APEC Policy Support Unit

POLICY BRIEF No. 35

July 2020

Supporting MSMEs’ Digitalization

Amid COVID-19
By John Karr, Katherine Loh and Andre Wirjo

KEY MESSAGES

 Micro, small and medium enterprises (MSMEs) are particularly vulnerable to the economic
impacts of the COVID-19 pandemic. Targeting economic relief for small businesses has been
a critical component of policy interventions in APEC economies. These interventions have
included a range of fiscal and monetary policies, as well as initiatives promoting digital
adoption.

 The COVID-19 crisis is pushing more consumers online and accelerating the adoption of e-
commerce – this will require further digital adaptation by MSMEs.

 While the immediate benefits of digital interventions may vary between sectors and firms,
adoption of digital solutions can help MSMEs in areas such as: 1) managing transactions at a
distance; 2) delivering goods efficiently; 3) facilitating access to financial services; and 4)
engaging with new and existing customers.

 Promoting the digitalization of MSMEs can help address a number of the economic challenges
posed by the COVID-19 crisis; however, the process of adopting new digital approaches to
selling does not come without risks.

 Despite the clear benefits, it is crucial to recognize the complex challenges that digitalization
presents, including: 1) cybersecurity and data privacy concerns; 2) exposure to digital fraud;
3) online misinformation; 4) asymmetric market power and platform dominance; and 5)
persistent digital divide and infrastructure-related issues.

 Supporting MSMEs’ digitalization efforts amid COVID-19, therefore, requires policymakers to

adopt a two-pronged set of interventions that allows MSMEs to reap the benefits of the digital
world while overcoming the challenges of digitalization.

This policy brief focuses on the challenges, risks, MSMEs’ digitalization efforts in the near-term,
and opportunities of MSME digitalization efforts before concluding with an eye towards the future,
over the immediate, near-term often characterized noting how the right mix of policies can build long-
as the “New Normal”. While recognizing that term enterprise resilience and more innovative
digitalization is not a silver bullet, this brief outlines economies.
how digital solutions can be used to support MSMEs
as the COVID-19 situation evolves, and describes COVID-19: A Grave Threat to APEC’s MSMEs
numerous examples of existing technology
solutions and partnerships that are currently As of early July 2020, COVID-19 has infected more
underway in APEC. The brief also highlights an than 11 million and resulted in more than 500,000
important consideration for MSMEs: that the deaths worldwide despite aggressive mitigation
COVID-19 crisis is pushing more consumers online, measures.1 As businesses shutter and individuals
and accelerating the adoption of e-commerce in stay home, the demand for goods and services has
many parts of the region. The brief offers a set of plummeted, contributing to growing unemployment
policy recommendations that could facilitate and work stoppages. Even in the most optimistic

