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Impact of Digitalization on SME Performance of the EU27: Panel Data Analysis
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Article
Impact of Digitalization on SME Performance of the EU27:
Panel Data Analysis
Jaroslava Kádárová, Laura Lachvajderová * and Dominika Sukopová
Department of Business Management and Environmental Engineering, Faculty of Mechanical Engineering,
Technical University of Kosice, 040 01 Kosice, Slovakia; jaroslava.kadarova@tuke.sk (J.K.);
dominika.sukopova@tuke.sk (D.S.)
* Correspondence: laura.lachvajderova@tuke.sk
Abstract: This article explores the relationship between digitalization and business performance in
European small‐ and medium‐sized enterprises (SMEs) amidst the COVID‐19 pandemic, which has
intensified the need for SMEs to adopt digital technologies for enhanced competitiveness. Con‐
ducted through a comprehensive literature review, this study investigates the impact of digitaliza‐
tion on SME performance. Employing the statistical software EViews 12, the research utilizes an
econometric analysis of panel data to examine the influence of digitalization on SME performance
and validate the formulated hypotheses. The dataset comprises 135 observations collected over a
five‐year period from 27 European countries. A linear regression model is used to test the hypothe‐
ses, revealing the relationship between the independent and dependent variables. Model specifica‐
tions are determined through various tests. This study’s findings demonstrate that the integration
of digital technologies and digital intensity significantly drives digitalization in European SMEs,
leading to positive impacts on performance. This article emphasizes the importance of digitalization in
SMEs for process streamlining, productivity improvement, and enhanced customer experience, ulti‐
mately fostering business growth and development. These empirical findings provide valuable evidence
for policymakers to prioritize the identification of appropriate measures for stimulating the integration
of new digital tools into SME infrastructure and serve as a foundation for future research in this domain.
Keywords: digitalization; small–medium enterprises; SME performance; panel data analysis

Citation: Kádárová, J.;
Lachvajderová, L.; Sukopová, D. 1. Introduction
Impact of Digitalization on SME
European industry is firmly committed to integrating the concept of digitalization in
Performance of the EU27: Panel Data
order to be more competitive in the context of globalization. This process has been accel‐
Analysis. Sustainability 2023, 15,
erated by the COVID‐19 pandemic, which has affected businesses in all industries. Busi‐
9973. https://doi.org/10.3390/
su15139973
nesses were forced to implement new internal workflows and felt the pressure to offer
their products through digital channels. They underwent significant changes and in a
Academic Editor: Isabel Proença very short time introduced solutions based on digital technologies [1]. The application of
Received: 10 May 2023 digital technologies makes it possible to implement new processes within the entire value
Revised: 17 June 2023 chain, through production, sales, and services. According to [2], the authors investigated
Accepted: 20 June 2023 the digitalization processes taking place in each industry and affecting the performance
Published: 22 June 2023 of small‐ and medium‐sized enterprises (SMEs), where they found a relationship between
the introduction of information technology (IT), digitalization, and financial performance.
They found out that IT deployment, employee skill improvement, and digital strategy
Copyright: © 2023 by the authors. Li‐ significantly drive digitalization. They identified IT as a key factor affecting financial per‐
censee MDPI, Basel, Switzerland.
This article is an open access article
formance through digitalization.
distributed under the terms and con‐ According to the European Commission, SMEs represent more than 99% of all busi‐
ditions of the Creative Commons At‐
nesses in the European Union (EU) and provide approximately two‐thirds of total em‐
tribution (CC BY) license (https://cre‐
ativecommons.org/licenses/by/4.0/). ployment. They contribute significantly to the gross domestic product (GDP) of the EU,
making up more than half of the added value of the non‐financial corporate economy [3].

Sustainability 2023, 15, 9973. https://doi.org/10.3390/su15139973 www.mdpi.com/journal/sustainability
Sustainability 2023, 15, 9973 2 of 20

