BISNIS & BIROKRASI: Jurnal Ilmu Administrasi dan Organisasi

Volume 29 Article 4
Number 2 Volume 29 No. 2 (May 2022)

5-30-2022

The Effects of Business Digitalization and Knowledge

Management Practices on Business Performance: Findings from
Indonesian Micro, Small, and Medium Enterprises
Rosdiana Sijabat
Atma Jaya Catholic University of Indonesia

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Sijabat, Rosdiana (2022) "The Effects of Business Digitalization and Knowledge Management Practices
on Business Performance: Findings from Indonesian Micro, Small, and Medium Enterprises," BISNIS &
BIROKRASI: Jurnal Ilmu Administrasi dan Organisasi: Vol. 29: No. 2, Article 4.
DOI: 10.20476/jbb.v29i2.1350
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The Effects of Business Digitalization and Knowledge Management Practices on
Business Performance: Findings from Indonesian Micro, Small, and Medium
Enterprises

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This research was made possible with the support of the Department of Business Administration, Atma
Jaya Catholic University of Indonesia.

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jbb/vol29/iss2/4
BISNIS & BIROKRASI: Jurnal Ilmu Administrasi dan Organisasi, May 2022 Volume 29, Number 2
DOI: 10.20476/jbb.v29i2.1350

The Effects of Business Digitalization and Knowledge

Management Practices on Business Performance:
Findings from Indonesian Micro, Small, and Medium
Enterprises

Rosdiana Sijabat
Department of Business Administration, Atma Jaya Catholic University of Indonesia, Indonesia
[email protected]

Abstract. Studies analyzing the link between business digitalization, knowledge management practices, and business
performance are rare, especially within the context of Indonesian Micro, Small, and Medium Enterprises (MSMEs). As such, this
study investigates the effects of business digitalization and knowledge management practices on the performance of MSMEs.
It thus offers novel insight into the mediative influence of knowledge management on the digitalization and performance of
MSMEs. Primary data, collected from 95 entrepreneurs involved in MSMEs, were used to test four hypotheses regarding the
effect of business digitalization on knowledge management practices and business performance using a structural equation model.
This study finds that digitalization has a positive and significant effect on the knowledge management practices and business
performance of MSMEs. It also finds that knowledge management practices have a positive and significant effect on business
performance, as it partially mediates the influence of digitalization on business performance. This mediative influence, thus, is
an important factor that should be considered when attempting to accurately describe the link between business digitalization
and performance. These findings indicate that MSMEs in Indonesia should better explore the potential benefits of digitalization.
Likewise, entrepreneurs and managers should attempt to better understand, adopt, and implement digital business and knowledge
management practices. These practical recommendations stem from the theoretical findings of this study, i.e., that knowledge
management plays an important role in the digitalization of business activities, thereby improving business performance.

Keywords: Digitalization, Business performance, Knowledge management, MSMEs, Indonesia

INTRODUCTION 60% of the nation's GDP (BPS 2020; Jayani, 2020).

A study by CISCO (2020) suggested that, through
Micro, Small, and Medium Enterprises (MSMEs) digitalization, Indonesian MSMEs would be able
play an important role in the Indonesian economy. to increase sales by 16% and improve productivity
Law No. 28 of 2008 regarding Micro, Small, and by 14%, thereby contributing an additional US$164
Medium Enterprises defines MSMEs as enterprises billion to the nation's GDP by 2024. McKinsey and
with annual sales of no more than Rp 300 million Company, meanwhile, estimate that the digitalization
and assets worth no more than Rp 50 million (micro), of Indonesian MSMEs would increase Indonesia's
annual sales of between Rp 300 million and Rp 2.5 GDP by US$140 billion by 2030.
billion and assets worth between Rp 50 million MSMEs' contribution to the national economy
and Rp 500 million (small), and sales of between may be increased through digitalization. In 2020,
Rp 2.5 billion and Rp 50 billion with assets worth the Mandiri Institute surveyed 230 Indonesian entre-
between Rp 500 million and Rp 10 billion (medium). preneurs involved in MSMEs (Pusparisa, 2020a;
According to Lokadata (2020), in 2018 MSMEs Budiarto et al., 2018). It found that digital and inter-
contributed 60.34% of Indonesia's Gross Domestic net technologies were used most heavily within the
Product (GDP), a 3.26% increase over the previous accommodation (75%), service (55%), and mercantile
year (57.08%); in 2019, this share decreased to 60%. (47%) sectors. Only 11% of MSMEs involved in con-
In 2020, MSMEs represented 99% of all Indonesian struction relied on internet channels. Most MSMEs
businesses, accounted for 95% of jobs, and contributed relied on digital and internet technologies for their

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102 BISNIS & BIROKRASI: Jurnal Ilmu Administrasi dan Organisasi, May 2022 Volume 29, Number 2

