ICT, innovation, and productivity in an African emerging economy: firm-level evidence from Ethiopia

Information and communication technologies (ICT) are widely regarded as a key driver of innovation and productivity growth; however, empirical evidence on the mechanisms linking ICT, innovation, and firm performance remains limited, particularly in African economies. This study examines the ICT–innovation–productivity nexus in Ethiopia using firm-level panel data from two rounds of the World Bank Enterprise Survey and a generalized structural equation modeling (GSEM) framework. The results provide evidence that ICT adoption enhances firms’ total factor productivity (TFP) primarily through innovation. Specifically, ICT has a positive and statistically significant effect on both product and process innovation, which in turn increase TFP. Process innovation exhibits a slightly stronger productivity effect than product innovation, highlighting the importance of efficiency-enhancing improvements. We also find a direct, albeit smaller, effect of ICT adoption on TFP, indicating that digital technologies influence firm performance both directly and indirectly through innovation. These findings show that, in developing-country contexts, ICT can function as a substitute for formal research and development (R&D) by facilitating access to, adaptation of, and exploitation of external knowledge. From a policy perspective, the results highlight the importance of combining digital infrastructure expansion with investments in innovation capabilities, skills, and organizational upgrading.