Challenges with digital technology adoption by SMEs: A case study from Viet Nam

Governments and firms around the world are grappling with the ongoing digital transformation known as Industry 4.0, which entails firms adopting automation and interconnectivity in their manufacturing and operational processes. While these technologies may offer productivity gains and competitiveness, sustaining their use can be challenging for firms when the benefits are less immediate and tangible or slow to materialize.

We partnered with a Vietnamese company that developed an enterprise resource planning (ERP) platform, to study adoption of digital tools in small and medium-size enterprises (SMEs). The ERP platform is a cloud-based pay-per-use technology that can be accessed via a smartphone or computer. It requires basic skills like those needed for using a typical smartphone and social media app.

We launched the Digital SME program in June 2021, providing free access to three modules of the platform—internal communications, human resources management, and customer relationship management—for one year, equivalent to a monthly subscription cost of about US$84.

The program was rolled out online as it coincided with severe mobility restrictions following the COVID-19 Delta wave. After advertising the program on Facebook and VNExpress, a leading online newspaper in Viet Nam, 605 firms expressed interest in participating and filled out a baseline survey. These firms had an average of about 40 employees and 20 percent were exporters. About 26 percent employed an information technology specialist and close to 52 percent were using other cloud-based services. The most frequently reported reasons for wanting to adopt the new software were to save time and increase productivity.

We randomly assigned firms to two equally sized groups: Digital Express and Prime. Digital Express received training and ongoing support for using the ERP platform for free for one year. Digital Prime was not offered support in the first phase but had a chance to participate in the program after one to two years.

We tracked take-up of the platform in the Digital Express group. Close to 80 percent of the firms used the platform after initial training was completed. However, the usage rate dropped to about 40 percent thereafter. About 18 months later, only 35 percent of Digital Express firms were still using the platform (figure 1).
 

Figure 1: Share of Firms Using the ERP Platform over Time

While providing ongoing technical support, our Vietnamese partner company recorded the reasons firms gave for not actively using the platform. The top reason was time constraints, with firms being too busy to focus on switching to the platform. Some argued that the COVID-19 crisis was a good time to implement changes, particularly for digitalization. Initial interest in the ERP platform was indeed high, possibly helped by the salience of digital technologies during the crisis. Ultimately, however, we found that firms were too busy dealing with the shutdown shock to implement these changes.

The second reason for not using the platform was staff issues. Firms that successfully took up the platform assigned a point person who championed adoption within the firm. Other firms could not assign a point person, or they had one who then left the firm. We conducted case studies that suggested that the point person needed to have sufficient support from top management as well as autonomy to convince other staff. Further, firms that had an immediate need to lower the transaction costs of managing paperwork manually were more motivated to keep using the platform.

Larger firms were less likely to use the platform, possibly because championing change in these firms is more difficult (figure 2). However, conditional on using the platform, employees in large firms had more active sessions than their counterparts in small firms, suggesting that there is more momentum in large firms after the initial barriers are overcome.
 

Figure 2: Relationship between Firms Size and Take-up of the ERP Platform

^{Note: Medium-size and large firms are those with 20-99 and 100+ employees at baseline, respectively. The points represent differences compared to small firms (<20 employees), with their corresponding 95% confidence intervals.}

So far, we have learned that adoption of digital solutions faces significant challenges even in firms that are interested in making this change and have been offered a platform free of charge. One reason may be that the benefits of this technology are less tangible since they are not directly tied to a specific production process and may thus be difficult to observe or more uncertain from the outset. The project’s long-term goal is to shed light on the benefits of the ERP platform by measuring its effects on firm performance. We plan to use administrative data from the firm census to track firms for several years, comparing the Digital Express and Prime groups.