everyday business activities. A survey conducted by MSMEs cannot readily embrace the dynamic concept
the Katadata Insight Center (Pusparisa, 2020b; Qosasi, of open innovation (Brodny & Tutak, 2022; Saini &
et al., 2019), meanwhile, found that 60.2% of MSMEs Bhargava, 2020)—which underpins the free exchange
relied on internet-based social media platforms to of ideas and solutions as well as collaborative efforts
market their products; 34% of enterprises used online to apply innovative (digital) technologies (Genest
marketplaces for this purpose. Digitalization improves & Gamache, 2020). Unlike larger corporations, for
MSME performance for several reasons (Szopa & whom the adoption of digital technology has been a
Cyplik, 2020; Shettima & Sharma, 2020). The adop- relatively simple matter, MSMEs have yet to achieve
tion of digital technologies and online sales of goods optimal results (Perez-Soltero & Leal-Soto, 2017).
and services can provide MSMEs with access to new Generally speaking, MSMEs poorly understand the
domestic and international markets, thereby giving potential benefits of using digital technologies for
them significant opportunities to grow and expand business activities, and this hinders their efforts to
(Fauzi & Sheng, 2020). employ said technologies (Fauzi & Sheng, 2020;
Digitalization also provides MSMEs with flexibil- Byukusenge & Munene, 2017).
ity in space and time, facilitating them in delivering The challenges faced by MSMEs in the digital
their products and providing customer-based services environment are heavily informed by the business
(Shen, Sun & Ali, 2021; Parviainen et al., 2017). environment. As noted by Brody and Tutak (2022),
Digitalization can also reduce costs and increase digital maturity—as measured by the absorption of
efficiency, as digital trade platforms ease the man- digital technology—differs significantly between
agement of transactions even as they provide access developed and developing nations. The absorption
to clients around the world (Eduardsen, 2018; Gruia of digital technologies is influenced by several fac-
et al., 2020). Through digitalization, MSMEs can tors, including innovation and knowledge (Saini &
strengthen customer engagement and improve ser- Bhargava, 2020; Bouncken, Kraus & Roig‑Tierno,
vice delivery (Schroeder, 2015), as it provides insight 2021). To benefit maximally from digitalization,
into customers' needs and wants that can be used to companies must employ diverse forms of knowl-
develop new products. In other words, digitalization edge to develop business models suited to the digital
allows MSMEs to engage with customers and rapidly environment; it is this element that is provided by
develop new products that can easily and efficiently knowledge management practices (Bouncken, Kraus
be marketed and sold (Szopa & Cyplik, 2020). & Roig‑Tierno, 2021). As a means of identifying,
Rapid advances in digital technology have pro- using, and disseminating digital technology, knowl-
moted a revolution in business activities (Agostini & edge management can help MSMEs develop the
Nosella, 2020; Jordão & Novas, 2017; Rivza, et al., business innovations they require to navigate the
2020). MSMEs, therefore, must adopt digital technol- digital environment (Ode & Ayavoo, 2020; Abbas,
ogies and expand their markets to remain competitive et al., 2020).
(Spivak, 2019). Entrepreneurs with the skill to use The importance of knowledge management in
digital technology efficiently have proven more com- business digitalization was previously underscored
petitive (Szopa & Cyplik, 2020; Nwaiwu, Duduci, & by Perez-Soltero and Leal-Soto (2017), who empha-
Chromjakova, 2020). Digitalization improves busi- sized that knowledge can only be effectively utilized
ness performance, increases production, and provides if it is managed properly. Knowledge management
access to new markets, as it eases businesses' efforts can help MSMEs increase their competitiveness by
to increase production, identify market opportunities, improving efficiency, stimulating innovation, and
and communicate with customers (Nwaiwu et al., optimizing customer service (Huusko, Kuusisto-
2020; Crupi et al., 2020; Perez-Soltero & Leal-Soto, Niemi, & Saranto, 2017). In light of previous studies
2017). As such, digitalization is an important factor of business digitalization and performance, it is evi-
in the success of MSMEs, as it increases competi- dent that digitalization necessitates a good model for
tiveness and expedites value creation (Perez-Soltero business performance. MSMEs' ability to digitalize
& Leal-Soto, 2017; Ferreira, Coelho, & Weersma, themselves and improve their performance is heav-
2019). ily informed by these businesses' ability to apply
Although digitalization has significant benefits knowledge management (Al-Emran et al., 2018;
for MSMEs, it poses a significant obstacle to many Huusko et al., 2017; Junior et al., 2020). As MSMEs
entrepreneurs—especially in Indonesia (CISCO, have limited resources, they are frequently unable
2020). Entrepreneurs in Indonesia have had dif- to employ knowledge management optimally, even
ficulty adopting new technologies as they tend to though proper knowledge management is ultimately
act reactively to changing market trends (CISCO, more important for MSMEs than it is for their larger
2020). MSMEs that produce traditional clothing, for brethren (Ferreira, Coelho, & Weersma, 2019).
example, have been unable to optimally use digital Several empiric studies have highlighted the
technology because they fail to promote their prod- importance of digitalizing MSMEs (Agostini &
ucts digitally (Faizurrohman, Baga & Jahroh, 2021). Nosella, 2020; Gruia et al., 2020; Hånell, Nordman,
Another obstacle to MSMEs' implementation of & Mattsson, 2020; Wang, Wang, & Horng, 2010;
modern and digital technologies is the limited avail- Sousa & Rocha, 2019). However, few have inves-
ability of resources. Due to their lack of resources, tigated this topic, especially in Indonesia. As such,
 SIJABAT, THE EFFECTS OF BUSINESS DIGITALIZATION AND KNOWLEDGE 103

