Digital transformation and productivity growth in European light manufacturing industries: evidence from panel data (2015–2022)

This study investigates the relationship between digital transformation and labor productivity in European light manufacturing industries from 2015 to 2022. Using an unbalanced panel dataset of 21 EU countries and eight subsectors, it employs pooled OLS, fixed effects, two-way fixed effects (TWFE), and instrumental variable techniques. Digitalization is measured through a composite index based on connectivity, digital skills, and integration. Results reveal a consistent positive association, with the preferred TWFE model indicating that a one-unit increase in digitalization raises labor productivity by approximately 0.43%. The effects are stronger in more digitally advanced countries, while evidence suggests diminishing marginal returns at higher levels of adoption. Decomposition shows that connectivity and digital integration contribute more than digital skills. Findings remain robust across multiple checks, though IV results are interpreted cautiously. Overall, digital transformation enhances productivity, contingent on complementary factors such as human capital and digital readiness.