi-
ness organisation (Comin and Mestieri 2018; Keller and Yeaple 2013). Therefore,
the internet may allow MSEs to boost their productivity. It may also enable and
encourage MSEs to do business with new partners, which can lead to substantial
growth in networks and, thus, sales and exports.
Nonetheless, the positive effect of digitalisation is not always reflected in pro-
ductivity data. Solow (1987) stated that ‘you can see the computer age everywhere
but in the productivity statistics’. This is known as the Solow paradox, a concept
that scholars are still exploring (Acemoglu et al. 2014). Researchers have developed
some possible explanations for the Solow paradox. Firstly, digital technology may
be underutilised because of technical bottlenecks, such as the reliance on humans
to input data (Triplett 1999), or a lack of access to the latest computing equipment
(Katz and Koutroumpis 2012). Secondly, it takes time for digital technology to affect
productivity (Basu and Fernald 2008). David (1990) showed that it took decades
for productivity statistics to reflect the breakthrough of electrification. Thirdly, the
measurement of the impact of digitalisation on aggregate output may be flawed or
incorrect (Triplett 1999). Brynjolfsson and Hitt (2000) argued that traditional macro-
economic approaches to measuring the performance impacts of digital technology
use do not effectively capture complementary organisational investments, such as
those in work practices and business processes.
A large body of literature has empirically shown the important role of digital
technology in promoting welfare in developing countries. For instance, Aker and
Mbiti (2010) found that the extensive adoption of mobile phones in sub-Saharan
Africa has greatly reduced search costs and improved markets. Muto and Yamano
(2009) observed that the expansion of mobile phone coverage induced the market
participation of farmers in remote areas. Jensen (2007) showed that the adop-
tion of mobile phones by fishers and wholesalers in Kerala, India, reduced price
dispersion and waste, and increased both the profits of fishers and the welfare
of consumers.
On the other hand, little evidence is available on the impact of digital technology
use on MSEs in developing countries. In the case of developed countries, Colombo,
Croce and Grilli (2013) investigated the adoption of broadband internet technology
and its associated application among SMEs in Italy. They found that the adoption
of basic broadband applications does not have any positive effect on the productiv-
ity of SMEs. However, the adoption of advanced broadband applications that are
346 A. T. Falentina, B. P. Resosudarmo, D. Darmawan and E. Sulistyaningrum

potentially relevant in SME operations produces productivity gains. The benefit

for SMEs appears only when the adoption is associated with extensive strategic
and organisational changes to business processes. Díaz-Chao, Sainz-González and
Torrent-Sellens (2015) analysed new co-innovative sources—including internet
use—of labour productivity in small firms that sell products locally in Girona,
Spain. In contrast to other studies, they found that co-innovation does not directly
affect the productivity of small local firms. They instead established an indirect
relationship between co-innovation and productivity in firms that initiate inter-
national expansion.

MICRO AND SMALL ENTERPRISES AND DIGITALISATION

The number of Indonesians using the internet has grown rapidly, from 8.1 million
(3.6% of the country’s population) in 2005 to 56.6 million (22% of the country’s pop-
ulation) in 2015 (ITU 2016). This growth began in internet cafés, where Indonesians
most commonly accessed the internet in the 2000s. Since then, mostly smartphones
have been used to access the internet in Indonesia. The percentage of Indonesians
using smartphones to connect to the internet skyrocketed from 29% in 2012 to 70%
in 2016, owing to the proliferation of smartphone uptake (Balea 2016; Jurriëns and
Tapsell 2017). During the 2010s, the penetration rates of the internet and mobile
phones in Indonesia were among the highest of neighbouring countries (Pangestu
and Dewi 2017).
Nonetheless, digitalisation is not yet widespread in Indonesia. The current
penetration rate is below that of several ASEAN member states and neighbour-
ing countries, and it is far behind that of developed countries. In addition, data
from Indonesia’s 2016 Economic Census show that only 5% of firms in the country
accessed the internet in 2016 (BPS 2017b). This reflects a very low level of connec-
tivity among transactors. Similarly, across Indonesia’s key sectors—such as the
manufacturing, financial and business services, and social sectors—IT spending
lags behind not only developed countries but also peer countries (Das et al. 2016).
Strong evidence that digitalisation improves MSE productivity may encourage the
Indonesian government to further develop digital infrastructure throughout the
country and encourage MSEs to adopt digital technologies.

FIELD SURVEY
In January 2018, we conducted a field survey of MSEs in Yogyakarta province,
which had about 525,000 MSEs in 2016 (BPS 2017a). The province has 5 districts,
including the city of Yogyakarta, and more than 800 villages. The number of MSEs
per village is about 600. Compared with the average for Indonesia, Yogyakarta has
a denser population of MSEs and a higher internet penetration among MSEs. There
are 140 MSEs per 1,000 people in Yogyakarta, compared with 100 MSEs per 1,000
people nationally. While only 5% of MSEs in Indonesia use the internet for business,
about 8% of MSEs in Yogyakarta use the internet for the same. Furthermore, MSEs
in Yogyakarta survive longer. The average age of MSEs in Yogyakarta is 12.6 years,
while the average for Indonesia is 9.1 years. However, MSEs in Yogyakarta and
Indonesia employ the same number of workers: about 1.8 workers per enterprise.
Thus, MSEs in Yogyakarta may typically be more developed than the average MSE
in Indonesia.
Digitalisation and the Performance of Micro and Small Enterprises in Yogyakarta 347

FIGURE 1 Survey Locations in Yogyakarta Province

Statistics Indonesia (BPS), Indonesia’s central statistics agency, constructed the

MSE sample list for our survey. The agency implemented a two-stage sampling
strategy to select 700 MSEs in Yogyakarta province as our sample list. The details
of this sampling procedure are available in appendix A1.
Undergraduate students from the Faculty of Social and Political Science at
Gadjah Mada University were trained as enumerators. Each respondent was
required to be either the owner or manager of a selected enterprise. We devel-
oped a mobile questionnaire utilising the application known as Survey Solutions,
a computer-assisted personal interview (CAPI) technology developed by the World
Bank. The mobile questionnaire we developed was installed on each smartphone
provided to our enumerators. We gave each enumerator a smartphone (Xiaomi
Redmi 3) and a Telkomsel (the main cellular operator in Indonesia) SIM card so
that they could use standardised equipment to collect the data. The CAPI method
enabled efficient data collection and data processing. Furthermore, it enabled the
collection of information on variables such as the coordinates of each sample and
the cellular signal strength. Figure 1 shows the locations of the sampled MSEs in
Yogyakarta province.
We explored internet use, as a proxy for digitalisation, among MSEs. We looked
at several ways in which MSEs were likely to use the internet in their operations,
such as to access websites, email, social media and online trading. We were par-
ticularly interested in the use of the internet to communicate with customers and
suppliers, to purchase inputs, to deliver services and to advertise products/services.
348 A. T. Falentina, B. P. Resosudarmo, D. Darmawan and E. Sulistyaningrum

TABLE 1 Descriptive Statistics

Variable Observation Mean SD Min. Max.