1
https://covid19.who.int/
scenario where a partial economic recovery begins region’s economies, and are likely to trend
in the second half of 2020, the PSU estimates a 3.7 downward for some time.
percent decline in growth within APEC this year,
leading to an output loss of USD 2.9 trillion and MSMEs Hit the Hardest. No business sector has
some of the highest unemployment rates reported been more shaken than the region’s MSMEs.
in decades.2 MSMEs are more vulnerable to economic shocks
because they tend to have fewer assets and more
At the individual economy level, the US seasonally- limited cash reserves than larger enterprises, as
adjusted insured unemployment rate soared past 17 well as lower levels of productivity. 11 Small
percent in May 2020 – an economic contraction on businesses also employ over 60 percent of all
a scale not seen since the Great Depression – workers in APEC and make up over 98 percent of
before declining back down to 14.1 percent in the all enterprises in most APEC economies. 12 Some
first week of June 2020. 3 Singapore’s Ministry of MSMEs have been forced to close their businesses
Manpower documented the largest first quarter and lay off employees, while many others are facing
jump in unemployment since the SARS outbreak in difficulty maintaining positive cash flow. One survey
2003, and expects labor market conditions to of Chinese SMEs conducted during the economy’s
continue to worsen in the second quarter of 2020. 4 lockdown identified the following pain points as
In Malaysia, the Malaysian Institute of Economic significant: 1) labor shortages; 2) lack of raw
Research predicts that the real GDP could contract materials; 3) weak consumer demand; and 4)
by as much as 6.9 percent with 2.4 million jobs lost significant stress on balance sheets and cash
as a direct result of the economy’s “movement flow. 13 A COVID-19 risks outlook survey by the
control orders”. 5 Meanwhile, China’s GDP World Economic Forum documented a number of
contracted by 6.8 percent in the first quarter of 2020 issues that respondents fear will impact their
– the first economic contraction since quarterly GDP businesses, including a prolonged global recession;
records began in 1992.6 While COVID caseload is surges in bankruptcies and industry consolidations;
low in Thailand, the World Bank has revised the cyberattacks and data fraud; and protracted
economy’s 2020 growth projections down from 2.9 disruption of global supply chains.14
percent to a range of -3.0 to -5.0 percent, reflecting
the economic contractions spreading around the Although many MSMEs have taken steps to reduce
world.7 overhead, expenses such as rent, insurance, debt
payments, and wages continue to put pressure on
Weakened global consumption and production of resources. Without support to address critical pain
goods has also precipitated the disruption of global points, the damage to local economies could lead to
and regional supply chains, which the International insolvency for many MSMEs and subsequent,
Trade Centre forecasts will reduce worldwide lasting spikes in unemployment and societal stress.
exports of manufacturing inputs by at least USD 228 Compounding these challenges inherent to MSMEs
billion.8 Asia excluding China is expected to export is the likelihood that containment measures will
USD 71 billion less to China; the European Union; persist for some time or need to be reintroduced
and the US combined. In the Philippines, the with new outbreaks. A June outbreak in Beijing, for
Department of Trade and Industry reported that, as example, has caused the Chinese government to
of 29 April, over half of MSMEs had stopped or impose new lockdown measures. Several states in
closed their operations due to the pandemic. 9 the US have paused or are scaling back their
COVID-19’s impact on the informal economy, where reopening after a surge of cases. Thus, efforts to
official data is sparse and a lack of work can often “open up” APEC economies will likely proceed in fits
lead to catastrophic outcomes, is undercounted but and starts with little or no synchronization across
likely significant. 10 These data points are just a borders.15
small sampling of reports on the overall health of the
2 10
https://www.apec.org/Publications/2020/07/APEC-Regional- https://www.ilo.org/global/topics/employment-
Trends-Analysis-July-2020-Update promotion/informal-economy/publications/WCMS_743623/lang-
3
https://www.dol.gov/ui/data.pdf -en/index.htm
4 11
https://www.mom.gov.sg/newsroom/press- https://www.ilo.org/empent/areas/covid-
releases/2020/0429-labour-market-advance-release-1q-202 19/WCMS_741870/lang--en/index.htm
5 12
https://www.mier.org.my/the-economic-impacts-of-covid-19/ https://www.apec.org/Publications/2020/04/Overview-of-the-
6
https://www.reuters.com/article/us-china-economy- SME-Sector-in-the-APEC-Region
13
gdp/hobbled-by-coronavirus-chinas-first-quarter-gdp-shrinks- https://www.cgdev.org/publication/impact-coronavirus-chinas-
for-first-time-on-record-idUSKBN21Z08Q smes-findings-from-esiec
7 14
https://www.worldbank.org/en/region/eap/publication/east-
asia-pacific-economic-update http://www3.weforum.org/docs/WEF_COVID_19_Risks_Outlook
8
http://www.intracen.org/covid19/Blog/The-Great-Shutdown- _Special_Edition_Pages.pdf
15
How-COVID19-disrupts-supply-chains/ https://www.channelnewsasia.com/news/world/covid-19-
9
https://business.inquirer.net/296227/dti-over-half-of-msmes-in- lockdown-ease-new-outbreak-coronavirus-cases-12720800;
ph-fully-stopped-operations-due-to-virus-outbreak https://www.channelnewsasia.com/news/world/total-lockdown-
chile-capital-covid-19-coronavirus-spike-12730810
Government Support to MSMEs During the Movement, which means “Proudly Made in
Crisis. Targeting MSMEs for relief during the Indonesia”. 25 The cross-ministerial initiative is
pandemic has been a critical component of working with digital platforms like JD.ID, Gojek and
economy-level policy interventions in APEC. Many others to provide education and training for MSMEs
economies are providing tax relief for small to go digital and expand market reach not only in
businesses by delaying payment deadlines or response to the crisis, but also to explore their digital
cutting rates. Korea has deferred tax deadlines and future.
reduced VAT for SMEs.16 Indonesia has exempted
small businesses from paying income taxes for six Benefits of Digitalization Amid COVID-19
months. 17 Economies are also providing wage
subsidies to help employers retain workers. In APEC has consistently acknowledged that MSME
Malaysia, a subsidy equals to 50 percent of digitalization is a critical next step for the region. The
minimum wage is expected to benefit three million 2019 APEC SME Ministerial Statement noted that
workers. 18 Economies are also using rate “e-commerce platforms can serve as important
reductions, soft loans, re-financing and guarantees channels for SMEs to gain greater access to diverse
to improve MSME liquidity. 19 New Zealand is global markets and can mitigate risk within supply
providing loans of up to NZD 100,000 to small chains”.26 The Boracay Action Agenda to Globalize
businesses that employ 50 or less employees. MSMEs calls for ICT and e-commerce to be utilized
China has cut rates, set up a refinancing facility, and to promote the internationalization of MSMEs and
reduced reserve thresholds for bank lending to integrate them into global value chains.27
SMEs.20 Japan has allocated over JPY 1.6 trillion
(USD 14.8 billion) to provide MSMEs with financial Indeed, the COVID-19 crisis may be accelerating
support through credit guarantees, low- and even trends towards e-commerce. One survey of the US
zero-interest loans, as well as subsidies on consumers found that online spending has
”sustainablization” (jizokuka) investments intended increased by as much as 30 percent in the month of
to help sustain businesses through the crisis. 21 March, and another survey found that 42 percent of
consumers were shopping more online.28 As buying
In addition to fiscal and monetary interventions, behaviors of consumers – as well as businesses –
policymakers have, in certain contexts, worked with change, MSMEs may have little choice but to
the private sector to promote the use of digital digitalize to adapt to the realities of the market and
solutions to help MSMEs remain in business. For remain competitive.
example, the Singapore government has introduced
a Food Delivery Booster Package to help food and Digitalization has been linked with a number of
beverage businesses make the transition from benefits for businesses. An IDC survey of more than
offline to online sales. Under this initiative, the 1,500 business leaders in the Asia Pacific region
government provides funding to food listed the following as among the top benefits their
establishments to conduct distance transactions organizations reaped from their digital
with customers and deliver products via five food transformation initiatives: improved profit margins,
delivery platforms. 22 The multinational technology productivity, and customer loyalty and retention,
company, Alibaba, has coordinated closely with the along with cost reductions, ability to offer new
Chinese government to introduce a number of products and services, and increased revenue. 29 A
emergency support services directly targeting Deloitte survey of Australian firms found that,
MSMEs. 23 Among the activities highlighted is its compared to small businesses with only a basic
B2C e-commerce solutions, which can be rapidly level of digital engagement, those with an advanced
deployed in just a few days.24 Indonesia announced level of digital engagement “achieved 28 percent
in May the launch of its “#BanggaBuatanIndonesia” more revenue growth in the past 12 months” and 60

