Investment in digitization and productivity growth, a non-linear relationship

The ECB analyses the correlation between the digitization process and the productivity of 2.4 million European firms over a 20-year period. While the study shows that firms in digital sectors are more productive on average than firms in non-digital sectors, the report finds that investments in digitization do not lead to a proportional increase in productivity, as productivity also depends on a range of other factors (degree of adoption and diffusion of technology in a sector and in the economy, size of firms, initial productivity, degree of concentration, etc.)...

 The main conclusions of the study were:

• Large companies are more productive than small ones, especially in digital sectors. The median large firm with more than 250 employees is 39% more productive than the median micro firm with less than 9 employees in the non-digital sector; and the median large firm is instead 55% more productive than the median micro firm in the digital sector.
  
  
• Firms in the digital sector are generally more productive than firms in the non-digital sector, regardless of size, and improve their productivity faster. They also have higher average productivity growth and productivity is more resilient in periods of crisis. For example, productivity growth in digital firms fell from levels of 4% per year (2003-2008 period) to levels of 2% per year during the sovereign debt crisis (2007-2012), while in the same period productivity in the non-digital sector fell from 2% to -0.6%.
  
  
• However, a 1% increase in digital investment only increases productivity by 0.02 points, suggesting that productivity growth will also depend on other factors: the starting position of each firm, the size of the firms, the degree of technological diffusion in the sector or economy, the degree of concentration and, above all, the level of adoption, diffusion and full adoption of technologies in the economy.
  
  
• Firms that lag behind in productivity are less able to reap the potential benefits of investment in digitisation.
  
  
• Ultimately, the analysis suggests that digitalization can be a game-changer for productivity but that it does not impact all firms equally, so policymakers should target policies that incentivize investment in digitalization in those sectors and firms with the greatest impact on the economy's productivity.