Data at enterprise level

MSE characteristics
Revenue per worker per month (Rp million) 567 7.07 17.63 0.00 250.00
Profit per worker per month (Rp million) 564 3.46 10.64 –24.93 145.60
Proportion of exports in total sales per
month (%) 576 0.85 6.16 0.00 100.00
Internet use (1 = yes) 576 0.43 0.50 0.00 1.00
Telkomsel cellular signal strength
(0 = no signal, 1–5 bars) 576 4.52 0.83 0.00 5.00
Telkomsel cellular data type
(0 = no signal, 1 = 2G, 2 = GPRS, 3 = EDGE,
4 = 3G, 5 = 4G, 6 = LTE) 576 4.92 0.38 0.00 6.00
Elevation (metres above sea level) 576 91.45 57.36 –14.00 370.00
Width of road (1 = < 2 m, 2 = 2–4 m, 3 = > 4 m) 576 2.07 0.69 1.00 3.00
Sector (1 = mining, 2 = manufacturing,
3 = services) 576 2.70 0.47 1.00 3.00
Home-based enterprise (2 = yes) 576 1.46 0.50 1.00 2.00
Enterprise age (years) 576 16.26 14.05 0.00 87.00
Association membership (1 = yes) 575 0.11 0.31 0.00 1.00
Cooperative membership (1 = yes) 575 0.10 0.30 0.00 1.00
Business licence (1 = yes) 576 0.30 0.46 0.00 1.00
Scale (1 = micro, 2 = small) 576 1.08 0.27 1.00 2.00
Entrepreneur characteristics
Gender (1 = male, 2 = female) 576 1.57 0.50 1.00 2.00
Education (0 = no education, 1 = primary
and junior high schooling, 2 = senior high
schooling or higher) 576 1.46 0.62 0.00 2.00
Age when they started doing business (years) 575 22.45 9.11 7.00 70.00
Age (years) 575 47.93 12.27 21.00 89.00
Data at village level
Number of Telkomsel BTSs in village 107 50.17 59.21 0.00 393.00

Note: Data weighted using sampling weight. GPRS, EDGE and LTE are data types commonly used in
Indonesia. BTS stands for base transceiver station.

We interviewed 576 of 700 MSEs in our sample list. Some MSEs in our list had
closed down and we could not find the addresses of others. Table 1 presents the
descriptive statistics from the survey data. The mean revenue per worker was more
than Rp 7 million per month, while profit per worker was almost Rp 3.5 million.
The mean proportion of exports contributing to total sales was about 0.85%. Exports
include the products that MSEs exported directly to customers abroad and those
that they exported using export firms.
About 43% of MSEs used the internet for business. This percentage is higher
than the national figure because we intentionally oversampled MSEs that use the
internet. The mean age of entrepreneurs was about 48 years and they started doing
business at about age 22 on average. More than 70% of MSEs were engaged in the
 Digitalisation and the Performance of Micro and Small Enterprises in Yogyakarta 349

services sector, while those in the manufacturing and mining sectors accounted
for 27% and less than 1%, respectively.
Nearly one-third of MSEs possessed a business licence and about 10%–11%
were members of business associations or cooperatives. On average, the strength
of the Telkomsel cellular signal available to businesses was about 4.5 bars (no
bars displayed on a smartphone screen would represent no signal and five bars
the strongest signal). Each village also had about 50 local cellular transmitters,
or base transceiver stations (BTSs), which facilitate wireless communication for
devices (Techopedia 2018). Data on the number of BTSs in villages were collected
from Telkomsel.

EMPIRICAL FRAMEWORK
We used two measures of firm performance: labour productivity and exports.
Labour productivity is represented by revenue and profit per worker per month.
Labour productivity is a vital element in assessing the living standards of workers
whose labour is the most essential input in a production process (OECD 2001). For
this paper, we used revenue per worker as the gross output-based productivity
measure, and profit per worker as the value-added-based productivity measure.
The two measures are complementary.
For exports, we focused on the proportion that contributed to each MSE’s total
sales, which we argue indicates the ability of MSEs to produce competitive prod-
ucts and marketing strategies for international markets and to therefore generate
higher returns. The desire to export products can motivate MSEs to improve their
productivity, technological and managerial know-how, and marketing strategies
(Sato 2013; Setiawan et al. 2016). We expected the use of the internet to positively
affect labour productivity and exports, since the internet can help improve pro-
duction and business processes (Fernandes et al. 2019; Kneller and Timmis 2016).
The following estimation model was used to estimate the effect of internet adop-
tion on firm performance:

=yi β Interneti + X i' .γ + BTS j .δ + θ k + θl + ε i (1)

where i represents an enterprise, j represents the village of enterprise i, k repre-

sents the sector of enterprise i, and l represents the district of enterprise i. y is the
measure of labour productivity (output per worker or value-added per worker)
or the proportion of exports contributing to total sales.
Coefficient β is the variable of interest for identifying the impact of internet use.
Internet is a dummy variable of internet use, where 1 equals use of the internet
in business activities and 0 otherwise. X represents a firm’s age, its scale and the
status of its association membership, cooperative membership, business licence,
export activity (for labour productivity only) and whether the firm is home based.
It also represents the width of the road adjacent to the firm and the elevation of
the firm’s location, as well as characteristics of the entrepreneur, such as gender,
age, education and age they started doing business. BTS represents the number of
BTSs in village j. θk represents a sectoral dummy variable (for mining, manufactur-
ing and services) and θl is a district dummy variable (Yogyakarta city and Bantul
district). εi is an idiosyncratic term. Details on how we constructed the variables
350 A. T. Falentina, B. P. Resosudarmo, D. Darmawan and E. Sulistyaningrum

are available in appendix table A2. Data were weighted using sampling weight
and standard errors were clustered at the subdistrict level.

