Drivers of digital adoption during the pandemic and the widening digital gap

Since the onset of the pandemic in 2020, there has been an upward trend in the adoption of digital technologies by businesses around the globe. While the adoption undoubtedly helped businesses cushion the impact of the pandemic, sustained use and complementary investments in organization and management will be important to reap the benefits from this uptake and increase efficiency levels.

In this blog, we analyze the drivers of digital technology adoption, focusing on the expansion of digital platforms and investment in new digital technologies, and discuss a widening gap in digital adoption across businesses using a sample of firms from the COVID-19 Business Pulse Survey in five EU countries (Bulgaria, Croatia, Greece, Poland, and Romania). Specifically, we focus on the following questions: Are there differences in the usage and new investments in digital technologies? What factors may have driven the usage and investments in digital technologies? We focus on the nexus between the expansion of digital platforms and investment in new digital technologies and explore three potential drivers: managerial capabilities to explore digital technologies; the firm’s digital readiness before the pandemic; and access to public support.

Acceleration in takeup of digital platforms has been a silver lining but with a focus on the “low-hanging fruits (adoption)” rather than investments in new digital technologies

Due to the disruption in business activities from the COVID-19 pandemic, firms began adjusting their business activities mainly through increased usage of existing digital technologies and solutions. Through the Business Pulse Survey, we followed businesses since the early stages of the COVID pandemic (May 2020) through the recovery phase (July 2022). By the end of this period, the likelihood that firms started using or increased their usage of digital platforms during the pandemic in the surveyed EU countries was 46 percent—a rise from 21 percent during the first phase (May 2020). At the same time, fewer firms invested in digital technologies over time. In the fourth wave, 46 percent of businesses increased their usage of digital technology, but only 33 percent invested in digital technology (Figure 1), suggesting a focus on the low-hanging fruit of adoption rather than investments in digital platforms.

Figure 1. Pattern of increased usage and investments in digital platforms

A widening of the digital gap among firms

Usage and investment in digital technologies depend on the firm’s level of digital readiness. Prior to the pandemic, 49 percent of firms in the sample have the lowest digital readiness score, while 21 percent and 30 percent of firms fall in the medium- and high-scores categories respectively. We compare the responses of these different groups of firms after the onset of the COVID pandemic and find that those businesses with higher digital readiness at the onset are more likely to increase their usage of digital technologies and are also more likely to invest in digital technologies (Figure 2). This pattern suggests a widening digital gap as firms with higher initial levels of digital readiness increase their digital capabilities faster than those with lower levels of initial digital readiness. Given the importance of the adoption of digital technologies in the recovery from the pandemic, this widening digital gap could result in an unbalanced recovery and increased inequality between businesses, with the few businesses with initial higher digital readiness recovering faster and disproportionately expanding their market shares.

Figure 2. Usage and investment in digital platforms by pre-pandemic digital readiness

Superior management practices and higher digital capabilities played key roles toward digital technology adoption during the pandemic

The pandemic took a toll on most businesses. Firms needed some time to strategize on mitigating the effect of the pandemic on their sales, production, and other business operations, while others had to identify new business opportunities as previous models became unviable. Enterprises with higher digital capabilities before the pandemic were more likely to increase their usage of digital technologies compared with those with no or little prior experience with digital technologies (Figure 3). These businesses had more knowledge of the benefits, availability, and suitability of different kinds of digital platforms for their business operations, and therefore, faced lower costs of digital adoption. Moreover, businesses with better managerial capabilities are more likely to increase their usage of digital technologies (Figure 3). The measure of managerial capabilities is based on the pioneering work of Nick Bloom and his co-authors in collaboration with the U.S. Census Bureau, and include the use of key performance indicator (KPI), marketing, and HR practices. Given what these practices measure, it is not surprising that sales targeting may have prompted timely innovative approaches such as testing and adopting new digital technologies for business functions such as sales and marketing.

Figure 3. Use of digital platforms by managerial capability and pre-pandemic digital readiness

Access to public support increased the likelihood of usage and investment in digital technology

Public support played an important role in encouraging firms’ responses and adjustment mechanisms to the pandemic, especially their employment adjustments and their choice to increase usage and investments in digital technologies. According to World Bank research (Cirera et al, 2020), businesses that received public support were less likely to lay off workers compared to those that did not. Additionally, we show in Figure 4 that firms that received assistance from the government not only increased their usage of digital technologies but were also more likely to invest in new digital technologies. This shows that public support can help reduce uncertainty and de-risking investments in digital technologies by providing a safety net and appropriate financial incentives. In this perspective, it is possible to think that well-targeted government support could help address the problem of the widening digital gap as long as support is targeted toward firms with lower digital capabilities.

Figure 4. Correlation between usage of digital platforms and access to public support