Digital Renaissance Amidst Crisis: Impact of Digitalization on Firm Performance during the Pandemic

This paper examines the impact of pre-pandemic digitalization investments on pandemic performance, using data from Türkiye. We compare firms that adopted digital technologies before the pandemic with those that did not, employing a coarsened exact matching and difference-in-differences approach. Our first contribution is the development of a novel firm-level digitalization index, constructed using firm-to-firm trade data. The findings show that digitalized firms outperformed their non-digitalized pairs across key metrics, including assets, sales, employment, profitability, and export shares. In particular, digitalized firms have real assets, real sales, and employment that are 3 percent, 5 percent, and 2 percent higher, respectively. The impact of digitalization is even more pronounced in terms of profitability, return on assets, and export share, with higher levels ranging from 0.13 percentage points to 0.50 percentage points. To explain these results, we identify key channels through which digitalization enhanced firm performance which is our second contribution. Specifically, we show that digitalized firms expanded their trade networks—adding more partners and operating over greater distances—reduced labor churn rates, and improved productivity and competitiveness. Digitalization expands market reach, boosting the number of trading partners by 5 percent, while also increasing the average distance to trade partners by 2 percent more than less digitalized firms.