Identification Strategy
The identification strategy takes into account potential endogeneity in the relation-
ship between internet use and productivity. While internet use may help to increase
labour productivity or exports, enterprises that are more productive may also rely
more on the internet. To manage this, we took the following steps.
We recorded the Telkomsel signal strength at the locations of the MSE samples.
Telkomsel is known to have the best cellular network coverage in Indonesia as
well as in Yogyakarta specifically. To avoid measurement errors, we recorded the
Telkomsel signal strength, ranging from 0–5 bars, using similar smartphones and
the same types of SIM cards.
To ensure that cellular signal reception was statistically independent of other
characteristics that may also affect firm performance, we first accounted for the
number of BTSs in a village, which is determined mainly by the cellular company.
This allowed us to capture further differences in signal strength among villages.
We then could assume that topography and building development character-
istics were the main remaining determinants of cellular signal strength. MSEs in
areas with high-density buildings or mountains that block the ‘line of sight’ to a
BTS may receive substantially weaker signals than MSEs with a direct line of sight.
Hence, we controlled for each MSE’s elevation as a proxy for whether the MSE was
situated in a mountainous area or a low plain. We also controlled for the width of
the public road adjacent to the MSE, as a proxy for the building density in the area.
Next, we included a district dummy variable to control for most of the subtle
variations in the economic or infrastructure development across Bantul district and
Yogyakarta city. A sectoral dummy variable was also included to control for sector-
specific factors that jointly affect internet use and enterprise performance. Having
controlled for the number of local BTSs, topography of the enterprise location, local
building and infrastructure development, and sectoral characteristics, we assumed
that the strength of cellular signal received by an MSE was random. This meant that
signal strength at the locations of the MSE samples could be argued as an exogenous
factor determining internet adoption among the samples. Therefore, we proposed
using signal strength as an instrumental variable (IV) as it does not directly affect
MSE performance but correlates with it exclusively through the use of the internet.2
Hence, we can eliminate the endogeneity issue in estimating equation 1, by
using an IV estimation method. That is, we can predict internet adoption by meas-
uring cellular signal strength at the location of the MSE. We can then use the
predicted internet adoption in the estimation of equation (1). The following is the
first-stage equation of our IV estimation:

Internet
= β signali + X i' .γ + BTS j .δ + θ k + θl + ε i (2)
i

where signal is the strength of the cellular signal at enterprise i.

This kind of approach, which exploits differences in geographical proximity
and topography, has been taken in several studies. Olken (2009) examined the
impact of media on social interactions in Indonesia, by exploiting topography and
distance to television transmitter towers as the main determinants of television and
Digitalisation and the Performance of Micro and Small Enterprises in Yogyakarta 351

radio signal reception. A similar approach was also adopted by Farré and Fasani
(2013) to evaluate the impact of media exposure on internal migration in Indonesia.
Yanagizawa-Drott (2014) utilised differences in radio signal coverage to examine
the role of mass media on genocide in Rwanda.
There is a possibility that the instrument correlates with some omitted con-
founding variables. For instance, an ambitious entrepreneur may choose a business
location with better cellular reception. However, we argue that this is unlikely for
Indonesian MSEs. Most are financially constrained, with almost 60% of the sampled
MSEs operating from the entrepreneur’s home. It would typically be too costly for
them to choose a location just to receive a better cellular signal.
Another omitted confounding variable could be choice of cellular provider.
Entrepreneurs whose Telkomsel signal strength is weak may try another cellular
provider. However, we argue this would be unlikely in Yogyakarta. Telkomsel is
known to have better coverage throughout Indonesia, including in Yogyakarta,
than any competitor. A Yogyakarta internet user who cares about signal strength
and coverage will generally prefer Telkomsel.

RESULTS
Impact of Internet Use
Table 2 presents the results of the first stage of the IV estimates, indicating that cel-
lular signal strength is a relevant and valid instrument for predicting internet use.
The coefficient of signal strength is positive and statistically significant at the 1%
level, with at least 40% of the variation in internet use explained by signal strength.
Without controlling for other factors, we found that the coefficient of signal strength
is 0.10 (column 1). The stronger the signal, the higher the probability of internet
use. Columns 2, 4 and 6 show the results estimated after we had controlled for the
characteristics of entrepreneurs, firms, districts and sectors. In column 2, we see a
higher coefficient of signal strength (0.17). We find that the coefficients for signal
strength are very similar for the first-stage estimations of models for revenue per
worker, profit per worker or exports.
That signal strength is a powerful and statistically significant instrument in
predicting internet use is shown by the heteroscedasticity-robust Kleibergen-Paap
F statistic range of 55.2 to 149.3 (Kleibergen and Paap 2006). The Kleibergen-Paap
Wald rk F statistic is used to test weak instruments when standard errors are clus-
tered. Once we had controlled for various factors, the F statistic decreased but the
instrument still passed the test to rule out weakness. For comparison, the Stock
and Yogo (2005) critical value for one instrument and one endogenous regressor
is 16.38 for a maximum of 10% bias.
In table 3, we present the estimates of equation 1, computed using the ordinary
least squares (OLS) and IV methods for each dependent variable. We informally
tested the validity of exclusion restrictions for the instrument by evaluating the cor-
relations between the IV and the error terms. For the restrictions to be valid, signal
strength can have no relationship with the dependent variables, except through
internet use, while other variables are held constant. In other words, if relevant
covariates in the specification are controlled for, the validity requires that the instru-
ment is not correlated with the residuals. The results are in appendix table A3.
We found no evidence of any correlations between the residuals and the instru-
ment for all dependent variables. The coefficients in the IV models, hence, can be
 352 A. T. Falentina, B. P. Resosudarmo, D. Darmawan and E. Sulistyaningrum

TABLE 2 First-Stage Instrumental Variable (IV) Estimates for Predicting Internet Use