Despite the fact that the COVID‐19 pandemic has had a significant impact on SMEs across
the EU, businesses have proven their resilience and adaptability to these challenges [4]. A
number of measures have been put in place to support them, including regulatory relief,
financial assistance, and targeted programs to support digitization and innovation. Digi‐
talization of SMEs can have a positive impact on the value added and performance. It can
help SMEs to streamline processes and production, increase service quality and produc‐
tivity, improve collaboration and communication within the enterprise, and improve the
customer experience. These improvements can help SMEs increase their value added and
improve performance, which is directly related to business growth and development.
SMEs are better able to compete in the market, which is crucial for success and maintain‐
ing a competitive advantage [5].
While there is a growing body of research exploring the broad topic of digitalization
and its implications for businesses, including SMEs, the specific impact on performance
measures is not yet well established. This gap indicates a need for more rigorous scientific
studies that systematically investigate the effects of digitalization on various aspects of
SME performance, such as productivity, profitability, innovation, market competitive‐
ness, and customer satisfaction. Scientific support in this context refers to empirical evi‐
dence obtained through rigorous research methodologies such as quantitative analysis,
case studies, surveys, or experiments. These studies should collect data on digitization
initiatives implemented by SMEs and objectively measure their performance results. Ad‐
dressing this gap requires conducting well‐designed research studies that control for con‐
founding factors, use appropriate statistical analyses, and consider contextual factors that
may influence the relationship between digitization and performance. Similar to the al‐
ready conducted studies that try to fill a gap in the given scientific field [6–8], by scientif‐
ically investigating the impact of digitalization on SME performance, researchers can pro‐
vide valuable insights, guidelines, and evidence‐based recommendations for SMEs, poli‐
cymakers, and other stakeholders to optimize the benefits of digital transformation and
improve the overall business performance. The aim of this study is to highlight the rela‐
tionship between digitalization and business performance, trying to understand whether
companies that digitize are among those that are more prosperous and have higher per‐
formance. To test this relationship, we considered a sample of 27 member countries of the
European Union (EU27), simulating a regression model for panel data considering a 5‐
year time horizon (2017–2021). Using a sample of the EU27 in the research provides a
focused and comprehensive examination of the EU context, allows for comparative anal‐
ysis, enhances statistical power, and takes advantage of the availability of relevant data.
This research contributes to the existing literature by improving the understanding of the
variables that influence the digitalization of businesses and providing empirical evidence
on how the integration of digital technologies affects the performance of SMEs in the EU.
The article is structured into sections as follows: the first section includes the indica‐
tors used for this study; Section 2 consists of a review of the literature among the investi‐
gated elements; Section 3 presents the research methodology; Section 4 presents the re‐
sults; Section 5 discusses the results and limitations of the conducted study; and finally,
Section 6 presents conclusions and future research directions.
Research Indicators
In this section, we will summarize the indicators (variables) that were authoritative
for our research, which fall under the umbrella of quantitative research approaches. Such
methods prioritize the identification of causal laws rather than individuals’ experiences
or beliefs, making them more objective. As the study employs public data, it is repeatable.
To evaluate the study’s overall quality, reliability and validity serve as essential criteria.
Therefore, our goal is to ensure consistent, non‐fluctuating results when applying the
same data to future studies. That is why we have used reliable sources such as:
 Eurostat—the statistical office of the European Union.

 European Commission—the executive branch of the EU, which provides information
on the policies, programs, and activities of the EU.
 European Investment Bank.
The following indicator expresses the share of total added value that SMEs of the
EU27 create. It evaluates the economic contribution of SMEs, which is considered to be
the key and driving force of innovation, job creation, economic growth, and the very per‐
formance of the company. The source for these data is Eurostat and the annual reports of
the European Commission. Enterprises that create a higher share of added value in the
economy tend to be more innovative, competitive, profitable, and efficient [3]. It is one of
the important indicators of business success and efficiency, because it expresses the value
that SMEs will create in the market. In Figure 1, we can see the representation of SMEs in
the EU27 individually, where Cyprus, Estonia, and Malta are among the most prosperous
in this indicator.

Figure 1. Share of value added of SMEs of EU27. Source: Eurostat [4].
Given that employment in SMEs represents approximately 98% of all businesses in
the EU27, employs more than 93 million people, and accounts for 67.4% of total employ‐
ment in the non‐financial business economy, overall employment in SMEs in the EU27 is
highly significant [9]. These businesses are a key source of employment and contribute to
the overall development of SMEs in the EU27. Employment of SMEs in the EU27 has a
significant impact on their performance and success. Companies that manage their work‐
force effectively can achieve benefits (innovation, increased productivity, competitive‐
ness), while those that do not may face limitations and challenges. Figure 2 shows the
percentage of SME employment in the EU27 by country.

Figure 2. Employment of SMEs in EU27. Source: Eurostat [9,10].
The digital intensity index (DII) serves as a tool for evaluating the digital maturity
and competitiveness of businesses in the digital world. It enables them to streamline and
improve their processes, enhance their outcomes, and increase the efficiency of resource
utilization. This index is also used to compare the level of digital maturity and the degree
of implementation of digital technologies or to identify opportunities for improvement
and growth of businesses. The DII is calculated by taking the ratio of a company’s digital
revenue to its total revenue, multiplied by 100. A higher DII indicates that a company is
more digitally intensive and therefore more reliant on digital technologies. The source for
our data is DESI, and its indicator DII in SMEs in each EU country from 2017 to 2021 is
displayed in Figure 3.

Figure 3. Digital intensity index in SMEs of EU27. Source: European Commission [11–15].
The indicator of integration of digital technologies measures the extent to which
SMEs in the EU27 adopt and use digital technologies in their business activities. Measur‐
ing the integration of digital technologies in SMEs is of utmost importance for understand‐
ing the digital competitiveness and readiness of SMEs in the EU. The index takes into

account factors such as the level of automation, the degree of data integration, and the use
of advanced analytics. Integration of digital technologies is calculated by assessing the
degree of adoption of digital technologies across these different areas of a company’s op‐
erations. While the DII focuses on the share of digital revenue in total revenue, the digital
technology integration index evaluates the extent to which a company has integrated dig‐
ital technologies across various areas of its operations. Both indexes are useful in assessing
the level of digitalization of a company, but they provide different perspectives on the use
and integration of digital technologies [16]. The countries with the best results according
to Figure 4 are Denmark, the Netherlands, Finland, and Sweden. On the other hand, the
countries with the lowest performance in implementing DT are Bulgaria, Croatia, Greece,
and Romania. The data are presented as the percentage representation of DT integration
in SMEs in the EU27 from the DESI index in the years 2017–2021.

