The Impact of Digital Economy Development on Total Factor Productivity in Saudi Arabia: A Panel Data Analysis

This study investigates the impact of digital economy development on total factor productivity (TFP) in Saudi Arabia using a dynamic panel data approach over the period 2010 to 2023. The digital economy is measured using a comprehensive, transparently constructed Digital Economy Index (DEI), which incorporates four sub-indices: digital infrastructure, digital services, digital innovation, and digital governance—all sourced from UNCTAD’s BDTI framework. TFP is estimated using the Solow residual method (Penn World Table 10.0) and validated through advanced panel econometric models. The research employs fixed effects, system GMM, and quantile regression techniques to ensure robustness, address endogeneity, and capture heterogeneous effects. The findings reveal a statistically significant and positive relationship between digital economy development and TFP, with a coefficient of 0.41 in the system GMM model ( p < .01). Digital infrastructure (coefficient: 0.28) and digital innovation (coefficient: 0.35) are identified as key mediators, with innovation exerting a stronger effect. Quantile regression results show that the impact of digital transformation increases with higher productivity levels (coefficient: 0.49 at the 0.75 quantile), indicating sectoral heterogeneity. This study contributes to the literature by providing country-specific empirical evidence, a transparent DEI construction methodology, and nuanced policy insights for Saudi Arabia and similar emerging economies. The results underscore the need to prioritize digital innovation alongside infrastructure and to tailor digital policies for lower-productivity sectors to ensure inclusive growth.