The Impact of Digitalization on the Financial Performance of Small- and Medium-sized Enterprises: Empirical Evidence from an Emerging Economy

Abstract

Digitalization is increasingly embracing nearly every part of our private and professional lives. However, whether digitalization is deemed to be a necessity that can boost the performances of small- and mid-size enterprises (SMEs) or it is a frivolous costly investment that hinders corporate activities is still unclear. This paper examines the impact of digitalization on the financial performance of SMEs in the context of an emerging economy. Using a comprehensive firm-level dataset consisting of over 5,000 SMEs in Vietnam during the period from 2005 to 2015, we find that digitalization plays a vital role in facilitating the financial performance of SMEs. Specifically, we find that the investment in computers, an e-mail system, internet connection and e-trading would pay off as it can lead to a significant increase in firm financial performance. We furtherfind that firms can benefit from digitalization because it can significantly improve productivity and sales, and yetdoes not lead to an acceleration in total cost. The positive effect of digitalization on firm performance is even more pronounced during the 2007–2009 global economic crisis, and thus highlights the pivotal role of digitalization in tackling the economic shock.