this study's primary goal is to investigate the link relations with customers. When customer relations are
between digitalization and business performance practiced through social media, customers can become
among Indonesian MSMEs—a topic on which the more involved in the development of products and
current literature is sorely lacking (Verhoef et al., services, thereby enabling greater innovation (Cheng
2021; Bican & Brem, 2020). Referring to Mizintseva & Shiu, 2019). Digitalization also refers to the con-
and Gerbina, (2018), knowledge management is a tinued adoption of digital technology by enterprises,
central part of digitalization, as it enables MSMEs thereby enabling them to automate their business pro-
to expedite the process and optimize their perfor- cesses, optimize operations, and increase efficiency,
mance. Within an Indonesian context, understandings thereby increasing competitiveness (Garzoni et al.,
of knowledge management's influence on business 2020). Lukonga (2020) emphasizes the importance
continue to evolve, and thus further research is nec- of technology (particularly digital platforms) in the
essary to obtain deeper insight. Consequently, the modern economy.
second goal of this study is to analyze the mediative The use of digital platforms provides entrepre-
role played by knowledge management in the digi- neurs with the opportunity to overcome size-based
talization and performance of MSMEs. challenges and improve profitability, thereby access-
This study provides several contributions. First, ing new markets, sourcing channels, and networks
it identifies business owners' perceptions of digi- (OECD, 2021). At the same time, digitalization
talization and its influence on the performance of provides businesses with a more efficient environ-
their MSMEs (Agostini & Nosella, 2020; Garzoni, ment in which they may expand their networks,
Turi, Secundo, & Vecchio, 2020; Viswanathan & thereby increasing competitiveness and productivity
Telukdarie, 2021). Studying the influence of busi- (Lukonga, 2020). Around the world, studies of digi-
ness digitalization is necessary to obtain insight tal technology and its adoption by businesses have
into the process in nations such as Indonesia, where underscored the importance of digitalization. OECD
99.99% of businesses are MSMEs (Maksum, Rahayu (2021) analyzed the digitalization of MSMEs in six
& Kusumawardhani, 2020; ADB, 2020). Second, this countries—Australia, Denmark, France, Korea, New
study highlights perceptions regarding the role of Zealand, and the United Kingdom—vis-à-vis these
knowledge management (be it undertaken knowingly businesses' online platform usage, transaction costs,
or not) in MSMEs. Third, this study shows the policy information asymmetries, effects, customer bases,
challenges faced by Indonesia in its efforts to promote global reach, and innovation opportunities during the
the digitalization of MSMEs as well as research and COVID-19 pandemic. It found that online platforms
development programs. Indonesia's MSMEs have have made it possible for MSMEs to reduce transac-
limited resources, and thus digitalization requires tion costs and information asymmetries, create direct
particular strategies (ADB, 2020). and indirect network effects, increase customer bases
and global reach, overcome size-based challenges,
Business Digitalization and create innovation opportunities. Through digi-
Business digitalization is understood as a break- talization, MSMEs (particularly hotels, restaurants,
through process through which enterprises adopt taxis, and retailers) can increase their productivity.
new means of doing business. Through this process, Cenamor, Parida, and Wincent (2019) write that
businesses shift away from conventional technolo- using digital platforms makes it possible for MSMEs
gies in favor of new ones that facilitate innovation, to improve their ability to communicate with exter-
model development, and service provision (Joshi nal partners and practice information management.
et al., 2021; Szopa & Cyplik, 2020). Business digi- Ultimately, businesses' ability depends heavily on the
talization may also be defined as the adoption and capacity of their networks. Their study of MSMEs
application of digital technologies by businesses in in Sweden considered several variables: digital plat-
their business activities, thereby fostering connec- form capability, network capability, performance, and
tivity between organizations and individuals (Lee, exploitation orientation, found that MSMEs' digital
Falahat & Sia, 2020; Martinez, 2019; Gruia et al., platform capability enables them to increase effi-
2020). Business digitalization emphasizes the conver- ciency and promote innovation through integrated
sion of analog information into digital information, processes and continued reconfiguration of interac-
as a result of which businesses can become more tions with external partners. However, the potential
competitive, create and exploit new opportunities, benefits of digitalization are ultimately limited by
and expand their operations (Ilcus, 2018; Martinez, MSMEs' ability to improve their usage of digital plat-
2019; Rivza et al., 2020). Business digitalization is forms and networks.
characterized, among other things, by rapid response Lukonga (2020) studied the practice of business
to market shifts and customer tastes (Szopa & Cyplik, digitalization by MSMEs in 21 countries in the Middle
2020). For MSMEs, digitalization offers the potential East and Northern Africa, as well as Afghanistan and
to reduce costs, introduce new products and services, Pakistan (MENAP), finding that digital technology
collaborate better with other entities, and reach wider has the potential to improve productivity and expe-
markets (Bokša, Šaroch & Bokšová, 2020; Quinton dite businesses' integration into the digital economy.
et al., 2018). Enterprises may also use business digi- Lukonga (2020) argued that, to become effective
talization to process information and maintain social mechanisms for inclusive growth, MSMEs must
104 BISNIS & BIROKRASI: Jurnal Ilmu Administrasi dan Organisasi, May 2022 Volume 29, Number 2

reconsider their development strategies and prioritize consideration. Most studies of innovation and perfor-
business digitalization. Big data, cloud computing, the mance have focused on the link between technological
Internet of Things, artificial intelligence, and machine innovation (particularly in product development) and
learning can increase efficiency, reduce expenditures business growth (particularly in sales) (Exposito &
and operational costs, and facilitate international Sanchis-Llopis, 2018). Per this discussion, if MSMEs
transactions. Broadband internet and digital technol- conduct business digitalization, they should be able
ogy likewise help companies develop more rapidly, to enhance their performance. Accordingly, the fol-
create jobs, and increase business output. lowing hypothesis is proposed:

Business Performance Hypothesis 1: Business digitalization positively

Entrepreneurs' ability to digitalize their business influences business performance
activities will strongly influence the performance of
their enterprises (Domi, Capelleras & Musabelliu, Knowledge Management Practices
2020; Cenamor, Parida, & Wincent, 2019; Aydiner, Digitalization requires knowledge, a corner-
et al., 2019). Digitalization, where conducted through stone of innovativeness (Abbas, et al., 2020; Hassan
the adoption of business analytics, can create addi- & Raziq, 2019). Knowledge makes it possible to
tional value for companies as it provides a means ascertain the success of digitalization and increase
of increasing market competitiveness (Aydiner, et business performance using a knowledge-based view
al., 2019). Business is a complex and multidisci- (KBV) (Yli-Renko, Denoo, & Janakiraman, 2020;
plinary process, one that requires specific knowledge Viswanathan & Telukdarie, 2021). According to KBV,
of all operations and resources as well as a means knowledge creates innovation and maximizes compet-
of analyzing business interactions and identifying itiveness (Yli-Renko, Denoo, & Janakiraman, 2020;
potential spaces for improvement. Only when these Herden, 2020; Damanpour, Walker, & Avellaneda,
elements are present can decisions be made to opti- 2009). KBV holds that knowledge is foundational
mize business process performance (BPER) and firm for business activities, as it provides companies with
performance (FP) (Aydiner et al., 2019). One study a competitive advantage over similar ventures (Klein
of 204 mid-level managers in Turkey investigated et al., 2010). MSMEs that develop knowledge-based
the most product-intensive MSMEs involved in the approaches can distinguish themselves from their
manufacturing and service sectors. In the manufactur- competitors through appropriate knowledge man-
ing sector, MSMEs included producers of foods and agement strategies (Im, Kim & Bond III, 2020).
beverages, durable goods, chemicals, pharmaceuti- Knowledge, be it tacit knowledge, explicit knowl-
cals, plastics, electronics, machines, textiles, leather edge, or embedded knowledge, promotes innovation
goods, and clothing. In the service sector, meanwhile, within MSMEs (Walker, 2017; Gubbins & Dooley,
MSMEs included those involved in investment, bank- 2021).
ing, finance, transportation, telecommunications, The empirical literature has highlighted the
media, information technology, construction, real importance of knowledge management in promot-
estate, health and social services, and retail facilities. ing a strategic orientation and improving performance
Aydiner et al. (2019) concluded that the adoption of (Abbas, et al., 2020; Hassan & Raziq, 2019; Massaro
business analytics positively influences BPER and et al, 2016). Knowledge refers to the process through
FP, through the effect is more marked in businesses which knowledge is managed and utilized, both within
of a certain size. and without an organization, to optimally achieve an
Business digitalization can improve business per- organizational goal (Ode & Ayavoo, 2020; Abbas, et
formance, particularly amongst MSMEs, as digital al., 2020). It is understood as a motor for the growth
processes make it simpler for companies to orient and development of knowledge capital (broadly
themselves toward consumers (Domi, Capelleras & defined), occupying a central role for all subjects and
Musabelliu, 2020). Such a customer orientation drives contributing to the formulation and development of
MSMEs to develop unique approaches to meeting organizational strategies for accumulating intellectual
customers' needs, increasing sales, and maximizing capital (Jordão & Novas, 2017). As such, knowledge
profits. It also enables MSMEs to cultivate a culture management provides businesses with a competitive
of innovation while developing new products and edge that enables them to optimize profits (Hassana
services. The more companies focus on the desires & Raziq, 2019). It helps businesses identify solutions
and needs of their customers, the more likely they to problems, develop dynamic training programs, and
are to develop innovative approaches. This has been make decisions. Knowledge management practices
supported by a study of 211 Albanian MSMEs active enable companies to maximize their innovativeness,
in the tourism sector, which found that digitaliza- be it directly or indirectly (Al-Emran et al., 2018; Xie,
tion serves to increase customer orientation, which Zou, & Qi, 2018).
correlates positively not only with MSME perfor- From another perspective, Hussain et al. (2019)
mance but also with entrepreneurs' innovativeness argue that knowledge management refers to a strat-
and innovation behavior. The influence of innovation egy used by companies to create knowledge, values,
on business performance depends heavily on the type and metrics, as well as map, index, transport, store,
of innovation and the aspect of performance under distribute, and share them. By applying knowledge
 SIJABAT, THE EFFECTS OF BUSINESS DIGITALIZATION AND KNOWLEDGE 105

management, businesses can employ a systematic The important role of digitalization and knowledge
framework for employees to share and communicate management in business performance has also been
their knowledge with others, thereby optimizing busi- found in developed nations. Salojarvi et al. (2005)
ness performance (Tan & Ramayah, 2018; Shahzad, investigated 108 MSMEs in Finland to ascertain the
2020). As with Tan and Ramayah (2018), Junior et al. correlation between sustainable sales growth and
(2019) define knowledge management as the process knowledge management activities. They found that
through which knowledge is stored. They argue that it annual sales growth is strongly correlated with knowl-
must not only be comprehensive but also explicit, as edge management awareness and that higher levels
only explicit knowledge can be properly stored in dig- of knowledge management are positively associated
ital information management systems and operating with sustainable sales growth in companies that have
manuals. This thus necessitates the coding, organiza- implemented a more comprehensive approach.
tion, and externalization of tacit knowledge, which Knowledge management practices are always
may prove to be a significant challenge for any orga- claimed and positioned as improving the performance
nization. Briefly, knowledge management is important of businesses through their innovation capability
for all business organizations, as it makes it possible (Chatchawanchanchanakij & Kittisak Jermsittiparser,
for enterprises to survive and thrive (Byukusenge 2020; Lai et al., 2022; Cardoni et al. 2020). A study by
& Munene, 2017; Bouncken, Kraus & Roig‑Tierno, Chatchawanchanchanakij and Kittisak Jermsittiparser
2021). A study by Junior et al. (2019) emphasized (2020) of 520 MSMEs in Thailand found that knowl-
that digitalization makes businesses more effective edge management practices are positively correlated
in coding, organizing, and externalizing their tacit with business performance. Proper management
knowledge and achieving the desired performance improves business performance through mediation
increases. Junior et al. (2019) investigated the appli- and innovation. This study not only found that MSMEs
cation of digital Knowledge Management Systems in Thailand are interested in applying technological
(KMS) by 33 MSMEs in Brazil, producing taxonomic innovations, but also that these companies' employees
insight into these enterprises' strategies for using require sufficient knowledge to improve their employ-
knowledge management systems. Noting a reciprocal ees' abilities and business performance. The elements
link between knowledge management tools and prac- contained within knowledge management practices
tices, they concluded that MSME initiatives designed make it possible for enterprises to explore and exploit
to implement said tools and practices are better able tacit knowledge, thereby making innovation possi-
to increase their efficiency and productivity. ble (Lai et al., 2022). According to Lai et al (2022),
As for developing nations, Byukusenge and systems that implement knowledge management
Munene (2017) investigated the link between busi- efficiently are better able to innovate and perform. A
ness digitalization, knowledge management, and study of 157 Taiwanese companies involved in the
business performance. Taking as their sample 377 finance, retail, and transportation industries found
MSMEs in Kigali City, Rwanda, they considered the that knowledge management involves codified values,
mediative effect of knowledge management and busi- trust, and knowledge, thereby improving innovative-
ness performance using the variables of knowledge ness and business performance.
management (acquisition, sharing, and application/ The link between knowledge management and
responsiveness), business performance, and inno- innovation was also identified by Cardoni et al (2020).
vation. This study confirmed that innovation fully Based on a study of 219 mid-sized Italian enterprises
mediates the link between knowledge management involved in knowledge-reliant industries, Cardoni
and business performance in MSMEs. A study of et al. (2020) conclude that knowledge management
MSMEs in Pakistan by Najma and Raziq (2019) practices can improve business performance when
found that, through knowledge management, com- companies have adequate performance measurement
panies can hone their competitive edge. This study, systems (PMS) in place. MSMEs, many of which still
which considered the link between knowledge man- operate in the informal sector, generally make deci-
agement and innovation, found a positive correlation sions as though they were family enterprises rather
between knowledge management processes and radi- than professional enterprises. Where MSMEs have
cal innovation. This, in turn, provides clear evidence implemented appropriate knowledge management
that knowledge management processes and radical practices, PMS enables them to optimize their busi-
innovation play a vital role in the creation of man- ness activities.
agement values and the realization of competitive
advantage through innovation. Furthermore, they Based on the above, the following hypotheses are
showed that knowledge acquisition contributes sig- proposed:
nificantly to firm performance and innovation. When Hypothesis 2: Business digitalization has a posi-
more ideas are extracted and exploited from internal tive effect on knowledge management.
and external sources, employees are better able to Hypothesis 3: Knowledge management practice
transform existing resources into new knowledge that has a positive effect on business performance.
can lead to innovation. In other words, the ability Hypothesis 4: Knowledge management practice
to draw knowledge from multiple sources enables mediates the positive effect of business digitalization
companies to be more competitive. on business performance.
106 BISNIS & BIROKRASI: Jurnal Ilmu Administrasi dan Organisasi, May 2022 Volume 29, Number 2

