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An Analysis of Digitalization and Firm Performance in Finland’s Private Service Industries

Author

Listed:
  • Kuosmanen, Natalia
  • Pajarinen, Mika
  • Heshmati, Almas

Abstract

The service sector is undergoing rapid changes attributed to digitalization. This study examines the relationship between digitalization and the performance of the Finnish private service firms from 2015 to 2021 using linked employer-employee data, financial data and an IT usage survey. Our descriptive and regression analyses reveal significant variability in the level and areas of digital adoption across service industries. Information and communication, and professional activities are found highly digitalized, while accommodation and food service activities, and transportation and storage lag in digitalization intensity. Additionally, we find a strong positive correlation between firms’ digitalization and revenues, particularly for firms with higher digital intensity. This correlation persisted throughout the COVID-19 pandemic. We also observe a positive correlation between digitalization and productivity in the early years, but more recent data suggest a weakening of this association, possibly due to increased digital adoption among less productive firms during the pandemic. Finally, our analysis indicates that larger firms, or those with a larger market share or international activities, tend to have higher levels of digitalization. Thus, investment in digitalization is recommended to enhance service sectors performance.

Suggested Citation

  • Kuosmanen, Natalia & Pajarinen, Mika & Heshmati, Almas, 2024. "An Analysis of Digitalization and Firm Performance in Finland’s Private Service Industries," ETLA Working Papers 117, The Research Institute of the Finnish Economy.
    • Handle: RePEc:rif:wpaper:117
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Digitalization; Firm performance; Productivity; Private service industry; Finland;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L80 - Industrial Organization - - Industry Studies: Services - - - General
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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