Adoption of digital technologies by firms in europe and the us

Adoption of digital technologies by firms in Europe and the united states: Evidence from the EIB Investment Survey

Debora Revoltella, Désirée Rückert, Christoph Weiss 18 March 2020

European firms lag behind the united states in R&D investment and the adoption of digital technologies. Using firm-level data from 2019, this column finds that larger firms have higher rates of digital adoption than do their smaller peers, and that digital firms have better management practices and show more dynamism. European policymakers seeking to close the innovation gap should address structural barriers to investment in digitalisation, remove disincentives to grow, and reduce market fragmentation, particularly in the service sector.

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In the last few decades, the rising need for intangible investment has been connected with individual firms’ innovation activities, but also with the structural top features of advanced economies – specifically, slow productivity growth and rising inequality (Haskel and Westlake, 2017). The global innovation landscape is changing rapidly because of the growing need for digital technologies and the emergence of China among the three global players (alongside the US and the EU) in R&D. The rise of China can be reflected in other measures of innovation, like the stock of international patents and top-cited scientific publications (IMF 2018, OECD 2017, Demis et al. 2019). While remaining at the frontier of innovation, the EU is investing less in R&D as a share of GDP than other major economies, like the US (Figure 1). Business R&D expenditures are largely in charge of the R&D gap in Europe. This low degree of R&D investment may have negative implications for innovation and long-term growth.

Figure 1 R&D investment intensity 2000-2017 (%)

Source: Eurostat.
Note: GERD (gross domestic expenditure on R&D) as a share of GDP; China excluding Hong Kong; no data for China in 2000; no data on the private non-profit sector in China.

Business R&D expenditures are highly concentrated, with a small amount of firms accounting for a big share of R&D investment. The world’s top 250 R&D companies represent a lot more than 70% of business R&D expenditures, with the very best 25 companies accounting for approximately one quarter of the full total. In comparison to sales or employment, R&D investment is targeted among a couple of hundred firms which have grown bigger as time passes. This concentration is specially pronounced in the high-tech, biopharma, and digital sectors, but also in traditional industries such as for example automotive and aerospace. In a recently available report (EIB 2019), we show that several Chinese companies are emerging as important players in the digital sectors, alongside US companies. The EU includes the automotive sector’s global leaders but has fewer firms in the fast-growing digital and technological sectors, representing only 12% of R&D investment in the tech sector in 2018 weighed against 52% for the united states (Figure 2).

This might explain the gap between your EU and the united states in creating new leading global R&D companies, especially in the digital sector, where economies of scale and winner-takes-all dynamics dominate. This deficit has been linked to the lower average rates of return on R&D investment in the EU than those observed in the united states (Cincera and Veugelers 2014). This disparity could be because of different business conditions, including usage of finance and a European regulatory environment that will not support young firms undertaking risky and innovative investments (European Commission 2016). Due to path dependency in innovation, these conditions may create challenges for the competitiveness of Europe.

Figure 2 Share of R&D expenditures in 2006 and 2018 (%)

Source: EU Industrial R&D Investment Scoreboard.
Note: See EIB (2019) for definition of the sectors. Share of R&D expenditures by the very best R&D investors, by sector and country. RoW: Remaining World.

A fresh report from the EIB sheds more light on the digitalisation of European firms (EIB 2020). Based on the latest data of the EIB Investment Survey, digital adoption rates are reduced Europe than in america. Only 66% of manufacturing firms in the EU, in comparison to 78% in america, report having adopted at least one digital technology (Figure 3). The difference in adoption rates is specially large in the construction sector, where in fact the share of digital firms is 40% in the EU and 61% in america, although it is 13 percentage points in the service sector and 11 percentage points in the infrastructure sector. Using data on specific digital technologies in the four sectors shows that this gap is driven by lower adoption rates of internet of things (IoT) technologies. Furthermore, firms in america construction sector employ drones more regularly than do firms in the EU.

Figure 3 Digital adoption in the EU and the united states (%)

Source: EIB Investment Survey (EIBIS wave 2019).
Note: The figure is founded on a survey asking firms to answer questions on four different digital technologies: if they have found out about them, not found out about them, implemented them in elements of their business, or whether their entire business is organised around them. A company is defined as ‘partially digital’ if at least one digital technology was implemented in elements of the business enterprise, and ‘fully digital’ if the complete business is organised around at least one digital technology. Firms are weighted using value added.

We also find that large firms have a tendency to digitalise faster in both EU and in america (Figure 4). This size effect is specially pronounced among manufacturing firms: for instance, only 30% of EU firms with less than ten employees adopted digital technologies, whereas this share increases to 79% for firms with an increase of than 250 employees.

Figure 4 Digital adoption in the EU and the united states, by firm size (%)

Source: EIB Investment Survey (EIBIS wave 2019).
Note: The figure shows the share of firms which have implemented (or organised their entire business around) at least one digital technology. Firms are weighted using value added.

