Institutional Governance, Artificial Intelligence Adoption, and MSME Digital Transformation in Indonesia: A Comparative Analysis of Jakarta and West Java Innovation Ecosystems

Abstract

This article examines how institutional governance structures shape artificial intelligence adoption, MSME digital transformation, and sustainable economic development in Indonesia through a comparative analysis of Jakarta and West Java innovation ecosystems. The study argues that digital transformation in emerging economies is not solely determined by technological availability, but by the interaction between institutional coordination, regulatory adaptability, financial inclusion mechanisms, innovation governance, and business ecosystem resilience. Drawing upon institutional economics, comparative business systems theory, and innovation governance literature, the article analyzes the divergent trajectories of digital entrepreneurship, AI-enabled business transformation, and sustainability-oriented economic governance in Indonesia’s two largest digital economic regions. Empirical evidence is derived from BPS Statistics Indonesia, Bank Indonesia, OJK governance reports, World Bank indicators, ASEAN digital economy datasets, and industrial policy documentation between 2020 and 2025. The findings indicate that Jakarta demonstrates stronger platform integration, financial technology penetration, and investment concentration, while West Java exhibits broader manufacturing-linked MSME integration and regional innovation diffusion. However, institutional fragmentation, uneven digital infrastructure, regulatory asymmetry, labor capability gaps, and ESG implementation inconsistencies continue to constrain inclusive digital transformation. The comparison reveals that sustainable digital economic development depends upon institutional coherence linking state coordination, technological upgrading, financial accessibility, and local innovation ecosystems. This article contributes to comparative economic governance scholarship by developing an integrated framework connecting institutional capacity, digital business systems, AI-enabled productivity transformation, and socio-economic resilience within emerging economies. The study further offers policy implications regarding industrial modernization, inclusive digital governance, sustainability-oriented investment, and adaptive regulatory coordination in Indonesia’s evolving digital economy.