Revenue per worker Profit per worker Proportion of exports

Variable (1) (2) (3) (4) (5) (6)

IV: signal strength 0.10*** 0.17*** 0.10*** 0.17*** 0.10*** 0.17***

(0.01) (0.02) (0.01) (0.02) (0.01) (0.02)
Excluded F statistic 147.23 61.85 134.50 55.18 149.27 65.29
Controls No Yes No Yes No Yes
Observations 567 567 564 564 575 575
R2 0.44 0.60 0.44 0.61 0.44 0.60

Note: The first stage was estimated using a linear probability model. Regions: Bantul district and Yogyakarta
city. Sectors: mining, manufacturing and services. Entrepreneur controls: gender, education, age and age
when the entrepreneur started doing business. Firm controls: home-based location, export status (for labour
productivity only), association membership status, cooperative membership status, business licence status,
scale, firm age, adjacent road width, location elevation, number of BTSs in village, and sectoral and district
dummies. Data weighted using sampling weight. Differences in observations for the proportion of exports and
revenue and profit per worker were due to missing observations. Standard errors clustered at the subdistrict
level are in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1

TABLE 3 Effects of Internet Use on Productivity

A. Labour productivity B. Exports

Revenue per worker Profit per worker Proportion of exports

OLS method IV method OLS method IV method OLS method IV method

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

Internet
use 9.05*** 4.47** 16.15***10.23*** 4.30*** 1.14^ 7.96*** 5.46* 1.88*** 1.36*** 1.97*** 1.73***
(1.54) (1.93) (3.89) (3.72) (1.18) (0.73) (2.12) (2.83) (0.34) (0.26) (0.35) (0.58)
Controls No Yes No Yes No Yes No Yes No Yes No Yes
Obs. 567 567 567 567 564 564 564 564 575 575 575 575
R2 0.10 0.28 0.04 0.26 0.06 0.23 0.02 0.20 0.04 0.06 0.04 0.06

Note: Instrumental variable (IV) = signal strength. Revenue and profit per worker are measured in millions
of rupiah per month. Change in the proportion of exports is measured in percentage points. Regions: Bantul
district and Yogyakarta city. Sectors: mining, manufacturing and services. Entrepreneur controls: gender,
education, age and age when the entrepreneur started doing business. Firm controls: home-based location,
export status (for labour productivity only), association membership status, cooperative membership status,
business licence status, scale, firm age, adjacent road width, location elevation, number of BTSs in village,
and sectoral and district dummies. Data weighted using sampling weight. Differences in observations for the
proportion of exports and revenue and profit per worker were due to missing observations. Standard errors
clustered at the subdistrict level are in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1, ^ p < 0.11
Digitalisation and the Performance of Micro and Small Enterprises in Yogyakarta 353

interpreted as the causal impacts of internet use on enterprise performance (labour

productivity and exports), when that use is associated with a stronger cellular
signal. Positive and significant coefficients of internet use suggest that internet use
contributes positively to labour productivity and exports.
Panel A of table 3 shows the effects of internet use on labour productivity as rev-
enue and profit per worker per month. The coefficients in column 1 show the results
of the OLS estimation without any controls. Here we see a statistically significant
positive effect, at the 1% level of significance (9.05). The result is similar when we
use controls, although the magnitude of the coefficient is reduced to 4.47 (column 2).
Columns 3 and 4 provide the results of the IV estimation, with and without the use
of controls. In column 3, we see a positive and statistically significant coefficient of
internet use, at the 1% level (16.15). In column 4, the coefficient is smaller (10.23)
owing to the use of controls. Similarly, using profit per worker per month as a
measure of labour productivity, we obtained positive and significant coefficients
for all model specifications using the OLS and IV methods (columns 5–8).
Regarding the effects on export performance, the coefficients of internet use
are positive and statistically significant (panel B). The OLS and IV estimates are
comparable in magnitude. As the export proportion is measured as a percentage,
the change is measured in percentage points. After the controls are used, the IV
estimates show that internet use in business activities—use related to a stronger
cellular signal—corresponds to an increase of almost 2 percentage points in the
proportion of exports per month, on average (column 12).
Using the OLS estimation, we calculated the monetary benefit MSEs obtain from
internet use associated with a stronger signal. As shown in table 3, internet use
increases revenue per worker by about Rp 4.47 million per month (or about 58% of
average revenue per worker) and increases profit per worker by about Rp 1.14 mil-
lion per month (or about 34% of average profit per worker). The local government
regulation on minimum wage in Yogyakarta in 2018 set a wage of about Rp 1.45
million per month. The impact of internet use, hence, is significant for local people.

Robustness Checks
In table 4, we present the reduced-form estimates of the effects of the instrument on
MSE performance. If broader cellular coverage positively affects MSE performance,
we would expect the coefficients of signal strength to be positive and significant. In
other words, we would expect enterprises that receive stronger cellular signals to
perform better. As the columns show, we see that the coefficients of signal strength
are positive and statistically significant. This indicates that broader cellular cover-
age leads to better firm performance.
Columns 1–2 of table 4 present the effects of cellular signal strength on revenue
per worker, estimated with and without the use of controls. Column 1 shows a posi-
tive and statistically significant coefficient of signal strength (1.53), at the 1% level
of significance. With controls used, the magnitude of the coefficient is 1.69 (column
2). In columns 3–4 of table 4, we re-estimate the reduced-form of the effects, with
profit per worker as the dependent variable. Columns 5–6 show the proportion of
exports as the dependent variable. The results show that a stronger cellular signal
with broader coverage promotes better firm performance.
We also used different specifications to test the robustness of the results. Firstly,
we excluded the contextual variables from the modelling—that is, elevation and the
354 A. T. Falentina, B. P. Resosudarmo, D. Darmawan and E. Sulistyaningrum

TABLE 4 Reduced-Form Estimation of the Instrumental

Variable (IV) Effects on Productivity

Revenue per worker Profit per worker Proportion of exports

Variable (1) (2) (3) (4) (5) (6)

IV: signal strength 1.53*** 1.69*** 0.76*** 0.93* 0.19*** 0.29***

(0.32) (0.59) (0.19) (0.48) (0.03) (0.11)
Controls No Yes No Yes No Yes
Observations 567 567 564 564 575 575
R2 0.14 0.28 0.10 0.22 0.02 0.05

