Boosting Productivity through Digitalization Takes Time

After a time lag of several years, the technical advances achieved through digitalization in the early 2000s have led to an increase in productivity in German industry. This is according to calculations by the ifo Institute. “Companies need time to adjust their production processes. New technology establishes itself gradually, not overnight. This means that although it’s theoretically possible to increase productivity right away, in practice it happens after some time,” says ifo researcher Robert Lehmann. “So even though digital technologies began to become more widespread at the start of the 2000s, productivity in the economic sectors we examined increased only toward the end of that decade.”

“Digitalization experienced another leap forward as a result of the coronavirus crisis, with many work processes changing almost beyond recognition,” Lehmann adds. “Similar to the first wave of digitalization, it’ll likely take a few years until the gains in productivity become noticeable.”

The number of people using mobile phones, the internet, and broadband started to climb in the year 2000, but this was not accompanied by any measurable change in overall economic productivity. “Many companies found it hard to gauge which new technologies it made sense for them to adopt, thus generating search costs,” Lehmann says. Moreover, rolling out new software also meant teaching employees how to use it, which created training costs. At the same time, employees’ existing skills became outdated. Companies also had to amend their production factors and workflows and ultimately needed time to set up new infrastructure such as online platforms. Additional investments first had to be planned and implemented before productivity gains could set in.

The results of the study will prove useful in defining a number of recommendations for how to accelerate the production gains of digitalization. “In the future, easier access to venture capital could help many companies tap financial resources, which in turn would expand the options for research and development activities,” Lehmann says. Similarly, tax incentives could help cover the costs of research and training. There is also the possibility of expanding funding for remote or hybrid working. Combined with additional investment to expand the broadband network, this could provide a way of fully exploiting the productivity potential of new technologies over the next few years.