Does digitalization adoption stimulate the performance of the European SMEs?

Purpose This research aimed to determine whether adopting digital technologies influences the performance of Small and medium-sized enterprises (SMEs) in the European Union. Design/methodology/approach Our study is based on the country-level dataset of the 27 European Union member states, covering the period from 2014 to 2023. The SME performance is measured by the two primary outcome variables – average value added of the SMEs in the country and average employment. The empirical approach relied on estimating the Least Squares Dummy Variables (LSDV) panel Vector Autoregressive models with Impulse Response functions, indicating the effects of digitalization over time. Findings The obtained results document a statistically significant and positive impact of the Digital Economy and Society Index (DESI) and basic digital skills enhancement on both performance variables, with up to two years of positive effects. Practical implications The article concludes that the digitalization efforts of the European Union member countries play a significant role in shaping SMEs' competitiveness. Therefore, they could be used as evidence to support policymakers' ongoing initiatives towards adopting digitalization and advancements in the digital economy. Originality/value The study relies on a robust econometric approach, and it visually displays the effects of digitalization adoption on SMEs' performance over time. Uniquely, it provides a whole European picture of SMEs' digital transformation and its impact on firms' performance.