Productivity Report 2020: Digital transformation as the key to improve well-being in Slovenia

One of the tasks of the Institute of Macroeconomic Analysis and Development as the National Productivity Board is the publication of an annual productivity report. This year's report, the second in a row, has been prepared in times of the corona crisis, which has significantly increased the already high complexity of the impact of megatrends on the competitiveness and productivity of countries and regions. The literature predicted already before the crisis that over the course of this decade we will be witnessing a culmination of the effects of digital transformation with the transition to the fourth industrial revolution, demographic change, but also the transition to a low-carbon economy and society, which could be reflected in changes of extraordinary speed, breadth and depth, or even in a disruptive transition. The corona crisis has added a new dimension to the already quite dramatic predictions on the basis of which the term transition to the "new normality" was coined. In preparing the Productivity Report 2020 we have tried to address the consequences of the corona crisis to the greatest possible extent, but a significant part of the studies and analyses nevertheless arise from the period before this crisis. Given the far-reaching consequences of the combination of all these effects, we have paid them great attention in the Report. This year, its main topic is digital transformation, whose consequences are already expected to be felt in this decade and which was identified by some sources as the most important factor for future economic growth and future levels of well-being. An intensive transformation of global value chains is underway, not only due to megatrends but also the corona crisis. This means that the future performance of individual regions and countries will depend far more than before on the success and foresight of the responses of all stakeholders and especially development policies to these challenges, which is therefore given special weight in the Report.

The Covid-19 crisis started after a decade of faltering productivity growth, which fell from 3.0% in 2000–2008 to 0.6% in 2009–2019 (or to 1.4% in times of buoyant economic growth between 2014 and 2018) and thus also slowed the pace of convergence with more advanced countries, which was mainly based on an increase in employment. In the medium term, the possibility of increasing economic growth by higher employment will be limited due to demographic change. Slovenia will thus be able to achieve GDP growth almost solely by increasing productivity growth, which will have to be accelerated significantly if Slovenia wants to reach the development level of the EU-27 or countries such as Austria. The transformation of global value chains could benefit Slovenia in this respect. In the area of knowledge and intangible capital, which will play an ever greater role in times of the fourth industrial revolution, Slovenia has so far retained its relative comparative advantages compared with competitor countries and regions, but it is losing them gradually over time. A successful transformation and consequently an increase in well-being is therefore possible only on the basis of a proactive development policy aimed at promoting innovation-driven economic growth. This must be based on exploiting the opportunities offered by the transition to a digital, but also a low carbon and circular economy. Due to accelerating climate change, both processes will have to be managed in a parallel but also, where possible, a complementary fashion.

An intensive transition to industry 4.0 is already expected before the middle of this decade, which means that the period of the transition will be extremely short. Clinging to existing production methods and business models would therefore be extremely risky, especially for the part of the business sector functioning as suppliers. This holds true not only because of the productivity premium enabled by the digitalisation of production processes, but mainly due to the benefits arising from digitally driven innovation, new business models and higher-quality and different products or services, which are the essence of digital transformation. With an estimated 26%, Slovenia is in the group of countries with the highest share of jobs highly vulnerable to automation, but the actual impact on the labour market will depend on the ambition and speed of the digital transformation. Studies based on microdata indicate a positive correlation between digitalisation and/or robotisation and employment, which means that companies that manage to transform among the first not only achieve faster growth but also accelerate employment.

However, ambitious and rapid digital transformation also requires enhanced social dialogue and prior social contract on how to maintain social and territorial cohesion, i.e. how to manage the digital transition towards an increase in well-being. It is vital to bear in mind that non-action is further augmenting the risk of increasing social and territorial polarisation. For example, for a successful transition and prevention of an increase in social inequalities, a timely adjustment and strengthening of knowledge and reskilling of the population will be of particular importance, a challenge for which Slovenia is not sufficiently prepared. The same applies to the territorial aspect: as the future development and employment prospects of Slovenia’s industrially oriented, i.e. non-central regions, will be relatively more dependent on their digitalisation, a successful digital transformation is also a precondition for more balanced regional development.

Slovenia still ranks only slightly below the EU average according to the Digital Economy and Society Index, but the gap is gradually widening. The business sector is lagging behind in investment in both ICT equipment and software and databases, particularly in manufacturing.Manufacturing survey data otherwise point to a gradual increase in investment in digitalisation and informatisation, but a large part of it goes to sustain existing business operations. Large enterprises are more successful in introducing basic digital operations, while small and medium-sized enterprises are lagging behind and are at the EU average. Survey data also indicate that Slovenian companies need to improve their mastery of existing 3.0 technologies before they can introduce 4.0 solutions. Nevertheless, more than a quarter of enterprises show a high readiness for industry 4.0, which is encouraging and a good basis for further stepping up of efforts in introducing smart factories. Slovenian manufacturing companies, however, are focusing mainly on traditional product sales, while servitisation business models, which increase value added, are insufficiently explored. It is therefore necessary not only to speed up innovation, but also to deepen digital transformation so that it will be more strongly reflected in higher revenues and the digitisation of products and services, introduction of a digital mindset and digital business models, servitisation and organisation and also more open business models. Although increasing gradually, the digital knowledge and skills of adults are still relatively low in international comparison, which is slowing the digital transformation of society and the economy. People in Slovenia positively assess the impact of digital technologies on the economy, while the share of those who have a positive view of their impact on society is the lowest in the EU. This could explain firms’ assessment that low readiness for change represents a serious obstacle for their digitalisation. In digitising public services, the key problem is services for businesses. There are also difficulties in the use of e-government solutions. 