Note: Revenue and profit per worker are measured in millions of rupiah per month. Change in the
proportion of exports is measured in percentage points. Regions: Bantul district and Yogyakarta city.
Sectors: mining, manufacturing and services. Entrepreneur controls: gender, education, age and age
when the entrepreneur started doing business. Firm controls: home-based location, export status (for
labour productivity only), association membership status, cooperative membership status, business
licence status, scale, firm age, adjacent road width, location elevation, number of BTSs in village, and
sectoral and district dummies. Data weighted using sampling weight. Standard errors clustered at the
subdistrict level are in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1

number of BTSs in the village. Secondly, we specified internet use by cellular data
type (for example, 2G and 3G) as the instrument instead of cellular signal strength.
Thirdly, we evaluated whether an enterprise near a neighbouring village could
connect to the internet using a cellular signal from that village—in other words,
we tested for spatial spillovers. Here, we added the weighted number of BTSs in
the neighbouring villages. The weighting used a contiguity matrix in which the
off-diagonal elements equal 1 if village i is adjacent to village j, and zero otherwise
(Anselin 1988). This matrix was then row-normalised—that is, the total of row ele-
ments was set equal to 1. Given spatial spillovers, the coefficient of this weighted
neighbouring BTS variable should be significant.3 Fourthly, we removed outliers
from the data set to evaluate whether they had driven the results. Small outliers
exist when a dependent variable is smaller than {Q1 – 1.5*(Q3-Q1)}, while large
outliers exist when a dependent variable is greater than {Q3 + 1.5*(Q3-Q1)}, where
Q1 is the first quartile and Q3 is the third quartile. Lastly, we showed the estima-
tion results for home-based MSEs only.
In general, we found that the specifications above produced robust results, as
shown in table 5. The coefficients of internet use are mostly positive and statistically
significant across specifications. Nonetheless, depending on the specification, the
magnitudes are larger or smaller than those of the main estimations. For the alter-
native IV estimation, the instruments are statistically significant in the first stage
and pass the test to rule out weakness, and the coefficients for cellular data types

3. This is not a spatial lag model (see Anselin 1988). We do, however, adopt the spatial
weight matrix usually used in a spatial lag model. A spatial lag model is not suitable for
our case, since an MSE in a village is generally too small to influence the performance of
other MSEs in another village.
 TABLE 5 Results of Further Robustness Tests

Revenue per worker Profit per worker Proportion of exports

Home- Home- Home-

IV = based IV = based IV = based
Contextual cellular Spatial MSEs Contextual cellular Spatial MSEs Contextual cellular Spatial MSEs
controls data spillovers Outliers included controls data spillovers Outliers included controls data spillovers Outliers included
removed type added removed only removed type added removed only removed type added removed only

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)

Internet use 7.15^ 8.37*** 14.53*** 6.33*** 8.38*** 4.42 3.64* 4.82** 2.22*** 9.10* 1.596*** 1.914*** 1.621***48.84*** –1.101
(4.57) (2.36) (4.00) (1.29) (2.82) (3.21) (2.02) (1.91) (0.57) (5.34) (0.568) (0.506) (0.593) (15.82) (1.626)

First stage
Signal strength 0.17*** 0.15*** 0.16*** 0.11*** 0.18*** 0.16*** 0.16*** 0.12*** 0.177*** 0.158*** 0.156*** 0.112***
(0.02) (0.03) (0.02) (0.04) (0.02) (0.03) (0.03) (0.04) (0.019) (0.025) (0.023) (0.038)
Cellular data type
2G 1.20*** 1.23*** 1.240***
(0.11) (0.10) (0.103)
GPRS 1.58*** 1.60*** 1.602***
(0.09) (0.09) (0.095)
EDGE 1.26*** 1.27*** 1.306***
(0.11) (0.11) (0.119)
3G 1.30*** 1.33*** 1.342***
(0.14) (0.14) (0.150)
4G 1.34*** 1.38*** 1.367***
(0.09) (0.10) (0.086)
LTE 0.92*** 0.95*** 0.921***
(0.16) (0.16) (0.166)
Neighbouring BTSs
(spatial spillovers) −0.06* 0.01 0.002
(0.03) (0.03) (0.004)
 TABLE 5 Continued

Revenue per worker Profit per worker Proportion of exports

Home- Home- Home-

IV = based IV = based IV = based
Contextual cellular Spatial MSEs Contextual cellular Spatial MSEs Contextual cellular Spatial MSEs
controls data spillovers Outliers included controls data spillovers Outliers included controls data spillovers Outliers included
removed type added removed only removed type added removed only removed type added removed only

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)

Excluded F statistic 78.63 63.84 35.59 63.36 8.69 74.71 66.74 31.87 40.64 9.03 84.335 60.652 37.465 45.612 8.71
Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Observations 567 567 567 505 334 564 564 564 498 341 575 575 575 127 346
R2 0.26 0.28 0.24 0.20 0.27 0.20 0.22 0.21 0.28 0.25 0.057 0.057 0.058 0.526 0.330

Note: Revenue and profit per worker and the proportion of exports are measured in millions of rupiah per month. Regions: Bantul district and Yogyakarta city. Sectors: mining, manufacturing
and services. Entrepreneur controls: gender, education, age and age when the entrepreneur started doing business. Firm controls: home-based location, export status (for labour productivity
only), association membership status, cooperative membership status, business licence status, scale, firm age, adjacent road width, and sectoral and district dummies. Contextual controls:
firm elevation and number of BTSs in village. Standard errors clustered at the subdistrict level are in parentheses.