16 23

https://www.pwc.com/kr/ko/publications/SamilCommentary/sami https://files.alicdn.com/tpsservice/4851ee417ad1a379aa93e23a
lpwc_korean-taxupdate-covid-19_16april2020.pdf b5d73048.pdf
17 24
https://jakartaglobe.id/business/indonesia-extends-tax- https://www.techcircle.in/2020/04/23/alibaba-cloud-offers-
breaks-to-include-all-sectors cloud-services-worth-30-bn-to-msmes
18 25
https://jakartaglobe.id/news/new-govt-campaign-encourages-
http://documents1.worldbank.org/curated/en/958361587405455 smes-to-ramp-up-digital-presence/
26
498/pdf/Social-Protection-and-Jobs-Responses-to-COVID-19- https://www.apec.org/Meeting-Papers/Sectoral-Ministerial-
A-Real-Time-Review-of-Country-Measures-April-17-2020.pdf Meetings/Small-and-Medium-Enterprise/2019_sme
19 27
http://www.oecd.org/coronavirus/policy- https://www.apec.org/Meeting-Papers/Sectoral-Ministerial-
responses/coronavirus-covid-19-sme-policy-responses- Meetings/Trade/2015_trade/2015_mrt_standalone.aspx.
28
04440101/ https://searchengineland.com/covid-consumers-pessimistic-
20
https://www.imf.org/en/Topics/imf-and-covid19/Policy- but-spending-more-online-331519
29
Responses-to-COVID-19 https://3er1viui9wo30pkxh1v2nh4w-wpengine.netdna-
21
https://www.jdsupra.com/legalnews/declaration-of-statement- ssl.com/wp-content/uploads/prod/sites/43/2018/11/Unlocking-
of-emergency-65708/ the-economic-impact-of-digital-transformation.pdf
22
https://www.enterprisesg.gov.sg/industries/type/food-
services/food-delivery-booster-package
percent more revenue earned per employee. 30 buyers and sellers by facilitating 58 percent more
Another study by the Singapore Ministry of Trade payments to local grocery stores and 78 percent
and Industry found that SMEs’ adoption of digital more payments to local cafes and restaurants.36 In
technology was associated with statistically the Philippines, PayMaya, a mobile money startup
significant increases in their value-added and with close to 20 million users and 80 thousand
productivity of 25 per cent and 16 percent, merchant accounts, launched a service that gives
respectively.31 A study by the Asia Pacific MSME MSMEs an easy way to accept payments from
Trade Coalition found that “digital tools could lower buyers via their smartphones.37
export costs of an average MSME by potentially as
much as 82 percent, while time savings can amount Delivering Goods Efficiently. The digitalization of
to as much as 29 percent”.32 business logistics is helping businesses maintain
on-time product delivery and seek cost-savings
While it should be recognized that the immediate during lockdown periods, as well as in places where
benefits of digital interventions may vary between lockdown has been eased but certain movement
sectors and firms,33 the adoption of digital solutions control policies remain in place. Digital food delivery
can generally help businesses tap new revenue platforms are a good example and have taken on
streams, reduce costs and eliminate pain points. new roles during the pandemic. Even before
Specifically in the context of COVID-19, digital COVID-19, Indonesia’s Gojek has evolved into what
solutions can support MSMEs in the immediate many refer to as a “super app” business model,
short run by helping to: 1) manage transactions at a featuring food delivery, payment processing, and
distance; 2) deliver goods efficiently; 3) facilitate shopping services. 38 During the COVID-19 crisis,
access to financial services; and 4) engage with Gojek has delivered a variety of products to millions
new and existing customers. of consumers who are unable to leave their homes
due to pandemic-related social restrictions.
Managing Transactions at a Distance. E-
commerce tools and a variety of mobile money and Smart logistics services are taking delivery logistics
digital payment services are helping MSMEs lock in a step further by utilizing artificial intelligence (AI) to
transactions and deliver goods and services while dynamically reroute delivery vehicles around
customers remain at home and many businesses lockdown areas and towards the lowest point of
are shuttered. Services like Ebay, Lazada, Rakuten, congestion, reducing delivery times at critical points
Tmall, Shopee, and Alibaba are facilitating B2B, during the crisis. By using AI and robotics to
B2C, and C2C transactions through easy-to-set-up facilitate deliveries, JD.com supplied 220 million
online storefronts which can extend the reach of products (including 290,000 tons of food supplies)
MSME sellers significantly. For example, DHgate to its customers across China in a span of just over
links over 1.9 million MSMEs in China with 19 million a month.39
enterprise buyers across 222 economies and
regions around the world. 34 The company has Facilitating Access to Financial Services. One of
responded to the COVID-19 crisis by launching a the biggest challenges faced by MSMEs during the
customer retention program to maintain strong links crisis is getting payment for shipped products and
between foreign buyers and local sellers.35 services rendered. Even when there are delays
between shipment and payment, some of which can
Promoting contactless transactions can reduce be lengthy, firms must continue to cover fixed costs,
transaction frictions, lower costs, and help manage such as rent and labor expenses. Ant Duo-Chain, a
COVID-19 transmission potential. For example, supply chain finance platform launched by Ant
during Russia’s week of self-isolation to combat the Financial, allows MSMEs to share details of
pandemic, Yandex.Checkout helped connect local transactions and verify invoices instantly. 40 This