Figure 1: The Conceptual Model

RESEARCH METHOD million (Table 2) and 63.2% had been established less
than three years previously (63.2%). Many (63.2%)
Respondents and data collection relied primarily on Instagram for their sales. Most
To ensure representativeness, any sample must respondents (57, or 60%) were women. In terms of
consist of entrepreneurs from diverse demographic education, 51 respondents (53.7%) had completed an
and geographic backgrounds. Before sample selec- undergraduate degree at a university. As mentioned
tion, the contact information (email addresses, above, the majority of MSMEs (86.3%) had fewer
telephone numbers, and physical addresses) of poten- than ten employees. Another nine MSMEs (9.5%) had
tial respondents was collected with the assistance 11 to 30 employees, while the remaining four (4.2%)
of the Ministry of Trade, Republic of Indonesia. A employed more than thirty people.
staff member distributed the survey instrument to
the owners and operators of MSMEs throughout Table 2. Profile of respondents
Indonesia. The survey instrument, a questionnaire
distributed through Google Forms, was available for
completion between March and October 2021. As
shown in Table 1, this questionnaire was completed
by entrepreneurs in fourteen provinces, with the most
respondents coming from the Jakarta Capital District,
Central Java, and West Java.
Table 1. Composition of sample by province.

A plurality of the MSMEs covered in this study

A total of 95 entrepreneurs completed the survey. (44.2%) were involved in the food and beverage
The vast majority of these respondents (82, or 86.3%) industry. Another 9.5% of enterprises were involved
operated MSMEs with fewer than ten employees. Of in the clothing industry. Other industries were less
these MSMEs, 71.6% had sales of less than Rp 300 represented, averaging only 1%.
 SIJABAT, THE EFFECTS OF BUSINESS DIGITALIZATION AND KNOWLEDGE 107

Table 3. MSMEs by industry/sector Table 4. Survey items

Variables and Measurements & Ayavoob, 2020; Balasubramanian, Al-Ahbabi

This study takes business performance as its & Sreejith, 2019). Also important is the relevance
dependent variable, business digitalization as its and transfer of knowledge, as well as the applica-
independent variable, and knowledge management tion of knowledge and maintenance of balance
practices as its mediator variable. All of these vari- (Balasubramanian, Al-Ahbabi & Sreejith, 2019;
ables are measured using items derived from previous Shahzad, 2020; Tan & Ramayah 2018).
studies, with all responses using a five-point Likert
scale ranging from 1 (strongly disagree) to 5 (strongly Analytical Technique
agree). Business digitalization was measured based on This study is quantitative, with analysis conducted
MSMEs' application and adoption of digital technol- using the multivariate Structural Equation Model
ogy for everyday business operations. Standards were (SEM). According to Hair, Matt, and Howard (2020),
based on previous studies (Szopa & Cyplik, 2020; Tan SEM is a statistics-based modeling technique that tests
& Ramayah, 2018; Byukusenge & Munene, 2017; the link between a construct and the latent variables
Lukonga, 2020; Garzoni, Turi, Secundo & Vecchio, that constitute the system. SEM enables researchers
2020). Items considered businesses' adoption of to statistically model complex theories (Schuberth et
technology for business administration, internal al., 2020). SEM can also be used for causal modeling,
communication, and external communication with as it enables researchers to analyze the causal link
outside stakeholders (clients, suppliers, and partners). between constructs and variables (Ruben et al., 2020;
Meanwhile, business performance was measured Lowry & Gaskin, 2014) and predict critical constructs
using the items developed by Aydiner et al., (2019); (Cepeda-Carrion, Cegarra-Navarro, & Cillo, 2019).
Domi, Capelleras, and Musabelliu (2019); Exposito SEM was also selected because of the exploratory
and Sanchis-Llopis (2018); and Ali, Gongbing, and nature of this study, which seeks to identify the poten-
Mehreen (2020). The items contained in these articles tial ties between variables, i.e., the effect of business
were deemed capable of measuring MSMEs' abil- digitalization on the performance of MSMEs, which
ity to compete in and adapt to changing business is suspected to be mediated by the application of
environments. knowledge management practices. Inductive rea-
Knowledge management practices were opera- soning was used, with the PLS-SEM model created
tionalized through four elements (Abbas, et al., 2020; through productive dialogue between theory and data
Hussain et al., 2019; Odea & Ayavoob, 2020; Gubbins (reality) to better identify and explore the associa-
& Dooley, 2021; Kasˇćela et al., 2020; Ngah & Wong tion between these variables (Hair, Matt, & Howard,
2019; Hassan & Raziq, 2019; Massaro et al, 2016). 2020; Schuberth et al., 2020). The use of this method
The first element was MSMEs' ability to obtain and is appropriate, as the research model offered can be
retain knowledge (i.e., discovery, capture, and storage) further developed to explain and predict the associa-
by recognizing needs and by acknowledging existing tion between variables (Hair, Matt, & Howard, 2020;
resources and processes. Also considered were com- Cepeda-Carrion, Cegarra-Navarro, & Cillo, 2019).
panies' ability to acquire and create knowledge, as Furthermore, PLS-SEM analysis was used because it
well as their capacity to share and transfer it (Odea does not require the analyzed data to have a normal
108 BISNIS & BIROKRASI: Jurnal Ilmu Administrasi dan Organisasi, May 2022 Volume 29, Number 2