*** p < 0.01, ** p < 0.05, * p < 0.1, ^ p < 0.11

Digitalisation and the Performance of Micro and Small Enterprises in Yogyakarta 357

TABLE 6 Platforms Used and Firm Performance

Revenue per worker Profit per worker Proportion of exports

Variable (1) (2) (3) (4) (5) (6)

Website (1 = yes) 3.39 5.67^ 2.35 3.84 3.09 2.64

(4.54) (3.38) (3.80) (3.08) (2.32) (2.14)
Email (1 = yes) 5.96 3.19 8.46* 3.60 3.97** 4.29**
(5.21) (3.73) (4.41) (2.56) (1.49) (1.90)
Social media (1 = yes) 7.47*** 4.99 3.14*** 3.85** 0.93* 0.47
(1.75) (3.55) (1.04) (1.40) (0.47) (0.80)
Online shopping −0.12 −0.44 −6.75 −4.86 −1.61 −3.28
platform (1 = yes) (6.38) (5.81) (4.45) (3.70) (1.66) (1.98)
Controls No Yes No Yes No Yes
Observations 334 334 332 332 339 339
R2 0.21 0.37 0.199 0.34 0.09 0.12

Note: Revenue and profit per worker are measured in millions of rupiah per month. Change in the
proportion of exports is measured in percentage points. Regions: Bantul district and Yogyakarta city.
Sectors: mining, manufacturing and services. Entrepreneur controls: gender, education, age and age
when the entrepreneur started doing business. Firm controls: home-based location, export status (for
labour productivity only), association membership status, cooperative membership status, business
licence status, scale, firm age, adjacent road width, location elevation, number of BTSs in village, and
sectoral and district dummies. Standard errors clustered at the subdistrict level are in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1, ^ p < 0.11

are significant (columns 2, 7 and 12). We found no evidence of spatial spillovers

for profit per worker and export proportion, since the coefficients of the weighted
neighbouring BTSs are not statistically significant (columns 8 and 13).

Which Internet Platforms Help Firms to Perform Better?

Entrepreneurs use various online platforms for business. To better understand what
kind of platform is associated with greater productivity, we regressed the measures
of productivity on firms’ use of email, social media, online shopping platforms and
their own websites (for advertising and sales, for example). We focused on MSEs
that use smartphones to connect to the internet. The estimation results from this
restricted sample, therefore, explain what type of online platform helps to increase
the productivity of enterprises that connect to the internet using smartphones.
As shown in table 6, the use of email and social media platforms appears to help
enterprises to improve their productivity. This is likely because the use of social
media enables MSEs to advertise and sell their products in the wider domestic
market, and because the use of email helps them to communicate and arrange sales
with customers abroad. This finding is similar to the findings of Damuri et al. (2018)
and Melissa et al. (2015), which show that social media supports the productivity
of Indonesian business.
However, there is no evidence that using online shopping platforms to sell
products is significantly linked to better performance. This may be because few of
the MSEs in the sample use these platforms. Email and social media are relatively
easy to access using smartphones and may require fewer skills or less technological
358 A. T. Falentina, B. P. Resosudarmo, D. Darmawan and E. Sulistyaningrum

savviness, whereas launching and running a website may require greater skill and
access to a computer. Although e-commerce platforms in Indonesia are growing
rapidly, the number of businesses that can effectively utilise them is still limited.

CONCLUSIONS
In this paper, we have examined the causal impact of internet use, as a proxy
for digitalisation, on the performance of MSEs, measured as labour productiv-
ity and exports. We have also explored the extent of digitalisation among MSEs
in Indonesia. In the identification strategy, we exploited the randomness of the
cellular signal strength received by enterprises in various areas, after controlling
for the number of local cellular transmitters, enterprise location topography, local
building and infrastructure development, and sectoral characteristics.
We acknowledge that we may not be able to extrapolate the findings for other
regions in Indonesia or other developing countries, as many differ greatly from
Yogyakarta, which has a dense population of MSEs, whose digital uptake has been
high. Nevertheless, we argue that the results could still be useful for other regions
and even those in other developing countries. For regions with less-developed
MSEs, the results could serve as an upper limit of how much the MSEs may benefit
from digitalisation encouraged by strong cellular reception.
We found that internet use helped MSEs to engage in the digital economy and
this digitalisation improved their labour productivity and increased their ability
to export their products. The findings are robust even after excluding some of the
contextual variables (elevation and the number of BTSs in villages), replacing the
instrument cellular signal strength with data type (for example, 2G or 3G), taking
into account spatial spillovers from adjacent villages, and omitting some of the
outliers. Therefore, this paper provides evidence that digitalisation, represented
by the use of the internet, can significantly benefit MSEs.
The evidence is in line with findings that digitalisation also benefits smaller
enterprises (Hagsten and Kotnik 2017; Lal 2004; Setiawan, Indiastuti and Destevanie
2015). While Colombo, Croce and Grilli (2013) and Díaz-Chao, Sainz-González and
Torrent-Sellens (2015) could not find any significant positive impacts of digitalisa-
tion for small enterprises in developed countries, this paper shows that the impact
is significant for MSEs in a developing country.
Among the digital activities studied, we found that using email or social media
significantly helps MSEs to engage in and benefit from the digital economy. These
results are encouraging since email and social media are relatively easy to access
using smartphones and require little technological savviness. Hence, the barriers
to participating in the digital economy are few.
The evidence from this paper could help to justify public policies designed to
boost internet quality and availability, as well as foster firms’ use of the internet in
developing countries. With a much higher penetration of quality internet, develop-
ing countries can expect the productivity of their MSEs to improve significantly.

ACKNOWLEDGMENTS
We are grateful to the Australia-Indonesia Centre (AIC) and for the Indonesia
Endowment Fund for Education (LPDP) for providing some funding for this
Digitalisation and the Performance of Micro and Small Enterprises in Yogyakarta 359

research. We are also grateful to PT Telekomunikasi Selular (Telkomsel) for allow-

ing us to use its BTS location data. We thank the survey team at the Faculty of
Social and Political Sciences at Universitas Gadjah Mada (Fisipol UGM) for help-
ing us to conduct the survey for this research. We also appreciate the feedback
from participants at the Arndt-Corden Department of Economics’ PhD seminar,
the 1st Sustainability and Development Conference, the 42nd annual conference of
Australia and New Zealand Regional Science Association International (ANZRSAI),
and the 15th annual international conference of the Indonesian Regional Science
Association (IRSA). All mistakes are the authors’ responsibility.

