Empowering entrepreneurs: How digital finance and smart policy fuel MSME growth

Digital financial inclusion (DFI) is the key bridge linking digital financial literacy (DFL) and government support (GS) to the improved performance of micro, small, and medium enterprises (MSMEs), according to a new study published in the International Journal of Financial Studies.

The study, titled "Digital Financial Inclusion as a Mediator of Digital Financial Literacy and Government Support in MSME Performance," is based on a large-scale quantitative survey of 260 culinary MSME owners in Makassar, Indonesia. It used Partial Least Squares Structural Equation Modeling (PLS-SEM) to demonstrate that DFI serves as a crucial mediating factor that transforms knowledge and institutional support into measurable business growth.

Building digital foundations for MSME competitiveness

MSMEs are the backbone of Indonesia's economy, contributing nearly 60% of GDP and employing 97% of the workforce. Despite their key role, many face barriers such as limited digital literacy and poor access to financial services. In response, Indonesia's MSME "Level Up" initiative and National Financial Inclusion Council have focused on building a digitally inclusive business environment through financial education, digital infrastructure, and fintech partnerships.

According to the authors, digital finance and literacy go hand in hand. Digital Financial Literacy (DFL) enables entrepreneurs to navigate e-wallets, online banking, and mobile payments securely, empowering them to participate fully in the digital economy. However, knowledge alone does not guarantee results. Digital Financial Inclusion (DFI), the ability to access and effectively use financial technology, amplifies the impact of literacy by enabling MSMEs to transact, manage capital, and expand markets.

The research found that DFL directly improves business performance (β = 0.200), but its effect multiplies when mediated through DFI. Entrepreneurs who understand digital tools are better positioned to integrate fintech into their daily operations, boosting efficiency, access to funding, and overall competitiveness.

Government support as a digital catalyst

While literacy equips entrepreneurs with skills, the study shows that government support (GS) provides the enabling environment that sustains digital transformation. GS had a stronger direct influence on MSME performance (β = 0.536), underscoring the importance of government-led interventions such as training programs, subsidies, and infrastructure investments.

DFI mediates this relationship as well. When MSMEs gain access to digital financial systems through government-backed infrastructure and policies, their performance improves significantly. The findings confirm that policies promoting affordable internet connectivity, digital payment ecosystems, and inclusive financial regulation are crucial for ensuring that MSMEs not only survive but thrive in a rapidly digitalizing economy.

However, the study cautions that even the most supportive government measures are only as effective as the users' capacity to apply them. The mediation effect of DFI was more pronounced for entrepreneurs with higher digital competence, suggesting that literacy and policy must progress in tandem to yield sustainable outcomes.

Linking digital literacy, inclusion, and performance

From a Resource-Based View (RBV) framework, the research interprets DFL and GS as strategic resources, and DFI as the capability that converts them into tangible performance outcomes. DFI is more than just access, it transforms digital knowledge into active participation, enabling MSMEs to utilize financial technology to improve operations, customer engagement, and profitability.

The study found that younger entrepreneurs under 42 years old benefited the most from DFL, demonstrating higher adaptability to digital tools compared to older business owners. It also revealed that firms leveraging digital services like mobile banking and e-wallets, including OVO, DANA, and GoPay, experience faster transaction times, better financial management, and improved revenue growth.

Crucially, DFI converts these individual competencies into collective progress. MSMEs that integrate fintech into operations not only enhance their financial stability but also contribute to national economic goals such as poverty reduction, inclusive growth, and digital transformation.

The authors note that the endogeneity tests confirm the model's robustness, with no significant bias in the direct relationships among DFL, GS, and performance, strengthening confidence in the causal pathway where DFI acts as the mediating engine.