distribution (Hair, Matt, & Howard, 2020). variables contained within the model were valid con-
PLS-SEM analysis was conducted in two stages, vergently and constructed well.
i.e., Measurement Model Analysis (MMA) and Table 5. Reliability and validity criteria for the constructs
Structural Model Analysis (SMA) (Hair, Matt, &
Howard, 2020). MMA was used to verify the conver-
gent validity, discriminant validity, and reliability of
the model. Convergent validity was measured based
on the size of the average variance extracted (AVE)
and loading factor. Discriminant validity, meanwhile,
was measured using the Fornel–Larcker criteria as Referring to Hair, Matt, and Howard (2020), the
well as heterotrait–monotrait (HTMT) comparison minimum value for convergent validity is 0.6; a load-
(Cepeda-Carrion, Cegarra-Navarro, & Cillo, 2019; ing factor of 0.6 indicates that the construct is good
Henseler, Ringle & Sarstedt, 2015). Reliability testing and valid, while a loading factor of 0.7 or greater
was conducted by measuring the composite reliability indicates that the constructs can explain 50% of the
(CR) value. SMA was conducted during the second variance in the indicators. Table 6 indicates that each
phase, during which the researcher examined the indicator has a loading factor of greater than 0.6, indi-
coefficient of determination (R2), conducted multi- cating convergent validity for each construct.
collinearity testing using the variance inflation factor Table 6. Convergent validity using loading factor
(VIF), and evaluated the predictive relevance using
cross-validated redundancy (Q2), effect size (ꝭ2), path
coefficient, and the fitness of the model.
Knowledge management was positioned as a
mediator variable in this study, and thus analysis also
investigated the mediative influence of this variable.
According to Hair, Matt, and Howard (2020), two
criteria must be met before a variable is found to have
a mediative role in SEM. First, the direct influence
of variables must be significant without including the
mediator variable. Second, the indirect influence of
variables with the mediator variable included must be
significant. In such cases, the direct effect between
variables will be reduced after including the mediator
variable, even as the coefficient remains significant at
all stages. Finally, the extent of the mediative effect
must be ascertained based on the variance accounted
for (VAF). A VAF of less than 20% indicates no medi-
ation; a value between 20% and 80% indicates partial
mediation; and a value of greater than 80% indicates
full mediation (Jung, 2021; Wong, 2016; Na-Nan;
Kanthong & Joungtrakul, 2021).

RESULT AND DISCUSSION

Measurement Model Analysis

The measurement model was examined using Next, discriminant validity was conducted to
composite reliability (CR) and Cronbach Alpha ascertain whether the constructs used differed from
values. The CR values of all constructs meet applica- the other constructs within the model (Hair, Matt,
ble standards if they are greater than zero, indicating & Howard, 2020). The discriminant validity of the
that the reliability criterion has been fulfilled. The constructs was examined using the Fornell-Larcker
Cronbach Alpha value must be at least 0.7 (Hair, Criterion (Hair, Matt, & Howard, 2020). As shown in
Matt, & Howard (2020), and the CR value may Table 7, the root AVE for each construct was larger
range between 0 and 1; a CR value of between 0.6 than the correlation value of the other constructs. As
and 0.7 indicates an acceptable level of reliability, such, it may be concluded that business digitalization,
while a CR value of between 0.7 and 0,9 indicates a business performance, and knowledge management
successful level of reliability. The outer model was are unique constructs, and discriminant validity has
subsequently analyzed to ascertain convergent valid- been ensured.
ity, based on Average Variance Extracted (AVE), with Further testing was conducted using the hetero-
a value greater than 0.5. The AVE value for each of trait–monotrait ratio (HTMT) (Hair, Matt, & Howard,
the Business Digitalization, Business Performance, 2020). The HTMT value shows the heterotrait-mono-
and Knowledge Management constructs was greater trait correlations of all constructs by comparing the
than 0.5, indicating that all of the indicators and latent mean and average of the correlation indicators for the
 SIJABAT, THE EFFECTS OF BUSINESS DIGITALIZATION AND KNOWLEDGE 109