Figure 4. Integration of digital technologies in SMEs of EU27. Source: European Commission [11–
15].
A positive GDP growth rate indicates that businesses are producing more goods and
services, thereby contributing to overall economic expansion. However, factors such as
technological advancements, economic conditions, and government policies can also in‐
fluence GDP growth in businesses [17]. A negative GDP growth rate, as seen during the
COVID‐19 pandemic (see Figure 5, year 2020), can contribute to a decline in economic
activity, which can in turn affect overall investment and development in the country.

Figure 5. GDP growth of EU27. Source: Eurostat [18].
Total investments (Figure 6) measured as a percentage of GDP in the EU27 represent
the share of total investment in the region as a percentage of GDP. This indicator expresses
how much of the economic activity in the region was spent on investments in a given
period. They are regularly monitored and published by various organizations, including
Eurostat, the European Central Bank, and the European Investment Bank.

Figure 6. Total investment of EU27. Source: Eurostat [19].
One of the main priorities of EU development is, among other things, digitalization.
The concept of sustainability and digitalization in all areas of life of EU member countries
is becoming increasingly important and represents a driving force for economic develop‐
ment [20]. As a result, the implementation of digital tools and models is important and
necessary to ensure the sustainable development and growth of EU businesses. The use
of digital models and tools, or the overall digitalization of businesses, became the number
one topic during the recent COVID‐19 pandemic, not only in Slovakia but also in other
EU countries, especially due to the threat of bankruptcy [21].

2. Literature Review: Digitalization of SMEs and Business Performance
The concept of Industry 4.0, also known as the phenomenon of the Fourth Industrial
Revolution, is based on a business strategy that involves the application of digital tech‐
nologies at the enterprise level [22,23]. This event has significantly influenced every aspect
of corporate life, making the adoption of new technologies necessary to remain competi‐
tive among businesses and in a constantly evolving market [24,25]. By developing a solid
competitive advantage, technology allows companies to differentiate themselves from
their competition [26]. The current course of digital transformation requires the digitali‐
zation of the production system, greater automation of processes, and the interconnection
of production sites that facilitate the automatic exchange of information and data [27].
Within supply chains, new technologies also affect business models with regard to com‐
munication [28].
Digital transformation offers growth and competitiveness opportunities for compa‐
nies of all sizes [29]. In Turkey’s manufacturing sector, digital transformation has been
shown to improve business processes and increase capabilities [30]. However, SMEs face
challenges in implementing digital technologies and require external support to integrate
them into their overall business strategy [31]. Adopting digital technologies strategically
and appropriately can stimulate the productivity, competitiveness, and performance of
SMEs [32,33]. Utilizing the latest digital technologies and digital marketing can help busi‐
nesses reach customers more effectively from a distance, thus affecting their performance
[34]. Effective adoption and use of digital technologies significantly impact SMEs’ perfor‐
mance [35,36]. Investing in innovation allows companies to achieve improvements in
business processes by using advanced digital devices that control production phases in
real time [37]. In this way, the profitability of the company can increase with the imple‐
mented technology [38]. Streamlining asset, economic, and financial performance is one
of the main priorities of all companies, and new digital technologies play a key role in
achieving this goal [39]. There is a positive relationship between economic performance
and digital technologies [40]. According to [41], the most innovative companies are also
those that have the highest profitability.
Depending on the industry, digital transformation varies for companies. Digital
transformation of companies depends on several factors, including the level of application
of cutting‐edge technologies, changing customer needs, and market size, in addition to
the business sector [42]. Boundary companies in digitalization show higher productivity
and revenue in the long run compared to less digitally oriented companies [43]. SMEs can
also use digital technologies to maintain marketing by supporting their business func‐
tions, such as using social media applications, open‐source software, mobile security, or
e‐commerce platforms to maintain marketing or using video conferencing, instant mes‐
saging, and shared calendars. These digital technologies may require payment for use or
may be completely free [44,45]. Other tools aimed at improving SMEs’ performance,
whether at an economic, social, or environmental level, include big data, Blockchain, arti‐
ficial intelligence, and the Internet of Things [46].
Companies’ level of digital transformation varies depending on contextual factors
and can be grouped into three categories. The first group includes SMEs that have a high
level of digital maturity and rapidly transition to digitalized businesses when faced with
challenges. The second group consists of SMEs that have liquidity problems but low levels
of digital sophistication and digitize only their sales function. The third group comprises
SMEs with limited digital literacy but are supported by a high level of social capital and
seek potential partners with excellent digital skills to address problems [47]. Successful
digital transformation requires investment in various dimensions, including infrastruc‐
ture, IT technologies, intellectual, strategic, formal and informal, structural, cultural, and
social dimensions [48,49]. For ideal optimal performance results, significant operational
changes must occur in the external environment in correlation with compatible internal
organizational changes [50]. However, these internal changes often face obstacles and

