EU, and emerging Europe, lags behind US in adoption of digital technology

emerging europe digitalisation

In the fight against the coronavirus, digital technology is playing an unprecedented role in the maintenance of daily life and economic and social activities, as well as in the recovery of industry and business. The coronavirus pandemic is becoming a tipping point for digitalisation – the dawn of a new era – by accelerating the maturity of digital technology: what was once a ‘nice to have’ could now become a ‘crucial to have’. For businesses and organisations to thrive and become more resilient in the medium and longer term, it may be more relevant than before to revisit digital transformation plans in order to stay competitive in the ‘new normal’.

In this context, a new report from the European Investment Bank (EIB) report: Who is prepared for the new digital age? takes a look at the state of digitalisation in the EU and United States from a unique business perspective. The report shows, based on a company-level survey, that EU firms in most sectors are falling behind the US. It also spells out the key concerns of firms when it comes to the adoption of, and investment in, digital technologies. In particular, it highlights how access to management, skilled labour and the regulatory environment affect the digitalisation of European as well as US firms.

“If European policymakers want European firms to become more digital they need to address structural barriers to investment in digitalisation,” says Debora Revoltella, the EIB’s chief economist. “Policy action should develop measures to fast-track the adoption of digitalisation. These include more advanced managerial skills and practices, improving the skills of workers through training and making it easier to finance investments in intangibles and digital technologies. The current Covid-19 economic crisis can be an opportunity to frontload some of those initiatives.”

The EIB Digitalisation Index, introduced in the report and based on firm-level data and perception, shows that the EU falls short of the US. Only four EU countries – and only one in emerging Europe – are ahead of the US in terms of digitalisation: Denmark, the Netherlands, Czechia and Finland.

The report claims that Czechia’s adoption rate of digitalisation is above the EU and US average for most technologies, and it is particularly high in the services and infrastructure sectors.

On average, however, European firms are less often fully digital and invest and adopt digital technologies less than their US peers. The difference between the US and the EU is particularly large in the construction sector, where the share of digital firms is 40 per cent in the EU and 61 per cent in the US. The difference in adoption rates between EU and US firms is 13 percentage points in services and 11 percentage points in the infrastructure sector. With regard to manufacturing, only 66 per cent of firms in the EU, compared to 78 per cent in the US, report having adopted at least one digital technology.

The report also finds evidence of better and more dynamic performance by digital businesses. Digital firms tend to have higher productivity than non-digital firms, have better management practices, are more innovative, grow faster and create higher paying jobs – also making recovery after a global crisis easier.

Size also matters for digitalisation: large firms tend to digitalise faster in both the EU and the US. This size effect is particularly pronounced among manufacturing firms. Only 30 per cent of EU firms with fewer than 10 employees adopted digital technologies, whereas this share increases to 79 per cent for firms with more than 250 employees.

A major barrier that is specific to Europe is an unfavourable firm-size distribution. Many small, especially older, firms in the EU consider labour market regulations, business regulations and the lack of external finance to be major obstacles to investment, which may further exacerbate the delay in digital technology adoption.

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