30 34
https://seller.dhgate.com/promotion/278-platform-introduction-
https://www2.deloitte.com/au/en/pages/economics/articles/bene en.html?d=platformyemian
35
fits-small-business-digital-engagement.html
31
https://www.mti.gov.sg/-/media/MTI/Resources/Economic- http://global.chinadaily.com.cn/a/202003/27/WS5e7d587fa3101
Survey-of-Singapore/2019/Economic-Survey-of-Singapore- 28217282661.html
36
First-Quarter-2019/FA2_1Q19.pdf https://medium.com/yandex-checkout/how-the-national-week-
32
off-in-russia-affects-online-businesses-yandex-checkout-study-
https://static1.squarespace.com/static/5393d501e4b0643446ab 372573efdf0
37
d228/t/5a83876b71c10b85cc1bd35d/1518569362142/MSME+R
eport-APAC.PDF https://www.sunstar.com.ph/article/1857371/Baguio/Business/P
33
For example, digital solutions may be of limited benefit to the ayMaya-launches-Negosyo-app-for-MSMEs
38
travel and tourism sectors so long as demand remains limited https://fortune.com/longform/grab-gojek-super-apps/
39
due to social distancing requirements or restrictions on https://jdcorporateblog.com/jd-supply-chain-alleviates-covid-
international mobility. On the other hand, small businesses 19-impacts-facilitates-industry-resumption/
40
engaged in manufacturing or food and beverage services could https://www.ledgerinsights.com/alipay-ant-double-chain-
see immediate benefits from digitalization because many of the blockchain-supply-chain/
underlying sources of demand remain sound for these sectors,
notwithstanding the current economic shock.
process allows MSMEs to sell validated invoices to making efforts to support MSMEs during the crisis.
banks, access payment immediately, and avoid the For example, Google is offering USD 340 million in
hassle of handling payment collection. Google Ads credits to small businesses.47

Fintech lending is also helping address the liquidity Zoom, a video-conferencing app developed in the
crisis among MSMEs, especially when lockdown United States, has quickly become an essential tool
requirements have made it challenging to physically for small businesses. It boasts roughly 200 million
visit financial institutions. In China, MyBank daily active users and has quickly surpassed rival
announced partnerships with 100 banks to launch solutions produced by established players during
“contactless loans” to support 15 million MSMEs, the pandemic, growing 1,900 percent since
using their “310” lending model.41 Risk is reduced December 2019. 48 As other services like Tencent
for the lender through AI tools that allow loan Meeting and Alibaba’s DingTalk come on board,
applications to be completed in 3 minutes and MSMEs will have even more remote customer
approved in 1 second with 0 human intervention. engagement options going forward, which is
Similarly, using transaction information and other expected to expand their market reach and
platform data, Mercado Libre’s payment platform is generate new sources of revenue.
now offering over USD 100 million in loans to
COVID-19 impacted MSMEs in Latin America.42 Digitalization Challenges for MSMEs

