During COVID-19, firms experienced unprecedented shocks. Their supply chains were disrupted as were their relationships with customers and workers; demand plummeted, as no one knew what would happen next. The dual shocks pushed firms to look for new ways to stay afloat and navigate their businesses. But in some cases, the crisis became an opportunity for innovative businesses, especially those that increased the adoption of digital technologies. How widespread was the innovation? Will it be enough to foster a productivity-driven recovery?
An initial analysis of novel data collected between April 2020 and January 2021 from Bulgaria, Poland, and Romania, suggests that the pandemic triggered some innovation. Still, it was limited to low-hanging fruits and varied depending on firm size and previous technology investments. A mix of financial constraints and managerial capacities likely limited deeper and more widespread innovation in firms.
COVID-19 lockdowns, workforce restrictions, and limited access to inputs (60 percent of firms reported problems obtaining inputs) reduced firm productivity and supply capacity. At the same time, demand slumped or shifted toward new products and services. These shocks were compounded by unprecedented uncertainty about the virus, the extent and duration of public policy responses, and future outlooks. These channels affected firms and sectors differently and in a manner that required businesses to adopt novel solutions or risk going out of business.
Firms needed a moment, but they did react. Initially (April-August 2020), most firms (more than 60 percent on average) did not implement any adjustments to the way they carried out their business. However, the share of firms that adopted some innovation steadily increased over time. By the end of January 2021, close to 60 percent of firms had either expanded the use of or invested in new digital technology, or introduced product innovation (Figure 1).
The challenges from the pandemic were multifaceted—from the disruption in the availability of inputs to the need to guarantee safe working conditions for workers or recreate broken relationships with customers—and so were the firms’ adjustments. Some firms reorganized production and distribution processes (process innovation, like takeaway and delivery in the hospitality industry). Others revamped their products to meet the customers’ needs (product innovation). We find that while both types of innovation were common to all three countries, on average, process innovation occurred more frequently than product innovation.
Firms’ responses were much more nuanced and complex than what the aggregate numbers suggest. Among the firms that did not increase their digital technologies usage, a minority (9 percent) did not use ICT (information and communication technologies) before COVID-19 and did not start using them during the crisis. Similarly, there were businesses that were already using ICT and did not increase usage during the crisis (55 percent). By the end of the second wave, about 90 percent of firms were using digital technologies for their business and almost one-third of firms had either started using or increased their use during the pandemic (Figure 2).
A higher intensity in the use of digital technologies could already contribute to a faster recovery. It could induce productivity gains and reduce the persistent productivity gap previously found between European and U.S. firms. However, digital technologies are complex and heterogeneous and can affect the opportunities of growth and convergence across different firms and local economic contexts unevenly.
For digitization to spur a productivity-driven recovery, it must concentrate on business functions with the highest potential to spur upgrade and firm growth (according to recent World Bank research). In these three countries, we find that digitization has concentrated in business functions such as marketing, sales, and business administration (Figure 3), which can be considered low-hanging fruits with less potential for spurring productivity at the firm level. So far, digitization is making very limited inroads in areas such as production and supply chain management, which require complex organizational changes.
More opportunities await firms with the possibility of expanding and incorporating digital technologies toward optimizing production capacity and more efficient supplier management. Given these findings, in our next blog, we will address the question of what could be preventing firms from expanding the use of digital technologies.