Table 7. The Discriminant validity Assessing the R2

The coefficient of determination (R2) is used to
evaluate the structural model (Hair, Matt, & Howard,
2020; Garson, 2016) and thus serves an explanatory
function. R2 consists of three thresholds, i.e., 0.75,
0.50, and 0.25. A value of 0.75 or greater is substan-
tial; 0.5 is moderate; and 0.25 is weak (Hair, Matt,
same construct (Hair, Matt, & Howard, 2020). If the & Howard, 2020). The R2 value for the business
HTMT approaches 1, the construct has low discrimi- performance variable is 0.661, indicating that the
nant validity. As such, to ensure discriminant validity, business digitalization and knowledge management
the HTMT value should be less than 0.9 (Hair, Matt, variables can explain 66.1% of variations in business
& Howard, 2020). Results of HTMT are shown in performance; the remaining 33.9% are explained by
Table 8. The results show that the HTMT value for variables other than the ones analyzed in this research.
all constructs is less than 0.9, indicating an acceptable In other words, the exogenous latent variables have a
level of discriminant validity. moderate ability to predict changes in business per-
formance. Business digitalization has an R2 of 0.612,
Table 8. Heterotrait–monotrait (HTMT) indicating a moderate influence on knowledge man-
agement. Finally, business performance can explain
61.2% of variations in knowledge management, with
the remaining 38.8% attributed to variables other than
those considered in this study.
Structural Model Analysis Assessing the Effect Size (f2)
In PLS-SEM, the inner structural model is tested The effect size (f2) provides a means of quantify-
by considering (1) collinearity at the construct level ing how the coefficient of determination (R2) changes
using the variance inflation factor (VIF) value; (2) when the exogenous latent variables are removed
explained variance R2, (3) predictive relevance from the model. As such, it provides a means of mea-
through cross-validated redundancy (Q2), (4) effect suring how each exogenous construct contributes to
size (f2), and (5) path coefficient (Hair, Matt, & the R2 (Garson, 2016; Verma & Naveen, 2021). If f2
Howard, 2020; Benitez, 2020). Collinearity indicates is less than 0.02, influence is minimal; an f2 of 0.15
that two independent constructs may be correlated. indicates a moderate influence; and an f2 of 0.35 indi-
It may be detected by calculating the VIF value. cates a significant influence (Reyes-Mercado, 2018;
Hair, Matt, and Howard (2020) indicate that, within Garson, 2016). Table 10 shows that business digitali-
the context of PLS-SEM, the VIF value should be zation significantly influences MSMEs' performance.
below 5. A VIF value greater than 5, but less than Knowledge management, meanwhile, has little
10, indicates that multicollinearity exists but is not a influence on the endogenous construct of business
serious concern (Kennedy 2008; Kutner, Christopher performance. The construct of business digitalization,
& Neter, 2004). When variables are highly correlated, meanwhile, has a moderate influence.
the constructs are not orthogonal and thus the model Table 10. f2 Effect size
has limited predictive ability. VIFs of constructs are
shown in Table 9. All VIFs are found < 5, therefore the
collinearity issue is not present between constructs.

Table 9. Collinearity test

Hypothesis Testing
T-testing was conducted to ascertain the sig-
nificance of influence between variables, using the
bootstrapping method as well as re-sampling in
SmartPLS (Reyes-Mercado, 2018; Ringle et al.,
2015). If the t-statistic value produced by bootstrap-
ping is larger than the t-table, the connection between
variables may be deemed significant (Ringle et al.,
2015). In this study, the t-table value was set using
a level of confidence of 95% (α = 5%), two-tail and
degree of freedom = 95 – 3 = 92. The t-table value
was thus established to be 1.986. Testing H1 (Table
110 BISNIS & BIROKRASI: Jurnal Ilmu Administrasi dan Organisasi, May 2022 Volume 29, Number 2

11), it was found that business digitalization has a sig- Table 11. Hypotheses testing and structural relationships
nificant effect on performance in MSMEs, (β = 0,532)
(t-statistics = 4,173). The standardized coefficient
value for H1 (0.532) indicates a positive correlation,
as hypothesized, and thus H1 is supported. When
MSMEs are digitalized, their business performance
improves.
Digitalization also has a significant direct influence Figure 2. Structural relationship
on performance (β = 0.780) and t-statistics (11.707);
as such, H2 is accepted. Business digitalization has
a positive influence on knowledge management;
when digitalization occurs, MSMEs are better able
to manage knowledge. This study also finds that
knowledge management practices have a direct and
positive effect on business performance, with β =
0.325 and t-statistics of 2.789. As such, H3 is also
accepted. In other words, knowledge management
practices are positively correlated with business per-
formance; when knowledge management practices
are improved, so does business performance. The VAF value was thus 0.2535/0.7855)*100 = 67.72.
This analysis thus found that knowledge management
Mediation Analysis partially mediates the effect of business digitalization
Knowledge management was positioned in this on business performance.
study as a mediator variable; as such, in H5, it was According to Benitez et al. (2020), one approach
hypothesized that knowledge management serves to to measuring model fit through PLS modeling is the
mediate the influence of business digitalization on Standardized Root Mean Square Residual (SRMR),
business performance. To analyze such mediative an index of the average of standardized residuals
influences, it is necessary to test the direct effect of between the observed and the hypothesized covari-
the exogenous variable on the endogenous variable, ance. SRMR has a value of between 0 and 1, with
which must be significant even without the mediative model fitness indicated by a value of less than or equal
influence of a third variable (Baron & Kenny, 1986; to 0.05 (Kock, 2020). The smaller the SRMR value,
Hayes, 2018). As noted earlier, H1 was supported; the better the fitness of the model being analyzed. As
business digitalization has a direct and significant shown in Table 12, the SRMR for the model under
influence on business performance, as shown by consideration is 0.05, indicating good fitness.
t-testing. Mediative influence can then be shown by
Table 12. Results of the model fit
including the mediator variable (knowledge manage-
ment) in the PLS channel to test the indirect influence.
If the mediator variable is found to have a significant
role, it is proven to influence the process through
several channels. Testing indicated that knowledge
management serves as a significant mediator, with β
= 0.254 and t-statistics of 2.692.
To ascertain the number of channels through which Discussion
the mediator variable (knowledge management) influ- This study seeks to investigate the influence of
ences the association between the other variables, business digitalization and knowledge management
it is necessary to calculate the variation accounted practices on the performance of MSMEs. PLS-SEM
for (VAF) (Meule, 2019; Wong, 2016; Hair, Matt, was used to analyze the direct and indirect effects
& Howard, 2020) using the formula VAF = (indi- of business digitalization, as mediated by knowl-
rect effect/total effect (direct effect + indirect effect). edge management practices, on the performance of
According to Hair, Matt, and Howard (2020), a VAF of MSMEs. This study finds that digitalization has a
less than 20% indicates no mediation; a value between positive and significant influence on the performance
20% and 80% indicates partial mediation; and a value of MSMEs (H1). Business digitalization is shown to
of greater than 80% indicates full mediation. In this have a positive and significant influence on knowl-
case, the VAF for the direct effect of business digita- edge management (H2), and knowledge management
lization on performance (0.532) was written as a; the is found to affect performance (H3) positively and
direct effect of business digitalization on knowledge significantly. Knowledge management is also found
management (0.780) was written as b, and the direct to mediate the effects of business digitalization on the
effect of knowledge management on business perfor- performance of MSMEs (H4). As such, the empirical
mance (0.325) was written c. Calculations were thus analysis of this study has supported the current theory
conducted using the formula b x c = d, or 0.780 x on business digitalization's influence on business per-
0.325 = 0.2535; a + d = e or 0.532 + 0.2535 = 0.7855. formance. This study has highlighted the importance
 SIJABAT, THE EFFECTS OF BUSINESS DIGITALIZATION AND KNOWLEDGE 111