For rural micro-entrepreneurs, the unbanked and The benefits of digitalization are clear, and the
communities with limited access to financial rapidity and scale with which many digital solutions
services, mobile banking has been critical during can be rolled out further support their adoption.
the COVID-19 crisis. In Papua New Guinea, However, policymakers should remain cognizant of
MiBank, a microfinance bank with a strong focus on the complex challenges that are on the other side of
women and low-income micro-entrepreneurs, is the digitalization coin. Indeed, some of these
using mobile services to reach remote areas with challenges have been brought to the fore as the
new banking services, including places where COVID-19 situation continues to evolve. These
physical branches do not exist.43 The Vietnam Bank include cybersecurity and data privacy concerns;
of Social Policies, MasterCard, and The Asia exposure to digital fraud; online misinformation;
Foundation have partnered to deploy mobile asymmetric market power and platform dominance;
banking services to 5.1 million low-income rural and persistent digital divide and infrastructure-
clients, 51 percent of whom are women. 44 The related issues.
COVID-19 crisis has created opportunities for this
partnership to accelerate the introduction of an Cybersecurity and Data Privacy Concerns.
expanded digital platform in line with the Prime Threats to cybersecurity and data privacy are both
Minister’s Financial Inclusion Strategy. a clear and present danger and a nebulous fear
stoking the anxieties of businesses and individuals
Engaging with Customers. One of the core alike. Even contact tracing apps intended to help
challenges for virtually all businesses during the economies fight the pandemic have been met with
pandemic is remaining engaged with customers and some hesitation, due to, among others, the public’s
acquiring new ones. Many consumer-facing concern about the privacy and security of personal
MSMEs and a number of B2B businesses now have data. Prior to the pandemic, reports of hacking
Facebook pages with which they present their incidents and data leaks were already abundant in
brands, products, and services, and effectively news media. With COVID-19 containment
engage with customers. 45 In addition, usage of measures and the significant increase in the
platforms like Instagram, where products can be adoption of digital tools, such incidents are likely to
featured visually, is on the rise. Facebook shared its increase further. For example, security flaws in
own data recently, noting that in economies hardest some videoconferencing apps have been exploited
hit by the virus, messages on the platform increased by internet trolls and hackers to disrupt ongoing
by 50 percent, demonstrating that customers are calls and programs. 49 Cybercriminals have also
online more than ever.46 These companies are also increasingly resorted to phishing scams by taking

