How Financial Digitalization Affects Business Performance and Business Innovation in Ultra-Micro, Micro, and Small Enterprises: Evidence from Indonesia

The expansion of digital financial services is reshaping business operations across developing economies. Using Bank Indonesia’s 2023 survey of over 5,000 enterprises, this study examines the role of financial digitalization in business performance and innovation among ultra-micro, micro, and small enterprises in Indonesia. Employing inverse probability weighting regression adjustment to address observable confounder bias, we find that financial digitalization is positively associated with business performance—specifically higher revenue, sales growth, and employment—as well as business innovation, including market expansion, product diversification, and exports. However, it is also associated with higher costs, with no significant short-term gain in profit. These associations vary across firm and owner characteristics: Older firms and those outside Java and Bali experience stronger performance gains, while younger firms and ultra-micro firms show greater innovation responses. These findings highlight the importance of targeted policies addressing digital literacy, infrastructure, and regulation to support inclusive digital transformation among ultra-micro, micro, and small enterprises.