On 5 May 2023 the OECD published a working paper by Manabu Nose and Jiro Honda with the title Firm-level Digitalization and Resilience to Shocks: Role of Fiscal Policy.

The study looked at the implications of digitalization for the economy, including the effect on the resilience of firms to economic shocks and the role of fiscal policy in promoting firm-level digitalisation. Using data on 1.8 million non-financial firms from 53 countries extracted from the Orbis database, the authors found evidence that digitalised businesses are more resistant to shocks, experiencing smaller falls in sales and profits than non-digitalised firms. In the case of loss-making firms, the absence of digitalization increases the effect and duration of the negative shock.

If the tax regime on digital services can be aligned with general taxation principles and competitive procurement rules on digital products, this could represent support for the effective promotion of firm-level digitalisation, which could help strengthen firms’ resilience to shocks. Fiscal interventions can be effective in the promotion of firm-level digitalization. The paper therefore examines the kind of fiscal policies that could drive digitalisation.

Businesses have an incentive to continue with further digitalization because the adoption of digital technologies is often expected to raise firm productivity through innovation. However, the government can also play a part in promoting digitalisation by facilitating access to digital technology. The public view of the fairness of the agencies administering the tax rules and the procurement rules can drive forward firm-level digitalisation.

The results of the study indicate that there are important differences between digitalized and less-digitalized firms and these need to be taken into account by governments when deciding on support for businesses. When there is an economic shock, some digitalised firms can survive and come out of the crisis in a better position than before. Some less digitalised firms may suffer lasting problems and may have little hope of recovering after the economic shock. Government support needs to go to those firms that need support and that have some hope of recovery from a crisis.

As digitalisation strengthens the resilience of a business to shocks at the micro level, it follows that progress in digitalization in a larger number of firms can strengthen the resilience of the overall economy at the macro level. The government should therefore monitor the status of firm-level digitalization to assess what further measures may be needed to strengthen businesses and the economy as a whole. Governments could lower the barriers for digital investment through a less restrictive tax regime. The use of tax incentives and subsidies could support the promotion of digitalization. Open and competitive public procurement could also promote digitalization in private business.