KfW Research: Investment in IT and digitalisation needs to double or triple

• In an international comparison, Germany’s use of digital technologies is only in midfield
• Significantly more investment is needed to catch up with other major countries
• SMEs need to invest EUR 35-50 billion in digitalisation alone each year

The digital transformation is an important driver of technological progress and growth. However, Germany is midrange at best in the use of digital technologies by the business community, and nor is the development of such technologies among the strengths of the German innovation system. In order to find out more about Germany’s weak position, KfW Research has examined how much Germany invests in IT in an international comparison. It found that Germany’s information technology investment in relation to gross domestic product is much lower than in other major countries of comparable economic power. In order to catch up with countries such as France, Japan or the UK, for example, Germany’s IT investment would have to at least double or triple – from currently EUR 49 billion to EUR 100-150 billion. Its SMEs also spend too little on the development and application of digital technologies. In order to keep up with this trend, SMEs’ digitalisation expenditure would have to increase from EUR 18 billion in 2019 to EUR 35-50 billion per year.

“We need considerably higher IT and digitalisation investment into the future, and that means now”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. The penetration of information technologies into business and society is not a completely new trend, but the current digitalisation wave is a far-reaching process that is not only sweeping through individual sectors but leading to profound changes in business and society. “Digitalisation is the main driver of future economic growth and increasing prosperity. New software developments are also becoming more and more important in areas that have traditionally been our strengths, such as the automotive industry as well as production, environmental and climate technologies. That makes digitalisation a beacon of hope for enhancing the competitiveness of broad sections of the economy and for a return to higher productivity rates. Germany must do more here to catch up with other countries again.”

The new analysis by KfW Research indicates several starting points for this. For example, many SMEs are unaware of the advantages which digitalisation can provide for their business. These must be highlighted further, particularly from a strategic perspective. Very specifically, solutions must also be found for the shortage of specialists and workers with relevant skills and for the difficulties in obtaining finance for digital projects. Germany’s underlying digital infrastructure must also be improved further.

The coronavirus crisis has also created a particular challenge which could slow down digitalisation activities in the aftermath of the current crisis phase. The experience of this crisis and the higher debt of many enterprises makes it more difficult for them to reconcile the conflicting goals of greater crisis resilience and the need to invest more in competitiveness. This threatens to seriously delay digitalisation projects.

The current analysis can be retrieved at: www.kfw.de/fokus

Note:

IT investment and digitalisation expenditure are not identical but have broad overlaps. Both categories comprise investment in novel or improved hardware and software, telecommunications equipment and databases. IT investment is also deemed to include routine and replacement investments. Digitalisation expenditure, on the other hand, additionally include immaterial investments such as expenditure on the development of IT strategies, on reorganisation in connection with digitalisation and on building IT skills, for example through basic and advanced training. There are no international comparative figures for digitalisation expenditure, so the analysis used the figures for IT investment.