challenges, which can be overcome by adapting business models, knowledge, and tech‐
nologies. To increase the benefits of adopting digital technologies, SMEs must spend more
time and effort innovating their business models [51].
Digital technologies can facilitate financial inclusion for SMEs, allowing them to ob‐
tain financial resources more quickly [52,53]. Studies have shown that digital financial
services significantly help SME owners and managers to manage their finances and trans‐
actions efficiently. However, there is a need to increase the portfolio of financial products
on digital platforms and reduce the cost of using digital financial services to maximize
their potential [52–54]. Additionally, increasing access to sources of financing other than
traditional ones, such as bank loans, can stimulate SME performance [54–56].
While digitization has numerous positive effects on SME performance, conflicting
results exist. For instance, one study from 2021 demonstrated that digital technologies
have a low impact on businesses’ innovative performance and that R&D expenditures are
the most reliable predictor of innovation [57]. This study challenges the belief that digital
technologies can enhance innovative performance.
Based on all the findings and in accordance with the previous literature review, a
research question was formulated to analyze the impact of digitalization on firm perfor‐
mance: “Does digitalization have an impact on SMEs performance?” Furthermore, we for‐
mulated research hypotheses listed in Table 1, which will help us answer the research
question.
Table 1. Hypotheses of the research study.
H1 The impact of DII on SMEs’ performance is significant
H2 Integration of digital technologies is a significant factor in SMEs’ performance
3. Research Methodology
Our research consists of an econometric analysis of panel data to verify and test the
impact of digitalization on the performance of SMEs, respectively, to confirm/reject our
hypotheses. The dataset of 135 observations represents data collected from the 27 EU
countries over a span of five years. To answer the research question and confirm/reject the
established hypotheses, we created a five‐year panel dataset, where the time frame is from
2017 to 2021. Figure 7, which shows the research flowchart, will serve as a better overview
of the process of conducting this study.


Figure 7. Research flowchart.
The longitudinal data or panel data method was chosen for its ability to track the
same individuals over time, making it easier to analyze dynamic reactions and control
unobserved heterogeneity in data that contain both cross‐sectional elements and time se‐
ries [58]. Using panel data has several advantages, as stated by [59], including greater
variability, less collinearity between variables, more degrees of freedom, higher efficiency,
and control of individual heterogeneity, providing more informative data. The statistical
program used for the analysis was EViews 12 [60]. The following Table 2 specifies six
variables that are based on the dataset and will be observed.
Table 2. Variables for descriptive statistics.
Dependent Variables Definition Unit

Value added (𝑉𝐴 ) Share of the total value added of EU27 SMEs %
Employment (𝐸𝑀𝑃 ) Total employment of SMEs in the EU27 %
Independent Variables
Integration of Digital
Level of implementation and use of digital tech‐
technologies %
nologies in EU27 SMEs
(𝐼𝑛𝑡𝐷𝑖𝑔𝑇𝑒𝑐ℎ )
Digital intensity index A tool for evaluating the digital maturity and
%
(𝐷𝐼𝐼 ) competitiveness of EU27 SMEs
Control variables
GDP growth Measured as percentage change %
Total investment
Percentage of GDP for each of the EU27 countries %
(Total_inv)
The independent variables listed above will serve to answer the research question

and confirm/reject our hypotheses, which are one of the main factors describing the level
of digitalization of SMEs in the EU. At the same time, we have identified the share of value
added and employment as the dependent variables, which are considered key
performance factors in businesses.
When we talk about interactions between dependent and independent variables,
according to [61,62], higher value added can support employment growth, and
conversely, increased employment can increase productive performance, which can
support the growth of value added. Additionally, the integration of digital technologies
can increase the digital intensity index and indicate a stronger integration of digital
technologies into multiple business areas, which can lead to more efficient and faster
operations. GDP growth can support greater overall investment, and increased
investment can lead to faster GDP growth, as it can support the creation of new jobs, the
development of new products and services, and promote economic growth.
Theoretical Background of Analysis
We utilized the least squares dummy variables (LSDV) method, which is a technique
specifically designed for panel data analysis. The LSDV method allows for individual‐
specific effects to be captured, providing a more effective and consistent estimate [63].
To test our hypotheses, we employed a linear regression model using regression
Equation (1), which considered both our dependent and independent variables. This
model illustrates the relationship between the independent variable and the dependent
variable, indicating how a change in the independent variable can impact the dependent
variable:
𝑌 𝛼 𝛽𝑋 𝜆 𝜀 (1)

