KfW Research: More SMEs are investing in their digitalisation

• Thirty-five per cent of businesses have recently completed digitalisation projects
• Share is much higher than before COVID-19
• Digital divide between large and small SMEs is widening

German enterprises continue to lag behind their foreign competitors in their digitalisation efforts. But the good news is that German SMEs are moving in the right direction, if slowly. The share of SMEs with completed digitalisation projects rose for the second time in a row between 2021 and 2023 to reach 35 per cent. That was five percentage points more than in the years 2017 to 2019, before the outbreak of the pandemic, and two percentage points more than between 2020 and 2022. Thus, 1.3 million of the 3.84 million SMEs in Germany have recently completed digitalisation projects – 100,000 more than in the previous survey.

These are the findings of the KfW SME Panel, in which KfW surveys small and medium-sized enterprises from all economic sectors every year. The panel defines digitalisation as projects that involve introducing or improving the use of digital technologies in an enterprise’s internal processes, products and interaction with customers and suppliers, as well as projects aimed at building digitalisation skills.

“Businesses typically take digitalisation steps in economically favourable times. Thus, the current increase departs from the pattern of behaviour otherwise observed and is remarkable”,

said Dr Volker Zimmermann, digitalisation expert at KfW Research.

“Many businesses obviously see a great need for digitalisation measures irrespective of the cyclical situation, for example because they expect permanent shifts in demand towards digital offerings and sales channels.”

In 2023, small and medium-sized enterprises in Germany spent EUR 31.9 billion on digitalisation projects. In nominal terms, that was EUR 2.6 billion more than in the previous year, or EUR 1.0 billion more after adjusting for price increases. It was also a significant increase on the pre-pandemic year 2019. But SMEs’ digitalisation expenditure still lags far behind their investment in fixed assets. In 2023, investment expenditure amounted to EUR 250 billion, which means that SMEs spent nearly eight times as much on traditional investments than on digitalisation.

In addition, large SMEs with 50 and more employees accounted for the largest share of digitalisation expenditure – EUR 12.9 billion or 41 per cent – even though they only represent two per cent of small and medium-sized enterprises. Businesses with fewer than five employees, which make up the bulk of SMEs, or 81 per cent, accounted for merely EUR 4 billion of digitalisation expenditure. Despite the sharp increase in digitalisation expenditure in all enterprise size classes in recent years, the concentration in large SMEs has grown significantly.

On average, SMEs spent EUR 25,000 on their digitalisation projects in 2023. That was 23 per cent more than before the outbreak of the pandemic. And there was a wide divide. Small businesses on average spent EUR 8,000, while large firms spent EUR 216,000. That means large SMEs on average spent almost 27 times more on digitalisation than small businesses. This span was ‘just’ 17-fold before the pandemic, for example in the years 2019 and 2016.

“In the past years, large SMEs succeeded in continuously widening their lead in digitalisation. Unless they significantly increase their digitalisation activities, small businesses run the risk of being left behind in digitalisation”,

said Dr Volker Zimmermann.

The full study can be accessed at KfW SME Digitalisation Report | KfW

Where does the German economy stand today? What does the country need to become future-proof? KfW Research explores these questions in the position paper “Managing the transition, strengthening growth”, with analyses of the current situation and recommendations for action in five policy areas. It is available for download at Papers and Proceedings on Economics | KfW