KfW Research: Digitalisation in SMEs bogged down by lack of expertise, digital infrastructure and finance

• Main barriers to digitalisation are data protection and security requirements as well as Internet quality needs
• Lack of financing options is particularly problematic
• Large SMEs are affected more often than small businesses

Although the coronavirus crisis triggered a digitalisation push among German SMEs, one fourth of the 3.8 million small and medium-sized enterprises are still not implementing any digitalisation activities. In other words, around 950,000 enterprises in Germany are not even taking basic steps such as moving their customer interactions to digital channels. KfW Research examined what is preventing enterprises from implementing digitalisation projects in a new analysis based on the representative KfW SME Panel.

The main reason reported was data protection and data security requirements (39 %), closely followed by inadequate digital infrastructure (38 %). Lack of IT skills within the company combined with a shortage of IT specialists came in third, at 32 %. Skills shortages are also associated with further barriers to digitalisation. Lack of suitable financing options prevents a good one in five SMEs (22 %) from putting in place digitalisation projects. So although financing challenges were mentioned less frequently than other barriers, businesses do perceive them as particularly problematic. Thus, financing barriers mean digitalisation projects cannot be initiated nor even developed in 43 % of affected enterprises.

A closer look reveals that large SMEs tend to be impacted more strongly by different digitalisation barriers than smaller businesses. Data protection and security poses a challenge to digitalisation for one in two (47 %) large SMEs with 100 or more employees but for only 36 % of the smallest businesses with fewer than five employees. The reason large SMEs are likely more affected is that they present a larger and particularly worthwhile target for Internet criminals. Lack of IT skills hampers digitalisation projects twice as often in larger SMEs than in small businesses (57 % vs. 30 %). This is likely due to the fact that they use more complex IT applications and carry out digitalisation projects that require more in-depth expertise. The perception of inadequate Internet connectivity as a barrier to digitalisation also grows significantly with the size of the enterprise (36 % in small businesses vs. 47 % in large SMEs). But this barrier is widespread not just in rural regions, as would have been expected (42 %). Inadequate Internet quality presents a barrier to digitalisation for one in three SMEs (32 %) in large cities as well.

“Besides the transition to sustainable economic activity and living, the digital transformation is the second major task facing Germany. But right now our businesses are only in mid-range compared with other European countries when it comes to the use of digital technology. They urgently need to move to the front ranks so that Germany remains internationally competitive and avoids a decline in prosperity”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “In my view, the following key issues must be tackled: 1. Improve digital skills in the workforce through training, 2. Expand digital infrastructure by providing broad Internet coverage and 3. Expand financing options for digitalisation projects.”

The current study can be downloaded from www.kfw.de/fokus

The database:

The current analysis by KfW Research is based on an evaluation of the KfW SME Panel 2021 and various waves from previous years. The KfW SME Panel is an annual survey of small and medium-sized enterprises in Germany with an annual turnover of not more than EUR 500 million. With a database of up to 15,000 companies a year, the KfW SME Panel is the only representative survey of the German SME sector, making it the most important source of data on issues relevant to the SME sector. Some 11,400 SMEs took part in the current survey wave between February and June 2021.