where:
 𝑌 is the dependent variable for observation (country) i in time (year) t.
 𝑋 is the independent (explanatory) variable for observation i in time t.
 𝛼 is the country‐specific intercept.
 β is the coefficient on the independent variable 𝑋 .
 𝜆 is the time‐fixed effect (time dummy variables) for time period t.
 𝜀 is the error term for observation i in time period t.
Based on Equation (1) and the number of dependent and independent variables, the
final analysis is divided into two separate models (equations). The resulting equations for
our study thus take the form:
𝑉𝐴 𝛼 𝛽 𝐷𝐼𝐼 𝛽 𝐺𝐷𝑃 𝛽 Total_inv 𝜆 𝜀 (2)
𝐸𝑀𝑃 𝛼 𝛽 𝐼𝑛𝑡𝐷𝑖𝑔𝑇𝑒𝑐ℎ 𝛽 𝐺𝐷𝑃 𝛽 Total_inv 𝜆 𝜀 (3)
where:
 𝑉𝐴 𝐸𝑀𝑃 are dependent variables.
 𝐷𝐼𝐼 , 𝐼𝑛𝑡𝐷𝑖𝑔𝑇𝑒𝑐ℎ are independent variables.
 𝐺𝐷𝑃 , Total_inv are control variables.
Regression analysis is commonly used to examine the relationship between
independent and control variables with a dependent variable. To determine the model
specification for Equations (2) and (3), we conducted various tests, including considering
whether to use pooled data or account for heterogeneity using fixed or random effects.
Fixed effects models assume that each entity has a unique intercept, which remains
constant over time. In contrast, random effects models allow the intercept to vary
randomly beyond the specific values of the independent variable, without making precise
assumptions about the variables. However, both fixed and random effects assume that the
effects are constant in time. Therefore, the main difference between fixed and random
effects is that fixed effects assume that the effects are specific to each entity, while random
effects allow for more flexibility in the intercept. It is important to carefully consider the
appropriate model specification based on the research question, data characteristics, and
assumptions of the different models [64].
Our proposed model aims to understand the relationship between the DESI index
and the value added of SMEs, and the effects of the model can be confirmed through tests
on data. We performed a Hausman test to determine whether to use fixed or random
effects in our model.
4. Results
To understand the variability of values in our analysis, we will provide descriptive
statistics of the variables used. We present the mean, median, and standard deviation,
which represent indicators of how close the data points are to a normal distribution. In
the case that the data have a standard distribution, or express characteristics of a Gaussian
distribution, the mean and median are close to each other. From Table 3, it is evident that
all variables in the model have means and medians with similar values, indicating that
the distribution of the variables is likely to be symmetric. Looking at the table, we can
identify potential major deviations in the following variables:
 The DII variable has a range of 65.8 (88.4–22.6), indicating significant variability
across the observations. Additionally, the standard deviation of 14.402 suggests a
relatively high dispersion of values around the mean. This suggests that there are
substantial differences in the digital intensity levels among the countries included in
the sample.
 Similar to the DII variable, the integration of digital technologies variable also
exhibits a wide range of 64 units (75–11). The standard deviation of 14.809 further
confirms the presence of significant deviations among the observations. This

indicates varying levels of integration of digital technologies across the countries in
the sample.
 The GDP growth variable shows a range of 20.3 (9.5–(−10.8)), indicating substantial
variations in economic growth rates. The standard deviation of 4.095 suggests a
moderate level of dispersion around the mean. This implies that different countries
in the sample experienced diverse rates of economic growth over the specified time
period.
Table 3. Descriptive statistics of variables. Source: own calculation in EViews 12.
Standard Number of
Variable Mean Median Maximum Minimum
Deviation Observations
Value added 58.257 58.000 78.700 42.300 8.258 135
Employment 73.592 74.800 81.800 57.400 5.554 135
DII 54.460 52.700 88.400 22.600 14.402 135
Integration of digital
40.318 38.000 75.000 11.000 14.809 135
technologies
GDP growth 2.038 2.900 9.500 −10.800 4.095 135
Total investment 22.141 22.500 32.000 12.300 2.980 135
These deviations highlight the heterogeneity and diversity among the countries
included in the sample.
To justify the findings presented in Table 3, we can consider the following points:
1. Sample Size: The table indicates that there are 135 observations for each variable,
which is a reasonably large sample size. A larger sample size increases the reliability
and precision of the statistical measures reported, providing more confidence in the
findings. The consistent number of observations for each variable implies that the
analysis covers the same set of countries or entities consistently across all variables.
This ensures comparability and allows for meaningful analysis and interpretation of
the relationships among the variables.
2. Mean and Median: The mean and median values provide measures of central
tendency for each variable. The closeness of the mean and median suggests that the
data distribution is standard. This indicates a symmetric distribution of values for
the variables under consideration.
3. Range: The range between the maximum and minimum values indicates the extent
of variability within each variable. For example, the maximum value of value added
is 78.700, and the minimum value is 42.300, indicating a range of 36.400. Similarly,
the ranges for other variables are also provided. The wide ranges observed suggest
significant variations across the observations, reflecting the diversity within the
dataset.
4. Standard Deviation: The standard deviation measures the dispersion or variability of
values around the mean. A higher standard deviation indicates greater variability
within the variable. In Table 3, the standard deviations for most variables are
moderate to high, suggesting substantial variation within the dataset.
Considering these points, Table 3 presents descriptive statistics that summarize the
characteristics and variability of the variables in the dataset. These statistics highlight the
importance of the dataset’s characteristics and variations within the research context.
To ensure the reliability of the model and the results, several tests were performed.
One such test was conducted to identify a direct relationship between the independent
variables of the model, known as multicollinearity [65]. If the model represents
multicollinearity, the regression coefficient would not represent the true ceteris paribus,
indicating that the variables are interrelated. In such a case, the model cannot accurately
capture the true impact on the dependent variable. The correlation matrix for Equation (2)

