DIGITAL ECONOMY TRANSFORMATION AND ECONOMIC GROWTH IN INDONESIA EVIDENCE FROM PROVINCIAL PANEL DATA

Abstract

This study examines the relationship between digital economy transformation and economic growth across 34 provinces in Indonesia over the period 2015 to 2022. Using a two-way fixed-effects panel regression model augmented with an interaction term to capture the moderating role of human capital, the study investigates how digital infrastructure investment, internet penetration, and e-commerce transaction activity influence provincial gross domestic product (GDP) per capita growth. The findings reveal that internet penetration and e-commerce transaction volume are positively and statistically significant predictors of provincial economic growth, with estimated elasticities of 0.23 and 0.18, respectively. Digital infrastructure investment exhibits a positive but heterogeneous effect, yielding statistically significant returns only in provinces with above-median human development index scores. The moderation analysis confirms that the growth dividend of digital transformation is substantially amplified in provinces with higher human capital endowments, with the top human development quartile realising a growth premium approximately 0.31 percentage points higher than the bottom quartile per unit of internet penetration increase. Robustness checks using system generalised method of moments (GMM) estimation confirm the direction and significance of the main findings. The study contributes to the literature on digital economics in developing countries by providing subnational evidence from Indonesia, a strategically important emerging economy in Southeast Asia, and demonstrates that complementary investment in human capital formation is an indispensable condition for maximising the growth returns of national digitalisation programmes.