41
Media and Marketing Strategies: How it Impacts the Small-and
https://www.businesswire.com/news/home/20190623005055/en Medium-sized Enterprises' Business Performance?
46
/MYbank-Works-Financial-Institution-Partners-Serve-15 https://about.fb.com/news/2020/03/keeping-our-apps-stable-
42
https://labs.ebanx.com/en/news/business/mercado-pago-will- during-covid-19/
47
extend-114-million-loan-to-small-enterprises-in-brazil/ https://www.businessinsider.com/facebook-google-offer-ad-
43
http://www.techinpacific.com/mibank-focus-digital-offerings- credits-grants-for-small-businesses-2020-3?r=US&IR=T
48
future-growth-papua-new-guinea/ https://www.businessinsider.com/zoom-revenue-increased-
44
https://asiafoundation.org/2020/04/13/the-asia-foundation- market-share-usage-analyst-rbc-2020-4?r=US&IR=T
49
mastercard-vbsp-expand-digital-finance-for-women- https://www.nytimes.com/2020/03/20/style/zoombombing-
microenterprises-in-vietnam/ zoom-trolling.html; https://www.bbc.com/news/world-asia-
45
Mokhtar, Noor Fadhiha & Rosufila, Zuha & Abu Hasan, Zuha 52240251
& Masa Halim, Masa Halim & Halim, Abdul. (2017). The Social
advantage of the general public’s anxieties. For party fraud, in which consumers request refunds
example, a spoof of World Health Organization’s from their issuing banks by claiming that the
“Safety COVID-19 Awareness” email made its way transactions they made were fraudulent. 54
around Australia in March this year. 50 The cost of Exposure to these kinds of fraudulent behavior
cybercrime is difficult to calculate, but one impacts MSMEs more negatively relative to larger
commonly cited study by McAfee estimated the firms because the associated costs are usually fixed
impact of cybercrime on the global economy at and thus constitute a larger proportion of their
nearly USD 600 billion pre-COVID.51 Among firms, revenues.
MSMEs are likely to be prime targets due to their
lack of the necessary resources and security Online Misinformation. Social media platforms are
policies to defend against cyberattacks, as well as a valuable source of information, especially in
lack of general knowledge about best practices. periods of crises, such as the COVID-19 pandemic.
Ultimately, not only does the concern over For example, the Director-General of the World
cybersecurity and data privacy represent a Health Organization regularly uses LinkedIn as a
challenge in and of itself for policymakers, it also channel to provide updates on the pandemic.
acts as a potential hindrance to MSMEs’ adoption of Services like Facebook and Instagram, which are
digital solutions. invaluable in disseminating information far and
wide, also serve as platforms to reach a larger
Exposure to Digital Fraud. Online transactions consumer market and have been used by MSMEs
have facilitated continued access to goods and to kickstart their online businesses because of their
services. However, digital economy tools have also low costs and minimal requirements to open an
been used to conduct questionable practices. This account. However, the freewheeling nature of these
has usually been seen from the perspective of platforms are also fertile grounds to spread false
consumers (e.g., online vendors selling fake or information, with severe ramifications.55 Specifically
unsafe hand sanitizers and surgical face masks, for MSMEs, false reviews and negative publicity on
price-gouging practices by some manufacturers and popular platforms could lead to loss of
retailers), and the enhancement of consumer transactions.56 Some providers have responded to
protection has been commensurately prioritized. 52 the infodemic. For example, Facebook has
Yet firms, including MSMEs, have not been spared enhanced efforts to remove harmful content,
from such practices, particularly in cases where including utilization of third-party fact checkers,
they are buyers of goods and services themselves. while WhatsApp has limited message forwarding to
As an illustration, COVID-19 has necessitated fast- slow the spread of misinformation. 57 However,
tracking of new suppliers to help many businesses misinformation remains a complicated issue with
access critical inputs needed to bring finished goods negative implications on businesses and social
to market. However, working with business partners cohesion as a whole.
without undergoing a proper due diligence and
vetting process may result in failed business Asymmetric Market Power and Platform
relationships and significant losses incurred by Dominance. Although market dominance and
MSMEs. Additionally, firms may encounter market power do not always go hand-in-hand, a
challenges as sellers. For instance, firms may be challenge that policymakers will need to consider is
more exposed to fraud involving chargebacks, in the danger of platform dominance morphing into
which they are required to take on the loss accrued market power in certain sectors of the economy. By
due to disputed transactions. A study conducted by encouraging greater adoption of digital solutions,
Chargeback911 found that organizations particularly those supplied by larger platforms,
generating less than USD 10 million were most economies may invite market consolidation by a
likely to report chargeback rates of over 1 percent in small number of large and influential digital players.
the Card Not Present (CNP) payments space. 53 Some service providers have indeed been
Firms may also be subject to practices such as first employing questionable tactics to increase their
50
pseva6aO31nS6aYYIaImtZPr2vCyadvsP7J7lAEAhB7dUq7Mg8
https://www.forbes.com/sites/emmawoollacott/2020/05/05/exclu 1YClrYHQhNezHxo1fc0J_EbjhB3aVraKoDg&utm_content=603
sive-cybersecurity-and-covid-19the-first-100- 13032&utm_source=hs_automation
54
days/#52070d4b39d5 https://www.forbes.com/sites/louiscolumbus/2020/05/18/how-
51
https://www.mcafee.com/enterprise/en- e-commerces-explosive-growth-is-attracting-
us/assets/reports/restricted/rp-economic-impact- fraud/#4d6585bb6c4b
55
cybercrime.pdf?utm_source=Press&utm_campaign=bb9303ae7 https://www.straitstimes.com/world/united-states/why-the-
0-EMAIL_CAMPAIGN_2018_02_21&utm_medium=email coronavirus-has-morphed-into-a-social-media-
52
https://www.justice.gov/opa/pr/department-justice-announces- nightmare?cx_testId=20&cx_testVariant=cx_1&cx_artPos=7#cx
disruption-hundreds-online-covid-19-related-scams; recs_s
56
https://safety.google/securitytips-covid19/ https://www.stuff.co.nz/business/small-
53
https://ad.chargebacks911.com/hubfs/whitepaper-state-of- business/114220251/how-fake-reviews-can-hurt-a-business
57
chargebacks- https://www.straitstimes.com/world/united-states/whatsapp-
Chargebacks911.pdf?utm_medium=email&_hsmi=60313032&_ limits-message-forwarding-to-slow-spread-of-coronavirus-
hsenc=p2ANqtz-_C_ZVD- misinformation
market share, such as putting pressure on startups between survival and closure is narrowing for many.
by copying their features or bundling their software With that in mind, this brief has focused some of the
to gain a competitive edge.58 As these enterprise- policy recommendations on quick wins that prioritize
level digital concerns gain greater influence in the business process bottlenecks. The idea is that
marketplace, large platforms may acquire sufficient policymakers could achieve impact by considering
market power to affect MSMEs, intentionally or not. – in coordination and dialogue with the private
One way would be through pricing (e.g., charging sector – a series of immediate “sprint” interventions
relatively steep service commissions on food to support MSMEs with digital solutions that
delivery) that cut into profits and drive some MSMEs address critical pain points through digitalization.
out of the market.59 Another way would be through
the use of algorithms that may put some MSMEs at Focus on Overcoming Digital Divide and
a disadvantage. As an illustration, the use of Onboarding. It is important for economies to
algorithms to decide with minimal human facilitate access to devices such as mobile phones,
intervention what are considered essential and non- tablets and computers, which constitute the
essential products led to certain products being hardware component that enables user access to
categorized as non-essential and their delivery the internet, as well as onboarding MSMEs to the
dates pushed back, with detrimental implications on relevant platforms so that they can begin using their
the merchants.60 services to address their pain points. Access to the
internet would also serve the dual purpose of
