Sectoral digital capabilities and complementarities in shaping young firms’ growth: evidence from Europe

We explore how digitalization impacts young firms’ growth. A longitudinal panel analysis of the EU’s new ventures during 2010–2018 reveals that digital sectoral capabilities affect young firms’ growth autonomously and via interaction with other sectoral capabilities. Digital sectoral capabilities play an important complementary role in facilitating the upscaling of young firms operating in R&D-intensive contexts as they mature and within environments rich in tangible capital investments. In business contexts characterized by high digital but low human capabilities, young firms struggle to grow, flagging a mismatch of skills’ composition. The effects of digitalization vary depending on the level of competition within each sector. The results on complementarities of sectoral capabilities suggest that horizontal policy solutions favouring specific capabilities in isolation may have limited or counterproductive effects. Instead, policy should target a portfolio of capabilities and consider their complementarities under competitive market structures. Our analysis shows that effective innovation policy should be broadly defined and closely integrated with competition policy.