Firms which have implemented digital technologies have higher labour productivity than non-digital firms. They have a tendency to engage more in innovation and higher value-added activities. Digital firms are also much more likely to have increased the quantity of employees in the last 3 years (Figure 5), suggesting they are more dynamic in both EU and the united states. You will find a positive correlation between managerial practices and digitalisation, possibly underlying the need for management skills for successfully searching for a deep transformation procedure for the firm.

Figure 5 Employment growth during the last 3 years, by digital intensity (% of most firms

Source: EIB calculations predicated on the EIB Investment Survey (EIBIS wave 2019).
Note: Share of firms with negative, stable, and positive employment growth in the last 3 years. Firms are weighted with value added.

Policy action: Firm size, management practices, and obstacles to investment activities

If policymakers want to close the gap in digital adoption between your EU and the united states, they have to address structural barriers to investment in digitalisation. The most crucial barriers look like those holding back European firms from growing into sufficient size.

The actual fact that EU firms are smaller normally than those in america may very well be a significant disadvantage for fast-tracking the adoption of digital technologies. There are numerous old and small firms in the EU that aren’t buying digital technologies (Rückert et al. 2019) and so are much more likely to consider the option of finance as a significant obstacle to investment, which might further exacerbate the delay in adoption rates. This shows that policymakers should prioritise measures that remove disincentives to grow, and reduce market fragmentation – particularly in the service sector, where in fact the EU is still definately not being truly a single market (Garicano et al. 2016, Gorodnichenko et al. 2018).

We also find that digital firms generally have better management practices. More specifically, digital firms report utilizing a formal strategic business monitoring system more regularly than non-digital companies, in both EU and the united states (Figure 6). Digital companies also have a tendency to more regularly reward individual performance with higher pay – a notable difference that is larger in america and the EU. In comparison, digital firms are less often owned or controlled by their leader (or members of the family of the principle executive) than are non-digital firms, which might be a reflection to the fact that digital firms have a tendency to be larger.

Figure 6 Management practices, by digital intensity (%)

Source: EIB calculations predicated on the EIB Investment Survey (EIBIS wave 2019).
Note: The figure shows the share of firms which have implemented various management practices by digital intensity (whether a company has implemented at least one digital technology). Firms are weighted with value added.

To meet up with peers, the EU should create better framework conditions to aid investment in innovation and digitalisation. Policy action should develop measures to fast-track the adoption of better management practices, enhance the skills of workers through training, and make it simpler to finance investments in intangibles and digital technologies. Financial diversification, e.g. raising equity rather than bank debt, is definitely an effective way to aid innovation and frontload investment in the digitalisation of European companies, specifically for small businesses – this could be as important as direct public R&D support.

The EU should be in a position to generate more new innovation leaders and present incentives to those leading companies to continuously reinvent themselves, pushing technological and digital frontiers. This consists of reforms which make it easier for firms that aren’t performing to exit the marketplace so that you can allow a reallocation of capital and labour to more productive firms. Strong barriers to investment for new innovative market entrants and less dynamism because of lower rates of failure could cause a systemic innovation deficit for Europe, especially in the fast-growing technological and digital sectors. This possibility demands improvements to the functioning of product and labour markets and the implementation of the digital single market.

References

Cincera, M and R Veugelers (2014), “Differences in the rates of go back to R&D for European and US young leading R&D firms”, Research Policy 43(8): 1413-1421.

Dernis H, P Gkotsis, N Grassano, S Nakazato, M Squicciarini, B van Beuzekom B and A Vezzani (2019), World corporate top R&D investors: Shaping the continuing future of technologies and of AI. Luxembourg: Publications Office of europe.

EIB (2019), Investment report 2019/2020: Accelerating Europe’s transformation. Luxembourg: European Investment Bank.

EIB (2020), Digitalisation in europe and america. Luxembourg: European Investment Bank.

European Commission (2016), Science, research and innovation performance of the EU: A contribution to the open innovation, open science, available to the world agenda. Directorate-General for Research and Innovation. Luxembourg: Publications Office of europe.

Garicano, L, C Lelarge and J Van Reenen (2016), “Firm size distortions and the productivity distribution: evidence from France”, American Economic Review 106(11): 3439-3479.

Gorodnichenko, Y, D Revoltella, J Svejnar and C T Weiss (2018), “Resource misallocation in European firms: The role of constraints, firm characteristics and managerial decisions”, NBER Working Paper No. 24444.

Haskel, J and S Westlake (2017), Capitalism without capital: The rise of the intangible economy. Princeton, NJ: Princeton University Press.

IMF (2018), World Economic Outlook, April 2018: Cyclical upswing, structural change. Washington, DC: International Monetary Fund.

OECD (2017), OECD science, technology and industry scoreboard 2017: The digital transformation. Paris: OECD Publishing.

Rückert, D, R Veugelers and C Weiss (2019), The growing digital divide in Europe and america. Unpublished manuscript.

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