Persistent Digital Divide and Infrastructure- allowing MSMEs to take advantage of government
Related Issues. While APEC has one of the highest fiscal interventions, by connecting them to up-to-
rates of connectivity in the world, the internet date resources for vital business information.
remains out of reach for close to 40 percent of the Specifically on hardware and software, grants,
population. 61 As highlighted in the 2019 APEC subsidies, and other incentives can be provided to
Economic Policy Report, “the gap in adoption and support first-time purchases and to upgrade legacy
utilization between sectors and firms on the frontier system. Partnerships with equipment providers
vis-à-vis the rest of the economy appears to have could also be considered.
widened over time. The lack of access to data, as
well as resource limitations and aversion to new Promote Lower Data Costs. An important and
technologies, may have contributed to the widening possibly critical point of intervention during the
gap”.62 This is not just a hardware issue. Broadly, COVID-19 crisis could be to temporarily address the
many MSMEs have limited digital literacy, which cost of accessing internet services for MSMEs. This
prevents them from optimizing the digital tools to temporary reduction could come in the form of a
which they have access. As the crisis unfolds, the subsidy or through crisis-response partnerships
digital divide has the potential to undermine the with telecommunications providers, and, over time,
economic success of businesses with limited digital could be reduced as the crisis subsides. A key
access and capabilities. Separately, even among benefit of lowering data costs for MSMEs is that
people and businesses with ready access to the these enterprises may become more willing to
internet, the significant shift to digital tools during participate in online digital literacy training, an often
the pandemic to facilitate engagement and bandwidth-intensive process that business owners
meetings among others, have put a strain on may avoid due to the cost of data.
bandwidth and the underlying telecommunications
infrastructure. For example, there have been Promote Digital Literacy. Given the low levels of
reports of government sites crashing due to sudden digital literacy in many sectors in which small
surge in users accessing services online. 63 businesses are active, training that emphasizes
building online business skills will be a critically
Supporting MSMEs’ Digitalization important activity in many sectors of APEC
economies. Under COVID-19 related measures,
Supporting MSMEs’ digitalization efforts amid online video and internet-enabled training could
COVID-19 requires policymakers to adopt a two- help with digital literacy campaigns, and
pronged approach of allowing them to reap the policymakers are advised to consider ways to work
benefits while overcoming the challenges of with the private sector to promote the development
digitalization. Facilitating MSMEs’ adoption of digital of such materials. ASEAN, Google, and The Asia
tools is of utmost priority, yet the window of time Foundation, for example, have partnered to support
58
https://www.wsj.com/articles/microsoft-aims-to-dominate- month?cx_testId=20&cx_testVariant=cx_1&cx_artPos=3#cxrec
technology-at-work-starting-with-those-video-calls- s_s
61
11591108757 https://www.apec.org/Publications/2019/12/APEC-in-Charts-
59
https://www.channelnewsasia.com/news/singapore/covid-19- 2019
62
delivery-takeaway-restaurants-circuit-breaker-12615976 https://www.apec.org/Publications/2019/11/2019-APEC-
60
https://www.straitstimes.com/business/companies- Economic-Policy-Report
63
markets/amazon-delivery-delays-on-non-essential-goods-to- https://www.straitstimes.com/world/united-states/coronavirus-
extend-another- fired-americans-send-unemployment-websites-crashing
MSME digitalization efforts using video and Address Competition Issues. Competition is one
distance learning techniques in alignment with the of the key underpinning conditions of the market
ASEAN Action Agenda on Digitalization of ASEAN economy. Improved competition can reduce prices
MSMEs.64 and enhance regional coverage in the
telecommunications sector. Increased competition
Support Access to Mobile Money and Fintech. can enable MSMEs to access a wide range of online
An intervention that should take place in tandem services capable of relieving their pain points, some
with general onboarding and digital literacy training of which have been elaborated above. Appropriate
is the introduction of mobile money and digital competition policies can also be employed to tackle
payment tools to firms that have yet to experiment newer issues, such as those related to the use of
with this technology. Policymakers could explore data (e.g., data sharing and portability) and
partnerships with private sector mobile money and algorithms. As technologies and business models
fintech providers to develop strategies that expand are evolving rapidly, competition policies may have
uptake of these services in the short run. Financial difficulty keeping up with the pace of change.
assistance from government-sponsored MSME Policymakers are advised to ensure that
support programs could also be channelled through competition policies and approaches, including
mobile money and fintech platforms as a way to those used to assess market power, can facilitate
draw in new users. Special emphasis should be new market entrants and the adoption of new
given to microfinance institutions, which can support business models, as well as ensure that digital
mobile money outreach to microenterprises through technologies and tools are not exploited to the
their existing large networks and extensive trust detriment of competition.
relationships with micro-entrepreneurs.
Promote Regional Cooperation and Public-
Enhance Trust in Digital Solutions. Realizing the Private Partnerships. The digital economy is
benefits of adopting digital solutions requires complex and multifaceted in nature. Maximizing the
conscious efforts by various stakeholders in tackling opportunities of digitalization while overcoming its
a myriad of inter-related issues, including data challenges require cooperation between
protection and privacy, cybersecurity and protection economies. The endorsement of the APEC Internet
from digital fraud. Failure to address any of these and Digital Economy Roadmap,66 the APEC Cross-
issues would negatively impact the trust that Border E-Commerce Facilitation Framework, 67 the
businesses and consumers place in digital formation of the Digital Economy Steering Group, 68
solutions, whatever their purpose. In the context of as well as the development of the APEC Privacy
cybersecurity, for example, strategies aimed at Framework 69 and APEC Framework for Securing
helping MSMEs guard against cybercrime should the Digital Economy70 are examples of work in this
raise awareness of risks (e.g., the need to be regard. The rapid shift to digitalization in response
prudent when entering into transactions with to COVID-19 containment measures has brought to
suppliers and customers) and targeted training to the fore of the need to accelerate efforts in this area.
new users of digital services. Such trainings would In addition, considering that the private sector could
go hand in hand with general digital or “cyber” be better placed to facilitate the delivery of some
literacy trainings for small businesses. Economies interventions, economies are encouraged to explore
can also enhance their capacities to deal with and enhance their public-private partnerships. For
cybercrime through enacting new legislation or example, by working with private enterprise
revising existing legislation relating to cybersecurity partners in the financial and telecommunications
and cybercrime. In the context of protection from sectors, policymakers can enhance MSMEs’ access
digital fraud, policymakers should be vigilant and to more advanced international payment processing
prepared to act decisively to maintain market tools, such as payment gateways, which can help
integrity and trust. In the context of data protection businesses more effectively manage online
and privacy, policymakers can continue to support transaction and cash flow needs. Partnerships with
MSMEs in their efforts to expand services to alternative lending institutions could help many
consumers while also understanding and honoring entrepreneurs in the region’s informal economy
the diverse needs of economies vis-a-vis data rebound from the COVID-19 crisis and grow in new
privacy.65 ways.

