Does a rising tide lift all boats? An empirical analysis of the relationship between country digitalization and low-tech SMEs performance

The rapid emergence of digital technologies has considerably changed the environment for firms' survival and development, reshaping the way they operate and gain competitiveness in the market. The influence of digitalization on firms has emerged as a critical research topic. Nevertheless, studies on the relationship between digitalization and firms' performance remain scarce. Based on a European sample of 149,645 SMEs operating in the low-tech industries, this paper examines the impact of the country's digital performance (measured by the Digital Economy and Society Index - DESI) on the financial performance of low-tech SMEs and the existence of sector-specific differences over the period 2016-2020. Results reveal that the state of digitalization of the economy and society might significantly affect SMEs' financial performance. Indeed, the higher a country's overall digital performance, the better the financial performance of the SMEs that operate there. Additionally, the paper shows that digitalization positively impacts the performance of SMEs in the agriculture, construction, and wood and leather industry. By contrast, digitalization has a negative impact on the performance of SMEs operating in the publishing and printing industry, as well as in the textile and clothing industry. This study provides several implications for government investment policies and SMEs.