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Digitalisation is an enormous opportunity and challenge for the current generation. It is revolutionising the world of work, business structures and value chains as well as innovation and market structures.
The recent COVID-19 pandemic is a sombre reminder of the relevance and necessity of digital technology for a variety of businesses and sectors: from health to retail, from manufacturing to education.
To catch up with peers, the EU will need to create better framework conditions to support innovation and digitalisation. Policy action should develop measures to fast-track the adoption of better management practices, improve the skills of workers through training and make it easier to finance investments in intangible and digital technologies. The fact that EU firms are, on average, smaller than in the US is thus likely to be a major disadvantage for fast-tracking the adoption of digital technologies.
There are many old and small firms in the EU that are not investing in digital technologies. Those firms are more likely to report less advanced management skills and more likely to consider the availability of finance as a major obstacle to investment, which may further exacerbate the delay in adoption rates. This suggests that policymakers should put more effort into measures to remove growth disincentives and reduce market fragmentation, in particular in the service sector, where the EU is still far from a single market.
Strong barriers to investment for new innovative market entrants in the EU and less dynamism as a result of lower rates of failure could cause a systemic innovation deficit for Europe, especially in the fast-growing technological and digital sectors. The EU needs to generate more new leaders in these sectors and give incentives to leading companies to continuously reinvent themselves so that they help push technological and digital frontiers. It is also critical to support fast-growing small and young innovative firms and frontload investment in digitalisation, to balance network effects and winner-takes-all dynamics. This calls for improvements to the functioning of product and labour markets and the implementation of the digital single market in the EU.
Read more in-depth findings and analysis for each European Union country