is shown in Table 4, which indicates that no correlation greater than 0.7 or less than −0.7
was found between the variables [65].
Table 4. Correlation matrix for Equation (2). Source: own calculation in EViews 12.
GDP
Variable Value Added DII Total Investment
Growth
Value added 1
DII −0.299 1
GDP growth 0.111 −0.070 1
Total investment −0.185 0.167 0.243 1
Similarly, in Table 5, which represents the correlation matrix for Equation (3), the
coefficients being less than 0.7 suggests that the variables do not exhibit a strong linear
association with each other. The correlation coefficients are relatively small, indicating
that there is no linear relationship between the variables. Therefore, we can conclude that
there are no problems with multicollinearity between the selected variables in both cases
(Equations (2) and (3)).
Table 5. Correlation matrix for Equation (3). Source: own calculation in EViews 12.
Integration of Total
Variable Employment GDP Growth
DT Investment
Employment 1
Integration of
0.531 1
DT
GDP growth 0.106 −0.184 1
Total
0.395 0.197 0.243 1
investment
Next, we ran the Breusch–Pagan heteroscedasticity test with the following
hypothesis:
 H0 = no heteroscedasticity in the model.
The results presented in Table 6 reveal that the p‐values associated with Equations
(2) and (3) are greater than the significance level of 0.05. This indicates that there is no
strong evidence to support the presence of heteroscedasticity in the model. As a result, we
accept the null hypothesis, suggesting that the assumption of homoscedasticity is met.
Table 6. Heteroscedasticity test. Source: own calculation in EViews 12.
Equation (2)
p‐value 0.871
Equation (3)
p‐value 0.437
In the next step, we will perform a Hausman test for Equations (2) and (3) to
determine which method we will use to perform regression analysis of the data. The
Hausman test establishes the following hypotheses:
 H0 = the random effects model is more appropriate for this study.
 H1 = the fixed effects model is more appropriate for this study.
According to Table 7, the probability value (p‐value) in both equations is less than
0.05, or less than 5%. In this case, we reject H0 and accept H1, which means that the fixed
effects model is more appropriate for our study.

Table 7. Hausman test. Source: own calculation in EViews 12.
Equation (2)
Chi‐Square Statistic 28.603
Chi‐Square Statistic Probability 0.000
Equation (3)
Chi‐Square Statistic 7.661
Chi‐Square Statistic Probability 0.043
Table 8 shows the final results of the panel data regression analysis for Equation (2)
using the LSDV method with the fixed effects model. The coefficient estimate for the
digital intensity index is 0.139 (standard error 0.049), and it has a p‐value of 0.006. This
suggests that a one‐unit increase in the digital intensity index is associated with an
estimated increase of 0.139 units in the value added, holding other variables constant. The
relationship is statistically significant at the 1% level. The regression model has a high
level of explanatory power, as indicated by the R‐squared value of 0.843. This means that
approximately 84.3% of the variation in the value added can be explained by the included
independent variable. The adjusted R‐squared value of 0.799 takes into account the
complexity of the model and suggests that approximately 79.9% of the variation in value
added is explained, considering the number of variables and degrees of freedom. Thus,
the R‐squared and adjusted R‐squared values suggest that the model explains a large
portion of the variation in the dependent variable (value added).
Table 8. Panel data results for Equation (2). Source: own calculation in EViews 12.
Coeﬃcients Estimation Value Added
p‐value
Constant 52.585 *** 0.000
(8.989)
Digital intensity index 0.139 *** 0.006
(0.049)
GDP growth 0.107 ** 0.021
(0.085)
Total investment −0.096 * 0.0826
(0.440)
R‐squared 0.843
Adj. R‐squared 0.799
Observations 135
Notes: * p < 0.1; ** p < 0.05; *** p < 0.01.
As in the previous step, Table 9 shows the final results of the panel data regression
analysis for Equation (3) using the LSDV method with the fixed effects model. Similar to
the regression analysis of Equation (2), the coefficient estimate for the integration of digital
technologies is 0.056 (standard error 0.011), and it has a highly significant p‐value of 0.000.
This suggests that a one‐unit increase in the integration of digital technologies is
associated with an estimated increase of 0.056 units in employment, holding other
variables constant. The relationship is statistically significant at the 1% level. The
regression model demonstrates a high level of explanatory power, as indicated by the R‐
squared value of 0.974. This means that approximately 97.4% of the variation in
employment can be explained by the included independent variable. The adjusted R‐
squared value of 0.967 takes into account the model’s complexity and suggests that
approximately 96.7% of the variation in employment is explained, considering the
number of variables and degrees of freedom. Thus, the R‐squared and adjusted R‐squared