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Digitalisation and the Performance of Micro and Small Enterprises in Yogyakarta 363

APPENDICES
A1 Sampling Procedure
Statistics Indonesia (BPS), Indonesia’s central statistics agency, constructed the
MSE sample list for our survey. The agency designed the sampling procedure,
drew the MSE samples to be in our list and calculated the sampling weight for the
survey. The sample frame was constructed based on BPS’s extended MSE survey
in September 2017, which contains information regarding internet use as well as
import and export activities undertaken by MSEs.
The steps in constructing the MSE sample list for our study were as follows.
First, BPS decided the minimum sample size appropriate for our study, using the
following equation (Sukmadi et al. 2008):

Zα2 / 2 × p × q × deff × (1 + non response ) 1.962 × 0.5 × 0.5 × 1.5 × (1 + 0.1)

n = ≈ 634
( MoE )
2
0.052

where Zα2 / 2 is the statistical value for the level of equal to 5% or the probability that
the true margin of error exceeds the acceptable level (1.96); MoE is the acceptable
margin of error, set equal to 0.05, which borders the lower limit of the usual range
of 0.05–0.10; p × q is the estimate of variance; p is the proportion using the internet
and importing or exporting; q is (1 – p); deff is the design effect (1.5); and the non-
response rate is assumed to be 10%.
Second, BPS employed the following procedure to select the samples. In the first
stage, the agency randomly selected two districts in Yogyakarta, since our budget
constraints prevented surveying all five districts in the province. The probability
of being selected in each district was proportional to the number of MSEs in each
district, based on the 2016 Economic Census listing. Bantul district and Yogyakarta
city were the districts selected in the first stage.
In the second stage, four MSE strata were constructed based on internet use (yes/
no), and export or import activities (yes/no). In the sample frame, each MSE that
was situated in either Yogyakarta city or Bantul district was assigned to a stratum.
For both districts, the intention was to have an equal number of MSEs randomly
selected from each stratum to produce the MSE sample list for our study—that
is, 100 MSEs in each stratum and a total of 800 MSEs, which is greater than the
minimum sample size required. However, there were not enough MSEs in the
chosen districts to make up the stratum of MSEs that did not use the internet and
the stratum of those that did not export or import. For this stratum, BPS randomly
selected only 50 MSEs in Yogyakarta city and 50 in Bantul district. The total number
of MSEs in our sample list was only 700.
Third, BPS calculated the sample weight for our sample list.
364 A. T. Falentina, B. P. Resosudarmo, D. Darmawan and E. Sulistyaningrum

TABLE A2 Variable Definition

Variable Description Source

Cellular signal strength
Number of base transceiver
stations (BTSs)
Elevation
Adjacent road width
Revenue per worker
Profit per worker
Proportion of exports
Home-based location
Export status
Association membership status Dummy variable equals 1 if firm is a member of
Cooperative membership status Dummy variable equals 1 if firm is a member of
Business licence
Scale
Firm age
Gender
Education
Entrepreneur age
Age when entrepreneur started Years
doing business
District dummy
Sectoral dummy
Telkomsel cellular signal strength (0­–5 bars) Survey
measured using Telkomsel SIM card and
Xiaomi Redmi 3 smartphones
Number of Telkomsel BTS units in village Telkomsel
Altitude (metres above sea level) measured Survey
by GPS installed in Xiaomi Redmi 3
smartphones
Categorical variable equals Survey
1 if < 2 metres in width (suits 1 car)
2 if 2–4 metres in width (suits 2 cars)
3 if > 4 metres in width (suits > 2 cars)
Rp million per worker per month Survey
Rp million per worker per month Survey
(revenue – expenses)
Share of exports contributing to total sales Survey
(%) per month
Categorical variable equals 2 if the business site Survey
is the same as the household residence,
1 otherwise
Dummy variable equals 1 if firm exports Survey
products abroad directly or indirectly,
0 otherwise
Survey
a business association, 0 otherwise
Survey
a cooperative, 0 otherwise
Dummy variable equals 1 if firm has a licence, Survey
0 otherwise
Categorical variable equals 1 if number of Survey
workers equals 1–4 (micro), 2 if 5–19 (small)
Calculated as (2017 – year when firm Survey
established)
Categorical variable equals 1 if male, 2 if female Survey
Categorical variable equals 0 if no education, Survey
1 if primary or junior high schooling, 2 if
senior high schooling or higher
Calculated as (2017 – year of birth) Survey
Survey
Bantul district (base) or Yogyakarta city Survey
Mining, manufacturing (base) or services Survey

Note: Base is the category against which other categories are assessed.
Digitalisation and the Performance of Micro and Small Enterprises in Yogyakarta 365

TABLE A3 Correlation between Errors and the Instrument

Residual of monthly Estimated Cellular signal

revenue per worker Internet use strength

Residual of monthly revenue

per worker 1.0000
Estimated Internet use 0.0500 1.0000
Cellular signal strength 0.0210 0.4822* 1.0000

Residual of profit Estimated Cellular signal

per worker Internet use strength

Residual of monthly profit

per worker 1.0000
Estimated Internet use −0.0622 1.0000
Cellular signal strength 0.0162 0.4822* 1.0000

Residual of export Estimated Cellular signal

proportion Internet use strength

Residual of export proportion 1.0000

Estimated Internet use 0.0843 1.0000
Cellular signal strength −0.0335 0.5531* 1.0000

Note: * statistically significant at the 1% level. Error terms are not correlated with signal strength.
 TABLE A4 Estimation Results with All Controls

