Inside out: The interplay between institutions and digital technologies for SMEs performance

Abstract

An effective digital strategy provides multifaceted benefits for firms of all sizes, including operational oversight, learning, and effective market interactions. Yet, despite the burgeoning evidence that digitalization provides essential resources for firms, disparate observations on the link between SME performance and digitalization across regions are noted in the literature. There remain concerns about whether SMEs enact effective digital strategies to reap the rewards, especially given that some SMEs have reported entirely forgoing digital activities due to resource constraints and exogenous forces in the market. In light of the varying global observations, it is crucial to understand how regional and multi-layered institutional settings influence SMEs to adopt, implement, and utilize digital resources to form solid policies and appropriate facilitative mechanisms. Therefore, this study compiled 11,485 observations of SME digital activities and performance from 88 distinctive institutional regions within Latin America and the Caribbean from 2006 to 2018. The study used data from the World Bank’s Enterprise Survey (WBES) and World Development Indicators (WDI) to reveal various institutional factors influencing SMEs’ adoption of technologies and subsequent performance via multilevel regressions. The findings suggest institutional barriers become insignificant when firms use digital technologies and suggest that it may insulate SMEs from exogenous shocks.