The European Union is closing the digitalisation gap with the United States. More than half of European firms responded to the pandemic by investing in digitalisation, and they are rapidly catching up with their US peers in implementing advanced digital technologies. Despite this, Europe is not well-positioned in digital innovation, and it is at risk of developing dependencies in several critical technologies.
Europe has a lot to gain from improved digitalisation. Digital firms are more resilient. They weathered the economic and trade disruptions unleashed by the COVID-19 crisis and the war in Ukraine better than other businesses, which suggests that they found more efficient ways of working. Digital firms also tend to be more productive and are more likely to engage in international trade and to invest in climate change measures.
Digitalisation in the European Union
The COVID-19 crisis pushed European firms to digitalise. More than half of EU firms, 53%, said they took steps to become more digital, for example by providing services online, according to the EIBIS.
While European firms made big gains, the share of firms that invested in digitalisation as a response to the pandemic was still higher in the United States. The gap comes mainly from EU micro and small firms, which were less likely than their US peers to have invested in becoming more digital.
- Only 30% of microenterprises in the European Union said they took steps to improve digitalisation in 2022, compared with 63% of large firms.
The European Union, however, has been closing the gap with the United States on the adoption of advanced digital technologies over the past four years.
- 69% of EU firms implemented advanced digital technologies in 2022, compared with 71% in the United States. The gap has shrunk since 2019.
Innovation and digitalisation
Access to high-speed internet services, a skilled workforce, and innovative environments all spur digitalisation. Firms located in regions with better infrastructure also see greater returns from investing in digitalisation.
Persistent and major differences in digital infrastructure continue to exist between EU regions. Regions with faster internet speeds tend to have a higher share of digital firms. Digital infrastructure also played a critical role during the COVID-19 crisis.
- 14% of EU firms surveyed in the EIBIS consider access to digital infrastructure, namely internet access and speed, to be a major obstacle to investment.
Firms’ digitalisation also depends on the availability of workers with digital skills. Firms in regions where the population has above-average digital skills are more likely to have implemented advanced digital technologies. Those businesses invested more frequently in improving their digitalisation during the COVID-19 crisis. To fully reap the benefits of digitalisation, regions need to improve education and training systems to constantly upgrade workers’ skills, as well as provide online learning for groups currently excluded from the digital economy.
- 59% of firms became more digital as a response to COVID-19 in regions with high digital skills, as opposed to 43% in regions with low digital skills.
The environment in which firms operate also makes a difference. Firms working in highly digitally innovative environments were more likely to invest in digitalisation as a response to COVID-19. At the same time, highly digitally innovative regions and weaker regions show no significant difference in the use of advanced technologies. This suggests that, while the innovative environment may have played a role in fostering digital transformation during the pandemic, the adoption of advanced digital technologies does not necessarily depend on location. Other factors are at play.
Firms that trade are more digital
Firms that engage in international trade are more likely to use advanced digital technologies or build their business around such technologies. Digital firms are also more likely to act concretely to address the adverse effects of trade disruptions. More broadly, digitalisation increases the resilience of the economy to large, unexpected shocks.
- Exporters and importers are over 10 percentage points more likely to adopt advanced digital technologies than non-traders.
- The difference for firms that both export and import (two-way traders) is even higher, at more than 20 percentage points.
Digital firms deal better with climate
Emerging digital technologies could play an important role in tackling environmental challenges. Examples of such technologies are smart urban mobility, precision agriculture, sustainable supply chains, environmental monitoring and disaster prediction. Digital technologies could also be instrumental in monitoring climate change and facilitating the much-needed shift towards a circular economy.
In addition, digitally advanced firms tend to invest more often in tackling climate change. Digital firms report more frequently that they have already invested and plan to invest more in adapting to climate change and in cutting their own emissions.
- 61% of digitally advanced firms already invested in climate change measures, compared with 36% of non-digital firms.
Supporting the digital evolution
Successfully managing the digital transition and taking advantage of its long-term benefits goes beyond adopting technologies. The digital transformation is a societal change. Striking the right technological balance is a complex process for the European Union, which is caught between global players that are defining the cutting edge of digital innovation, national preferences, and societal and regulatory patterns that set boundaries on the use of digital technologies.
Policymakers need to pay equal attention to measures aimed at facilitating the use of digital technologies and to those addressing potential problems, such as the automation of tasks. While potential productivity gains from digital technologies are large and not keeping up with digital developments is high-risk, digitalisation does present potential problems for industries and societies.
To make the most of the digital transformation, the European Union will need to position itself well in the global environment, creating better internal conditions for innovation in technologies that are crucial to European interests and helping workers improve their digital skills.