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Adoption of digital technologies by firms in Europe and the US

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Adoption of digital technologies by firms in Europe and the US

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

Over the past few decades, the rising importance of intangible investment has been associated with individual firms’ innovation activities, but also with the structural features of advanced economies – in particular, slow productivity growth and rising inequality (Haskel and Westlake, 2017). The global innovation landscape is changing rapidly due to the growing importance of digital technologies and the emergence of China as one of the three global players (together with the US and the EU) in R&D. The rise of China is also reflected in other measures of innovation, such as 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 percentage of GDP than other major economies, including the US (Figure 1). Business R&D expenditures are largely responsible for the R&D gap in Europe. This low level of R&D investment may have negative implications for innovation and long-term growth. 

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

Adoption of digital technologies by firms in Europe and the US 2   

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

Business R&D expenditures are highly concentrated, with a small number of firms accounting for a large share of R&D investment. The world’s top 250 R&D companies represent more than 70% of business R&D expenditures, with the top 25 companies accounting for about one quarter of the total. Compared to sales or employment, R&D investment is concentrated among a few hundred firms that have grown bigger over time. This concentration is particularly pronounced in the high-tech, biopharma, and digital sectors, but also in traditional industries such as automotive and aerospace. In a recent 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 compared with 52% for the US (Figure 2). 

This may explain the gap between the EU and the US 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 associated with the lower average rates of return on R&D investment in the EU than those seen in the US (Cincera and Veugelers 2014). This disparity may be due to different business conditions, including access to finance and a European regulatory environment that does not support young firms undertaking risky and innovative investments (European Commission 2016). Because of 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 (%) 

Adoption of digital technologies by firms in Europe and the US 3

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

A new report from the EIB sheds more light on the digitalisation of European firms (EIB 2020). According to the latest data of the EIB Investment Survey, digital adoption rates are lower in Europe than in the US. Only 66% of manufacturing firms in the EU, compared to 78% in the US, report having adopted at least one digital technology (Figure 3). The difference in adoption rates is particularly large in the construction sector, where the share of digital firms is 40% in the EU and 61% in the US, while 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 suggests that this gap is driven by lower adoption rates of internet of things (IoT) technologies. In addition, firms in the US construction sector employ drones more often than do firms in the EU. 

Figure 3 Digital adoption in the EU and the US (%)

Adoption of digital technologies by firms in Europe and the US 4

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

We also find that large firms tend to digitalise faster in both the EU and in the US (Figure 4). This size effect is particularly pronounced among manufacturing firms: for example, only 30% of EU firms with fewer than ten employees adopted digital technologies, whereas this share increases to 79% for firms with more than 250 employees. 

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

Adoption of digital technologies by firms in Europe and the US 5

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

Firms that have implemented digital technologies have higher labour productivity than non-digital firms. They tend to engage more in innovation and higher value-added activities. Digital firms are also more likely to have increased the number of employees over the past three years (Figure 5), suggesting that they are more dynamic in both the EU and the US. There is a positive correlation between managerial practices and digitalisation, possibly underlying the importance of management skills for successfully enrolling in a deep transformation process of the firm.

Figure 5 Employment growth over the last three years, by digital intensity (% of all firms

Adoption of digital technologies by firms in Europe and the US 6  

Source: EIB calculations based on the EIB Investment Survey (EIBIS wave 2019). 
Note: Share of firms with negative, stable, and positive employment growth over the past three 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 the EU and the US, they need to address structural barriers to investment in digitalisation. The most important barriers appear to be those holding back European firms from growing into sufficient size. 

The fact that EU firms are smaller on average than those in the US is 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 (Rückert et al. 2019) and are 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 prioritise measures that remove disincentives to grow, and reduce market fragmentation – particularly in the service sector, where the EU is still far from being a single market (Garicano et al. 2016, Gorodnichenko et al. 2018). 

We also find that digital firms tend to have better management practices. More specifically, digital firms report using a formal strategic business monitoring system more often than non-digital companies, in both the EU and the US (Figure 6). Digital companies also tend to more often reward individual performance with higher pay – a difference that is larger in the US and the EU. By contrast, digital firms are less often owned or controlled by their chief executive (or family members of the chief executive) than are non-digital firms, which may be a reflection of the fact that digital firms tend to be larger. 

Figure 6 Management practices, by digital intensity (%)

Adoption of digital technologies by firms in Europe and the US 7

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

To catch up with peers, the EU will need to create better framework conditions to support investment in 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 intangibles and digital technologies. Financial diversification, e.g. raising equity instead of bank debt, can be an effective way to support innovation and frontload investment in the digitalisation of European companies, especially for small businesses – this can be as important as direct public R&D support. 

The EU needs to be able to generate more new innovation leaders and give incentives to those leading companies to continuously reinvent themselves, pushing technological and digital frontiers. This includes reforms that make it easier for firms that are not performing to exit the market in order to allow a reallocation of capital and labour to more productive firms. Strong barriers to investment for new innovative market entrants and less dynamism as a result of lower rates of failure may cause a systemic innovation deficit for Europe, especially in the fast-growing technological and digital sectors. This possibility calls for 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 return 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 future of technologies and of AI. Luxembourg: Publications Office of the European Union.

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

EIB (2020), Digitalisation in the European Union and the United States. Luxembourg: European Investment Bank. 

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

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 the United States. Unpublished manuscript.

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