Clipped from: https://www.thehindubusinessline.com/opinion/digitisation-as-a-survival-strategy/article66782222.ece
Digitalisation will help firms, especially the smaller ones, be part of global, green value chains
Over three years into the Covid-19 pandemic, its adverse effects on livelihood, firms and the economy continue. The initial days of the pandemic witnessed closure of firms, especially micro, small and medium enterprises (MSMEs) that make the bedrock of any economy. The demand-supply shock induced by the pandemic resulted in a fall in industrial production, large-scale unemployment, a plummeting of global trade, greater inequality, higher levels of poverty and unfavourably altered the growth trajectory of economies.
Unfortunately, the impacts of the pandemic are likely to further delay the realisation of SDGs (Sustainable Development Goals) 1 (no poverty), 5 (gender equality) and 10 (reduce inequality). The pandemic has had an amplified effect on MSMEs and female workers.
According to the UNIDO Covid-19 survey, MSMEs in more vulnerable industries experienced a 53 per cent decline in their capacity utilisation compared to 35 per cent for large firms in the same sectors. Overall, SMEs experienced a significant decline in sales and profits than large firms. Further, the UNIDO’s Industrial Development Report (IDR) 2022 highlights that decreasing sales transpired into greater layoff of female workers. However, despite its catastrophic impact, some economies remained robust and resilient to the pandemic, which begs the question: How did some firms manage to foster such resilience and robustness?
According to the IDR 2022, strong industrial capability coupled with digitalisation cushioned the blow for many economies. In this regard, the pandemic has played a pivotal role in providing impetus to firms to adopt digitalisation measures. Widespread digitalisation has been touted as a critical element in the post-pandemic recovery as firms and economies plan to build back better and foster greater resilience and robustness in their operations.
. A common thread among firms adopting digitalisation was strong production capabilities. Production capabilities are implicit in nature which are nested within the firm and are acquired through learning-by-doing and daily experiences from various organisational activities.
These capabilities are often associated with good management practices, internationally recognised quality certification, and training imparted to employees, all of which shield the firms during the time of unprecedented crisis. A recent RazorpayX report highlights that 35 per cent of SMEs in India are hesitant to adopt digital solutions due to limited understanding and inadequate training.
Production capabilities are crucial for adopting digitalisation and other advanced technologies, which in turn are essential to strengthen firms’ robustness. The UNIDO survey reveals that on an average, digitally advanced firms were more capable of withstanding pandemic shocks in terms of their impact on sales, profit, and employment. Adoption of digitalisation also paves the way for fintech solutions that can bridge the financial gap that exists for MSMEs by helping them expand their online customer base and enabling the faster flow of funds. By adopting the digital payment ecosystem, MSMEs can reduce their expenditure outlay associated with dated ways of managing finance.
Quick response strategy
Another key advantage of digital adoption is that it creates readiness in the firm’s ecosystem. This, coupled with the superior production capabilities of digitally advanced firms, implies that firms can implement a quick response strategy in the face of a crisis, which in the case of Covid came in the form of swift shift towards remote working possibilities: a strategy that was beyond the realm of firms without digital infrastructure. Also, digitalisation has also been a pivotal channel enabling firms’ internationalisation process like global value chains (GVCs).
The authors’ research on India highlights that a firm’s expenditure on digital infrastructure increases the odds of it participating in GVCs by 9 per cent to 20 per cent.
With rapid digital adoption and the fragility of the existing business models highlighted by the pandemic, new business models are emerging with firms moving away from just-in-time manufacturing to just-in-case manufacturing. Firms are, however, not cognisant of the future shocks that may arise from climate change and other environmental concerns.
However,, there is a global observance of greening of manufacturing which is altering the landscape of manufacturing. This is evidenced by the rise in global impact investment — investment made to generate positive social and environmental impacts — from $502 billion in 2019 to $715 billion in 2020.
With this, firms are trying to emphasise on the 7th SDG goal of affordable and clean energy, the 11th goal of sustainable cities and communities, and the 13th goal of climate action. The post-pandemic trajectory of SDG-driven economic growth is driven by digitalisation and innovation.
Reddy teaches Economics at IIM Raipur, Subash teaches Economics at IIT Madras, and Gopalakrishnan is a fellow at NITI Aayog. Views are personal