values suggest that the model explains a large portion of the variation in the dependent
variable (employment).
Table 9. Panel data results for Equation (3). Source: own calculation in EViews 12.
Coeﬃcients Estimation Employment
p‐value
Constant 58.827 *** 0.000
(2.421)
Integration of digital technologies 0.056 *** 0.000
(0.011)
GDP growth 0.061 ** 0.011
(0.023)
Total investment 0.557 *** 0.000
(0.114)
R‐squared 0.974
Adj. R‐squared 0.967
Observations 135
Notes: ** p < 0.05; *** p < 0.01.
As previously stated in the methodology section of our study, our panel regression
analysis aims to establish causality between the independent and dependent variables. In
the following section, we will discuss the R‐squared and adjusted R‐squared coefficients
and use them to answer our research question and validate our hypotheses.
5. Discussion
The main objective of this article is to discuss the causality between our dependent
and independent variables. In the results of Tables 8 and 9, we can see the statistical
relevance of the independent variables with R‐squared and adjusted R‐squared. The
statistical term “R‐squared” indicates the proportion of variation in the dependent
variable that is accounted for by the independent variable. The value of this coefficient
falls within the range of zero to one, with zero signifying that the independent variable
has no effect on the dependent variable and one indicating that the independent variable
(DII) perfectly accounts for the dependent variable (value added). In our case for both
equations (models), this is a quite high value, from which we can conclude that the
regression model confirms the positive causality between the variables and is statistically
relevant. Furthermore, the results reveal that the control variable total investment has a
statistically significant negative impact on value added. The total investment variable is
considered as a control variable and is not the central topic of discussion in this research.
These conclusions (Equations (2) and (3)) are based on an analysis of 135 observations
in the context of a 5‐year time span. It is important to note that the significance levels of
the coefficients are denoted by asterisks: * indicates p < 0.1, ** indicates p < 0.05, and ***
indicates p < 0.01. These levels help assess the statistical significance of the coefficients and
provide insights into the reliability and robustness of the relationships between variables.
For this study, measurement validity (construct validity) was a key criterion because we
were looking for measurements that would reflect the concept. One of the most common
problems in conducting a quantitative study is the problem of incorrect measurement of
variables, and to overcome this, we used control variables that are highly related to the
topic and theory. Regarding the control variables used, there are several notes to be made.
Firstly, for our model and evaluated datasets, GDP growth and total investment are not
statistically relevant as control variables.
Given the performed panel regression of data in both models, we can now move on
to confirming or refuting our hypotheses. Table 10 presents the results of the hypotheses.

Table 10. Results of statistical hypotheses.
Hypothesis Valid (Yes/No)
Hypothesis 1 Yes
Hypothesis 2 Yes
According to the validity of our hypotheses, we can confirm that independent
variables (DII and integration of digital technologies), representing the digitalization of
SMEs in the EU27, have a significant impact on our dependent variables (value added and
employment), representing the performance of SMEs in the EU27, and there is a mutual
causality between them.
The adoption of digital technologies by SMEs can improve their efficiency and
productivity, creating a competitive advantage against their rivals [66]. This can also lead
to the acquisition of new competencies, skills, and knowledge, inspiring businesses to
introduce new processes and products. While there are multiple innovation advantages
to digitalization, SMEs are limited by their financial and human resources, making it
challenging to adopt these technologies [67,68]. According to these financial limitations,
we are not concerned that control variables, mainly related to finances, could influence
the overall outcome, as these variables are not the central topic of this study. There are
many indicators from which our dependent variables are derived. In this study, we
carefully selected those control variables that we know have some impact on the
dependent variables, but this impact is shared among many other indicators, and given
the limited financial resources of SMEs, they become sufficiently relevant to our study.
Upon analyzing the results of both regression models, it can be concluded that the
model was appropriately specified. Additionally, both selected independent variables
(digital intensity index and integration of digital technologies) were significant and had a
positive impact, establishing a causal relationship between digitization and business
performance. Our results could be linked to other studies, where one of them focuses on
various aspects of digitization in German firms, where authors examine the impact of big
data analytics on product innovation in German manufacturing and service companies
[69,70]. The other study examines the impact of Industry 4.0 on product innovation in
German manufacturing and service companies. Both studies found a positive impact of
big data and Industry 4.0 on product innovation. Research and development are a key
driving force of innovations in SMEs of different sizes. This finding is consistent with the
authors of the study, who examine how digital technologies such as 3D printing and big
data affect the innovation performance of European companies [55]. Empirical findings
suggest that digital technologies do not support innovations and that investments in
research and development are the most reliable predictors of innovations.
In contrast to the mentioned German studies [69] and [68], our research focuses on
the digitalization of SMEs in general. First, it focuses on SMEs that are characterized by
limited financial and human resources that may hinder the speed of digital technology
adoption, as well as business performance. These numerous inhibitory factors may have
suboptimal effects on the innovation performance of SMEs. Second, SMEs are considered
a heterogeneous group of enterprises in this study, with micro‐enterprises facing greater
negative effects of limited resources than small‐ and especially medium‐sized enterprises.
Therefore, a more detailed panel data analysis of SMEs depending on their size could be
the subject of future research. The results of such a study could reveal more detailed
results and impacts of digitalization on business performance.
Limitations of the Research
The topic of the impact of digitalization on the performance of SMEs in European
countries is an important area of research, but like any study, it also has its limitations. In
the following points, we will present several broader perspectives on the limitations of
this study:

1. Data quality and availability: One of the biggest limitations of the conducted panel
data analysis is the quality and availability of data. In the case of the conducted study,
we had to ensure that the selected indicators had a certain relevance and availability.
To solve the problem of accessing data for all countries based on their national
economies, which are necessary for the analysis, we decided to use indicators that
are publicly available through the official statistical offices of the EU, the World Bank,
and the European Commission.
2. Correlation vs. causality: Another limitation of panel data analysis is the difficulty in
establishing causality. Although we found a correlation between digitization and
SME performance, it is challenging to determine whether digitization caused an
improvement in performance or whether the improvement was caused by other
factors.
3. Generalizability: The study’s findings may not be applicable to all SMEs in European
countries, as the sample size and composition may not be representative of the entire
population. Additionally, the study may not be generalizable to SMEs in other
regions or countries, as digitalization and business practices may differ.
4. Panel data analysis: While panel data analysis is a powerful tool for studying change
over time, it is not without its limitations. For example, it assumes that the effects of
the independent variables are constant over time, which may not be the case.
Additionally, the study may have omitted important variables that could affect
SMEs’ performance, leading to potential confounding variables.
6. Conclusions
The aim of our study was to investigate the impact of digitalization on the
performance of SMEs. We focused on a group of SMEs in the EU27 from 2017 to 2021 and
analyzed datasets of dependent variables representing business performance and
independent variables representing SMEs’ digitalization. Panel data analysis was
conducted using the statistical software EViews 12, providing valuable insights into the
relationship between digitalization and SME performance.
The results of the panel data analysis indicate that the integration of digital
technologies and the intensity of digitalization significantly enhance business
performance in terms of value‐added growth and employment within the EU27. Notably,
our study period encompassed the effects of the COVID‐19 pandemic, which accelerated
digitalization efforts and presented challenges to traditional business development.
Our findings contribute to the existing knowledge on the role of digitization in
improving SME performance. They can serve as inspiration for future studies and have
implications for researchers and policymakers, highlighting the importance of
digitalization in driving SME success.
Moving forward, there are several research challenges that need to be addressed in
this field. One challenge involves identifying and categorizing specific risks associated
with digitalization, such as cyber threats and data breaches. Additionally, further research
is needed to quantify the extent of the impact of digitalization on SME performance and
assess the negative effects of digitalization‐related risks. It is also important to understand
how the impact of digitalization varies across different industries and conduct industry‐
specific studies.
Addressing these challenges through future research can help deepen our
understanding of the impact of digitization on SME performance in the European context,
especially in the face of crises and risks. It is crucial to identify measures and strategies
that can help SMEs cope with these challenges and leverage digital technologies
effectively. Factors such as education and training, access to technology and information,
and the utilization of digital tools to improve customer experience should also be
investigated.
In conclusion, further exploration is needed to better comprehend the impact of
digitization on SME performance in the face of crises and risks. These research challenges

represent crucial areas for future investigation, offering valuable insights for SMEs aiming
to enhance their competitiveness and navigate the dynamic business environment.
Expanding the sample size globally and including more variables measuring
digitalization and business performance could be a potential direction for future research,
enabling a more comprehensive panel data analysis based on SME size.
Author Contributions: Conceptualization, L.L. and J.K.; methodology, D.S.; software, L.L.;
validation, J.K., D.S., and L.L.; formal analysis, J.K.; investigation, L.L.; resources, D.S.; data curation,
D.S.; writing—original draft preparation, L.L.; writing—review and editing, D.S. All authors have
read and agreed to the published version of the manuscript.
Funding: This research received no external funding.
Institutional Review Board Statement: Not applicable.
Informed Consent Statement: Not applicable.
Data Availability Statement: Data sharing is not applicable to this article.
Acknowledgments: This paper was developed within the implementation of the project VEGA 1‐
0340‐2021 “The impact of a pandemic and the subsequent economic crisis on the development of
digitization of enterprises and society in Slovakia”.
Conflicts of Interest: The authors declare no conflict of interest.
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Impact of Digitalization on SME Performance of the EU27: Panel Data Analysis

Article in Sustainability · June 2023

Jaroslava Kadarova Laura Lachvajderova

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