Revenue per worker Profit per worker Proportion of exports

OLS method IV method OLS method IV method OLS method IV method

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

Internet use 9.05*** 4.47** 16.15*** 10.23*** 4.30*** 1.14 7.96*** 5.46* 1.88*** 1.36*** 1.97*** 1.73***
(1.54) (1.93) (3.89) (3.72) (1.18) (0.73) (2.12) (2.83) (0.34) (0.26) (0.35) (0.58)
Elevation –0.04 –0.05 –0.02 –0.03 0.00 0.00
(0.04) (0.04) (0.02) (0.02) (0.00) (0.00)
Number of BTSs –0.00 –0.00 0.01 0.00 –0.00 –0.00*
(0.01) (0.01) (0.01) (0.01) (0.00) (0.00)
Road width < 2 metres 9.41 8.57 4.25 3.59 0.23 0.16
(6.61) (6.83) (3.39) (3.58) (0.64) (0.60)
Road width 2–4 metres –0.00 –1.14 –0.41 –1.32 0.17 0.09
(1.73) (1.96) (1.33) (1.33) (0.50) (0.48)
Mining sector –2.84 –1.82 –4.67 –3.96 –2.03** –1.94**
(3.42) (4.44) (4.24) (4.20) (0.86) (0.89)
Services sector 5.48** 4.81** 1.00 0.47 0.10 0.06
(2.39) (2.46) (1.87) (1.93) (0.39) (0.38)
Yogyakarta city –2.88 –3.46 –2.28* –2.69** 0.92** 0.88**
(2.47) (2.31) (1.25) (1.36) (0.39) (0.38)
Home-based location 5.24 5.03 0.59 0.46 0.01 –0.00
(3.47) (3.43) (2.11) (2.13) (0.35) (0.35)
Exporter –0.24 –2.38 2.07 0.43
(3.25) (3.10) (3.66) (3.83)
Association member –1.10 –1.42 4.32 4.09 1.55** 1.51**
(3.30) (2.75) (4.80) (4.37) (0.69) (0.66)
Cooperative member –2.95 –2.39 –1.29 –0.88 0.10 0.13
(2.05) (2.02) (2.30) (2.12) (0.55) (0.53)
Business licence 3.63* 3.28* 1.55 1.21 0.10 0.07
(2.01) (1.92) (1.10) (0.99) (0.31) (0.32)
Small-scale firm 8.09* 6.35 8.71* 7.40* 0.70 0.5790
(4.76) (4.77) (4.78) (4.32) (1.00) (0.99)
Female entrepreneur –1.65 –1.86 0.67 0.48 –0.61 –0.61
(1.59) (1.62) (1.33) (1.21) (0.43) (0.42)
No education –3.36 –0.90 –4.29 –2.45 –0.32 –0.16
(3.87) (4.39) (2.64) (2.56) (0.53) (0.59)
Primary or junior high schooling 2.83 4.37*** 0.03 1.13 –0.47** –0.37
(1.95) (1.63) (1.29) (0.93) (0.20) (0.28)
Age when entrepreneur started –0.06 –0.10 –0.05 –0.08* –0.01 –0.01
doing business (0.08) (0.06) (0.05) (0.05) (0.02) (0.02)
Entrepreneur age –0.06 –0.05 0.01 0.02 0.01 0.01
(0.08) (0.08) (0.06) (0.06) (0.02) (0.01)
Firm age 0.28 0.28 0.14 0.14 –0.01 –0.02
(0.23) (0.23) (0.12) (0.12) (0.01) (0.01)
Observations 567 567 567 567 564 564 564 564 576 575 576 575
R2 0.10 0.28 0.04 0.26 0.06 0.23 0.02 0.20 0.04 0.06 0.04 0.06

Note: Regions: Bantul district (base) and Yogyakarta city. Sectors: mining, manufacturing (base) and services. Data weighted using sampling weight. Standard errors
clustered at the subdistrict level are in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1
368 A. T. Falentina, B. P. Resosudarmo, D. Darmawan and E. Sulistyaningrum

TABLE A5 Descriptive Statistics by Internet Use

Internet users Non-users

Variable Obs. Mean SD Obs. Mean SD

MSE characteristics
Revenue per worker per month (Rp million) 349 9.05 16.67 218 5.56 18.21
Profit per worker per month (Rp million) 347 4.30 12.06 217 2.81 9.38
Proportion of exports in total sales
per month (%) 356 1.88 9.13 220 0.07 1.35
Telkomsel cellular signal strength
(0 = no signal, 1–5 bars) 356 4.63 0.70 220 4.44 0.92
Telkomsel cellular data type
(0 = no signal, 1 = 2G, 2 = GPRS,
3 = EDGE, 4 = 3G, 5 = 4G, 6 = LTE) 356 4.95 0.29 220 4.90 0.43
Elevation (metres above sea level) 356 90.85 55.08 220 91.90 59.14
Width of road (1 = < 2 metres, 2 = 2–4
metres, 3 = > 4 metres) 356 2.17 0.68 220 1.99 0.69
Sector (1 = mining, 2 = manufacturing,
3 = services) 356 2.73 0.46 220 2.70 0.49
Home-based location (2 = yes) 356 1.50 0.50 220 1.43 0.50
Enterprise age (years) 356 12.69 9.82 220 18.99 16.08
Association membership (1 = yes) 356 0.15 0.35 220 0.08 0.28
Cooperative membership (1 = yes) 356 0.10 0.29 220 0.11 0.31
Business licence (1 = yes) 356 0.37 0.48 220 0.25 0.43
Scale (1 = micro, 2 = small) 356 1.15 0.35 220 1.03 0.17
Entrepreneur characteristics
Gender (1 = male, 2 = female) 356 1.52 0.50 220 1.61 0.49
Education (0 = no education, 1 = primary
and junior high schooling, 2 = senior high
schooling or higher) 356 1.75 0.49 220 1.23 0.62
Age when they started doing business
(years) 356 22.17 6.63 220 22.66 10.64
Entrepreneur age (years) 356 40.81 9.58 220 53.38 11.28

Note: Data weighted using sampling weight.

Digitalisation and the Performance of Micro and Small Enterprises in Yogyakarta 369

TABLE A6 Main Estimation Results by Sector

Revenue per worker Profit per worker Proportion of exports (%)

Manufacturing Services Manufacturing Services Manufacturing Services

Variable (1) (2) (3) (4) (5) (6)

Internet 8.865** 15.040*** 14.580* 4.333* 2.590 –0.0740

(4.170) (4.361) (8.624) (2.600) (2.513) (0.590)
Controls Yes Yes Yes Yes Yes Yes

Obs. 242 322 242 319 242 330

R2 0.270 0.315 0.474 0.280 0.295 0.479

Note: Regions: Bantul district and Yogyakarta city. Sectors: mining, manufacturing and services.
Entrepreneur controls: gender, education, age and age when the entrepreneur started doing business.
Firm controls: home-based location, export status (for labour productivity only), association member-
ship status, cooperative membership status, business licence status, scale, firm age, adjacent road width,
location elevation, number of BTSs in village, and sectoral and district dummies. Since firms in the
mining sector constituted < 1% of the samples, no results are available for this sector. Data weighted
using sampling weight. Standard errors clustered at the subdistrict level are in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1