Unleashing productivity growth in the age of digitalisation: Evidence from German SMEs

Recent literature has increasingly focused on deciphering the modern productivity puzzle, with particular attention given to the link between digital technologies and firm-level productivity. So far, much of this research has primarily focused on large and publicly listed firms. Leveraging a panel dataset covering German small- and medium-sized enterprises (SMEs) over the period 2016 to 2021, we investigate whether digitalisation can help revive the sluggish productivity growth and narrow the gap between productivity frontrunners and laggards. We measure digitalisation through firms' digital capital stocks (DK) that we derive from a broad measure of digitalisation expenditures. Building on an augmented Cobb-Douglas production function, we examine the relationship between DK and labour productivity (LP ). Our findings show that higher DK is positively associated with higher LP levels, with the effect being even stronger for firms that are already more digitally advanced. Moreover, higher digitalisation expenditures appear to be related to narrowing the productivity gap between laggards and the frontier.