Main Digitalization Index (MDI): understanding productivity engines

Digital transformation integrates digital technology into business operations, fundamentally changing how organizations operate and deliver value. This transformation goes beyond adopting new technologies; it requires reevaluating business processes and strategies to leverage digital advancements effectively

Productivity Benefits

A significant advantage of digital transformation is its profound impact on productivity. Digital tools automate tasks, enhance data accessibility, and enable real-time decision-making, thereby improving efficiency. Workforce management tools, for instance, streamline employee scheduling, while collaboration platforms facilitate seamless communication among team members, regardless of location. This promise of productivity growth drives significant investments in software, as highlighted in our recent whitepaper on the enterprise software industry.

Sectoral Differences

However, despite widespread adoption of digital transformation, industries vary in their commitment and proficiency in integrating digital technologies. Each sector faces unique challenges and opportunities, resulting in different levels and speeds of digital transformation. These differences offer a unique opportunity to analyze how digital tools influence productivity.

Measuring Digital Transformation

Accurately measuring digitalization is crucial for understanding its impact on productivity growth. However, digitalization is multifaceted, encompassing more than just software adoption; it includes IoT sensors, Generative AI, and other technologies. Consequently, there is no standardized method for measuring digitalization.

To address this, the Market Intelligence team at Main Capital developed the Main Digitalization Index (MDI). Inspired by studies such as McKinsey’s examination of digitalization across American sectors and the European Digital Intensity Index, the MDI assesses digitalization levels in five key categories: Digital Business, Digital Security, Digital Technologies, Digital Workforce, and Enterprise Software.

Main Digitalization Index (MDI)

From an initial dataset sourced from Eurostat, containing over 150 metrics related to technology adoption and digital business practices, the Market Intelligence team selected fifty variables to compose the Main Digitalization Index (MDI). This MDI spans all major sectors, ensuring a comprehensive assessment of digitalization.

For sectors where data is incomplete, the Market Intelligence team used estimation techniques. These estimations are based on other reliable data sources such as the OECD’s Taxonomy of Digital Intensive Sectors, a framework for categorizing sectors based on their digital intensity, allowing for accurate estimations.

Categories of the MDI

• Digital Business: Measures presence of digital business activities, like e-commerce, digital sales, social media use, and e-invoice usage
• Digital Security: Assesses cybersecurity practices and the security of digital operations based on factors such as ICT security guideline adoption and security awareness.
• Digital Technologies: Measures the use of digital technologies in operations, including AI, IoT, and cloud computing.
• Digital Workforce: Indicates the degree to which the workforce is digitally enabled, considering internet access, digital document usage, and ICT training participation.
• Enterprise Software: Measures enterprise software usage, including CRM, ERP, security software, and accounting software adoption.

The aggregated scores from these categories are combined to generate an overall digitalization score on the MDI for each sector.

Sectoral Insights

Compiling the MDI reveals the digitalization status across industries. The Information and Communications Technology (ICT) sector leads, driven by high scores across all categories. Trade scores well due to widespread e-commerce adoption. Professional and Financial Services excel in digital security, digital workforce, and enterprise software adoption. Other sectors, such as Leisure and Healthcare, show strengths in specific categories but have areas for improvement.

Digitalization and Productivity Growth

Now, with the establishment of a digitalization measure via the MDI, we can compare varying levels of digitalization with productivity growth across sectors. According to a regression analysis by the Market Intelligence team, digitalization levels show a statistically significant and strong positive correlation with productivity growth, measured as the rate of increase in output per unit of input.

“Our analysis shows that sectors with higher digitalization levels achieve more significant productivity gains. Early adopters of digital technologies, such as manufacturing, professional services, and ICT, have reaped substantial benefits. Conversely, sectors like construction and transportation are still navigating digital transformation complexities.” – Daan Dinkla, Market Intelligence Associate, Main Capital.

Conclusion

Digitalization is a fundamental driver of productivity growth. As sectors adopt digital technologies, they streamline operations, enhance efficiency, and foster innovation, resulting in significant productivity improvements.

“Enterprise software is crucial in this transformation, facilitating the seamless integration of digital technologies into business operations. For instance, in the manufacturing sector, software integrates data from IoT sensors and smart machines directly into the production planning process, optimizing workflows and boosting overall efficiency” Daan adds.

In conclusion, the growth of the enterprise software market reflects a broader shift towards a more digital and productive future. As businesses continue investing in digital tools and strategies, even greater productivity gains and operational efficiencies across all sectors can be anticipated.