64 67
https://asiafoundation.org/2020/06/22/asean-and-the-asia- https://www.apec.org/Meeting-Papers/Annual-Ministerial-
foundation-with-support-from-google-org-collaborate-to-equip- Meetings/2017/2017_amm/Annex-A
68
200000-micro-and-small-enterprises-with-digital-skills-and-
tools-amidst-the-covid-19-crisis/ http://mddb.apec.org/Documents/2019/SOM/SOM3/19_som3_0
65
https://www.apec.org/Publications/2020/03/Regulations- 22.pdf
69
Policies-and-Initiatives-on-E-Commerce-and-Digital-Economy https://www.apec.org/Publications/2017/08/APEC-Privacy-
66
https://www.apec.org/- Framework-(2015)
70
/media/Files/Groups/ECSG/17_csom_006.pdf https://www.apec.org/Publications/2019/11/APEC-
Framework-for-Securing-the-Digital-Economy
Concluding Thoughts

The COVID-19 crisis has proven to be one of the

John Karr and Katherine Loh are Senior Director and
most challenging moments in APEC history. While Consultant, respectively, at The Asia Foundation; Andre
digitalization has been an ongoing process, the Wirjo is an Analyst at the APEC Policy Support Unit.
nature of the virus and the corresponding
containment measures have necessitated that The views expressed in this Policy Brief are those of the
people and businesses adapt quickly. Indeed, authors and do not represent the views of the APEC
although telecommuting was nothing more than an member economies.
option available to select employees in some firms,
it has become the “new normal” for a significant The authors would like to thank Emmanuel A. San Andres
for providing valuable comments to the draft.
share of the working population. For practical
reasons, this brief has been geared to provide the This work is licensed under the Creative Commons
rationale for facilitating the adoption of digital Attribution-NonCommercial–ShareAlike 3.0 Singapore
solutions by firms and sectors that are likely to see License.
the immediate benefits of digitalization during the
crisis (e.g., food and beverage, retail, wholesale).

As the COVID-19 situation evolves, policymakers The APEC Policy Support Unit (PSU) is the policy
may wish to extend or expand support to other firms research and analysis arm for APEC. It supports APEC
and sectors with longer term enhancements in members and fora in improving the quality of their
deliberations and decisions and promoting policies that
mind, such as in the case of the tourism and support the achievement of APEC’s goals by providing
hospitality sectors. Encouraging the expanded objective and high quality research, analytical capacity
sophistication and reach of, for example, marketing and policy support capability.
and visibility-raising of products and services in the
tourism industry could pay significant dividends as Address: 35 Heng Mui Keng Terrace, Singapore 119616
the region begins its post-COVID recovery. MSMEs Website: www.apec.org/About-Us/Policy-Support-Unit
that deal regularly with international customers – E-mail: psugroup@apec.org
such as in the tourism and hospitality industries –
would benefit from public private partnerships that APEC#220-SE-01.10
enhance their access to cloud-based digital
marketing solutions and digital literacy training.
Such efforts could help restart critical tourism
sectors hit hard by the pandemic.

Although this brief has focused the discussions on

the immediate and near term, particularly with
respect to supporting the adoption of digital tools by
MSMEs, tackling some of the challenges above is
an effort that must continue even after the pandemic
subsides. If anything, the pandemic has accelerated
the digitalization of the economy and therefore,
necessitates that economies re-double their efforts
to address these challenges. Relatedly, any
discussion in which digitalization is a key
component of building a resilient future must be
seen as part of a broader discussion on the
implications of Fourth Industrial Revolution (4IR)
technologies on the labor market and future of work.
Thus, it is critical that policymakers continue to
make progress on policies pertaining to human
capital development and social protection, among
others, as elaborated in other PSU publications. 71
APEC can lay the foundation for a digital future that
promotes innovation and business dynamism while
ensuring inclusive growth and shared prosperity.

71
https://www.apec.org/Publications/2019/11/2019-APEC- Economic-Policy-Report;
Economic-Policy-Report; https://www.apec.org/Publications/2020/06/COVID-19-4IR-and-
https://www.apec.org/Publications/2017/11/2017-APEC- the-Future-of-Work