A closer look at the digitalization of European businesses in the wake of COVID-19

• Firms that adopted digital technologies fared better during the pandemic but there were disparities in adoption with regard to firm size
• Financial support to digitalize played an important role, and more is needed
• The EU needs to focus on reducing the widening digital divide

Before the COVID-19 pandemic, the adoption of digital technologies was usually associated with more innovative businesses. However, in the pandemic’s wake, digital adoption by small businesses became an integral part of their survival — and those in the European Union (EU) were no different. Recently, the European Investment Bank published their latest findings from their 2021 Investment Survey, which sheds light on the impact of digitalization on micro, small, and medium businesses in the EU, in addition to implications and policy recommendations.

The EIB Investment Survey (EIBIS) — which interviewed 12,000 micro, small, and medium businesses in manufacturing, construction, services, and infrastructure sectors across the 27 countries within the European Union, in addition to a benchmark sample from the United States — took a closer look at firms that became more digital in response to the pandemic as well as those that were already using (or recently adopted) advanced digital technologies, such as platforms, big data and AI, advanced robotics, the internet of things, and drones, among others. The survey highlights some of the positive findings that these digital firms in the EU experienced, in addition to identifying areas for improvement, particularly for non-digital firms. Below, we outline some of the findings from the survey, starting with the good news:

• Digital firms were better able to cope with the pandemic’s aftermath. The EIBIS showed that 61% of firms have adopted advanced digital technologies. These digital firms were less likely to experience a decrease in sales since the start of the pandemic. Across the EU, firms in the infrastructure or manufacturing sectors were more likely to implement digital technologies, while those in the construction sector were less likely. Further, platforms and advanced robotics were the most widespread digital technologies. Firms that have adopted advanced digital technologies were more optimistic about their business prospects and the economic outlook in the next 12 months. The EIBIS also grouped countries based on firms’ assessment of digitalization in 2021, with Finland, Malta, and Denmark being identified as frontrunners for firm digitalization (compared to Bulgaria, Poland, and Croatia with modest digitalization).
• Digital firms tend to be more productive and tend to implement better management practices. The EIBIS found that digital firms were more productive and more likely to export to other countries, compared to their non-digital counterparts. Additionally, digital firms were more likely to implement better management practices, such as strategic business monitoring, performance pay, gender balance, and monitoring of climate targets. For example, 71% of firms that became more digital and used advanced digital technologies reported using strategic business monitoring (compared to 35% of non-digital firms).
• Incentives for small firms to digitize have been effective. EIBIS found that businesses that received financial support for digitalization in the last three years were almost twice as likely to invest more in digitalization in the wake of the pandemic. For EIB, these incentives can help overcome the inertia that many firms face. It’s promising to see new digitization support initiatives, like those we discussed in a previous post.

The EIB Investment Survey also identified some disparities in digitalization, particularly with regard to firm size and a widening digital divide:

• Micro and small firms in the EU are less likely to adopt digital technologies. The EIBIS found that a greater proportion of micro and small firms did not adopt digital technologies in response to COVID-19. For instance, across the EU 47% of micro and 39% of small firms remained non-digital in 2021, compared to 26% and 15% of medium and large firms, respectively. In contrast, a smaller proportion of US micro and small firms are non-digital. Countries with the greatest proportion of non-digital micro-firms in 2021 were France, Latvia, and Lithuania. More needs to be done to better target the barriers which prevent micro and small firms in the EU from digitizing.
• The digital divide in Europe is growing, posing a risk for employment. Findings from the EIBIS also point to a digital divide in Europe, particularly with regard to digital infrastructure and skills. For instance, while 16% of EU firms overall cite access to digital infrastructure as a major obstacle to digitization, this proportion was greater in certain countries, like Austria, Germany, Italy, and Spain. Similarly, firms operating in countries with a smaller proportion of the population with high levels of digital skills were less likely to implement advanced digital technologies, such as Bulgaria, Romania, and Poland. On the whole, this divide poses a risk to employment overall, since non-digital firms make up the greatest share of employment in Europe. The EIBIS also found that non-digital firms pay lower wages and are less likely to invest in employee training. For the EIB, there’s potential to unlock greater digital transformation of firms by increasing access to faster broadband speeds and improving digital skills training and education.
• The biggest obstacles to transformation include the costs of investment in digital technologies and finding staff with the right skills. For digital and non-digital firms in the EU, the EIBIS found that investment costs and availability of staff with the right skills were among the top major obstacles when investing in digital technologies. Other obstacles were market demand, availability of finance, digital infrastructure, and uncertainty.

Recommendations

To better support small businesses to adopt digital technologies, the EIB suggests that Europe needs to focus on an enabling ecosystem, a shared vision that addresses the imbalances across the EU, and policy support for finance and skills gaps. How? Firms that started digitalization activities in response to the COVID-19 crisis said they would like technical support and help in identifying new markets to continue their transformation. Non-digital firms also suggest that funding advice and consistent regulation would best support their digital transformation. Finally, policy initiatives to improve digital skills and retrain workers can help support firms to adapt across the region and reduce the skills gaps between firms.

It’s in recognition of this growing digital divide that Strive Community is equipping European small businesses with the training, technology, and tools they need to build resilience and thrive, starting with our Strive UK program, and with more programs in Europe coming soon — stay tuned.