Table 13. Uses of information and technology in the Table 14. Uses of information and technology by the
MSMEs' business MSMEs' business field

of business digitalization for MSMEs, thereby sup-

porting earlier research by Aydiner et al., (2019).
Both relatively minor digitalization, for instance, the
adoption of email communications, and advanced
digitalization efforts such as the implementation of maximally for our marketing and branding."
business analytics and the creation of e-commerce Table 14 shows that the industry/sector in which
platforms, can improve performance (Aydiner, 2019). MSMEs are involved influences their use of digi-
It may be surmised that the digitalization efforts under- tal information. Business digitalization was most
taken by Indonesian MSMEs have increased their common among MSMEs from which clients made
customer orientation and enabled them to develop purchases directly, i.e., in 51 of 95 MSMEs, as digital
an innovative business culture (Domi, Capelleras, & technologies made it simpler for these businesses to
Musabelliu, 2020). interact with their clients. MSMEs frequently used
A survey of MSMEs found that most of the enter- digital technology (including social media) for adver-
prises (65 of 95) contained within the sample had tising; 33 of the 95 MSMEs surveyed indicated that
embraced digitalization by adopting computer and they had used social media—primarily Instagram
internet technologies. Many (60) used Wi-Fi to access (63%)—for advertising purposes. Digital technolo-
the internet, and many more (60) used email for their gies were also employed to receive payments from
business correspondence. Of the 95 MSMEs sur- customers, as well as for shipping, production, and
veyed, 52 had begun selling their goods and services general administration. Some MSMEs (10%, also
through e-commerce platforms; however, only 22 had used information technology for procurement, dis-
developed their own websites. The MSMEs included tribution, and after-sales activities.
in this survey appeared unprepared for more advanced Consistent with previous studies, such as that of
digitalization activities such as employing customer Garzoni et al., (2020), digitalization enables MSMEs
relationship management (CRM), enterprise resource to become more flexible and decentralized, thereby
planning (ERP), or supply chain management (SCM) bringing them closer to customers and making them
software; fewer than 5% of respondents had adopted better equipped to make decisions ideally (Garzoni
such software platforms. et al, 2020). The positive effect of digitalization on
Through digitalization, entrepreneurs have become MSME performance, previously noted by OECD
more innovative in developing their products. MSMEs (2021) and Garzoni et al. (2020), was also noted by
have thus been able to reduce costs, improve product one informant, who mentioned that "because, through
quality, and increase sales significantly (Exposito & digitalization, I've been able to expand my reach and
Sanchis-Llopis, 2018). Digitalization's importance for customer basis while increasing brand awareness"
business performance also lies in its ability to intro- (Respondent #24). Digital businesses can perform
duce integrated management systems and improve better, as they can use technology to expand their reach
administration, thereby increasing business perfor- and broaden their markets (OECD, 2021; Lukonga,
mance (Cenamor, Parida & Wincent, 2019). Belitski 2020). As noted by Respondent #35, "Digitalization
et al. (2022) showed that MSMEs have increasingly enables MSMEs to 1) reach their target markets, 2)
adopted digital technology during the COVID-19 pan- introduce the products sold/produced, and 3) see their
demic. Such an increase is also noted in this study, competitors' standing in the market."
which notes that Indonesian MSMEs have embraced This study also provides evidence that digitaliza-
digital technology to deal with the pandemic. As tion is also correlated with knowledge management,
explained by one informant in responding to an as it equips MSMEs to adapt to new conditions and
open-ended question "because it is the age of digital thereby improve their knowledge management prac-
information, during which information can prove a tices (Buntak, Kovačić & Martinčević, 2020). The
blessing, it is thus very important for me to combine adoption of innovative technologies drives enterprises
my business with the digital world and introduce to create and share organizational knowledge more
my products to general society." (Respondent #2). effectively and efficiently (Alvarenga et al., 2020).
Similarly, Respondent #4 noted, "the offline situation Improved knowledge management then contributes
right now [during the COVID-19 pandemic] is really significantly to further digitalization (Alvarenga
bad for sales, so we have had to use digital technology et al., 2020). It also fosters a positive exchange of
112 BISNIS & BIROKRASI: Jurnal Ilmu Administrasi dan Organisasi, May 2022 Volume 29, Number 2

knowledge, thereby facilitating innovative collabora- Recognizing that cross-sectional studies produce
tion (Crupi et al., 2020). conclusions that are only valid for certain points in
Based on the above discussion, it is clear that time, future research should employ a longitudinal
knowledge management practices serve to improve approach to make more general findings. Second,
business performance, as shown by previous studies. this study has focused its analysis primarily on the
Knowledge management and innovation are closely influence of business digitalization on MSME perfor-
correlated and crucially influence businesses' ability mance. As such, future studies should consider how
to adapt to changing situations and improve their per- the specific processes of digitalization affect busi-
formance (Ode & Ayavoo, 2020; Abbas et al., 2020; ness performance. Third, this study has shown that
Ngah & Wong, 2019). When MSMEs implement knowledge management has a significant effect on
knowledge management, they are better equipped to business performance. However, the components of
create and exploit knowledge and thus gain a competi- knowledge management may not affect performance
tive edge (Ngah & Wong, 2019; Aydiner et al., 2019; equally; therefore, it is necessary to investigate how
Parviainen et al., 2017) business performance is influenced by the specific
mechanisms of knowledge management.
CONCLUSION
ACKNOWLEDGEMENT
Business digitalization and its effect on perfor-
mance have long been investigated by organizations The author acknowledges the financial support of
seeking to improve their performance. This study the Department of Business Administration, Atma
contributes to this literature by exploring the influ- Jaya Catholic University of Indonesia
ence of digitalization on performance as mediated
by knowledge management practices. It finds that REFERENCES
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