Consequences for the country and economic policy recommendations

Given the complexity of the challenges, the country needs to act strategically, i.e. in a comprehensive and coordinated manner and with a long-term perspective. This will be possible only on the basis of an open, integrated approach and in collaboration with the business sector and society in general, which also enables an appropriately responsive and adaptive development policy. 

As the enabling conditions are complex and complementary, a long-term, stable, predictable and credible development policy is crucial, and that requires:

1.    A more ambitious approach to boosting digital transformation deployment. Digital transformation programmes in Slovenia’s competitors are generally more ambitious and in the most advanced countries even significantly more ambitious than in Slovenia. That said, in the recent period Slovenia has developed a range of financial and advisory measures, which should be upgraded and particularly strengthened. The government should also increase other, complementary, investment, particularly in R&D and innovation, but also in other types of both intangible and tangible capital. On the public sector side, it is necessary to further accelerate the provision of efficient digital public services for citizens and particularly for businesses, while strengthening direct support on the demand side via public procurement and other instruments.

2.    Strengthening the business environment and the digital innovation ecosystem. The quality of the business environment, which is conducive to growth and allows rapid entry of highly productive companies and rapid exit of less productive ones, remains a precondition for competitiveness in the digital age. For the transition to digitally driven growth, the government should also ensure a more coordinated, systemically supported, long-term and targeted digital innovation ecosystem, which actively fosters innovative, cross-sectoral and multidisciplinary approaches, in addition to counselling and promotion of collaboration among stakeholders.

3.    Development of skills adapted to medium-term needs. In the area of lifelong learning, Slovenia should increase adult participation in lifelong learning, expand retraining programmes and promote participation in these programmes, strengthen lifelong career planning schemes and encourage corporate investment in education and training. In the area of higher education, the priority is to increase the number of available enrolment places at study programmes important for digital transformation and strengthen the links between higher education institutions and the economy. At the same time, it is necessary to make education more responsive to the needs of the economy and society, which requires high-quality and up-to-date information on current and future skills needs.

4.    Further investment in digital infrastructure, security and open data. In terms of connectivity, Slovenia is losing its advantage over the EU average, the main problem being the lag in introducing next generation technologies, which are crucial for digital transformation. Given that large companies have already been forced to enter the 5G era and that for medium-size and small companies this is expected for 2023 or 2024, Slovenia cannot afford to lag behind in this area. It will also have to pay more attention to cyber security, increase the responsiveness and flexibility of the regulatory framework and place even more emphasis on data availability and (industrial) standardisation.

5.   Mobilisation of society for change and an inclusive transition. For a successful transition, broader social and cultural conditions for change need to be ensured on the basis of an ambitious development policy and a clearly defined strategy, which also mobilise the business sector. At the same time, technological development and changes on the labour market call for a reflection on the new social contract, including provision of stronger safety nets, which is necessary from an economic point of view, since relative security of the population enables a faster and more ambitious digital transformation.

Digitalisation is changing the very nature of the innovation process, as it requires even greater (flexible) specialisation of companies, a shift from a sectoral to an ecosystem approach and a greater emphasis not only on rapid response, but also on own breakthrough innovation. Recommendations should therefore also be addressed to the business sector. A successful digital transformation of companies therefore requires:

1.    An immediate and strategic approach to digital transformation based on clearly defined, possibly niche, key competences and functions within the changing global value chains;

2.    Intensive investment in the (lifelong) learning of employees and the establishing of a “digital mindset and culture”;

3.    Acceleration of investment in digital projects and their upscaling, including by accelerating investment, particularly in R&D and innovation;

4.    A transformation of companies’ organisation and business models with a greater emphasis on an agile, multidisciplinary, multifunctional and open, collaborative approach, including through stronger cooperation with the supporting environment, the research community and also with start-ups.

As the National Productivity Board, IMAD wants to stimulate a broader discussion on possible ways to enhance productivity. To this end, we presented this year's Productivity Report to the public at a high-profile online conference Economic and Social Transformation of Slovenia during the Fourth Industrial Revolution, which we organised together with the European Commission Representation in Slovenia on Wednesday, 11 November 2020. In more than three hours of a content-rich discussion, the participants supported the findings, guidelines and recommendations from the Productivity Report, which was presented by the editor, Dr. Peter Wostner, and served as a starting point for the discussion, and discussed various aspects of productivity promotion. In the discussion distinguished speakers from the European Commission, the Government Office for Development and European Cohesion Policy, the Ministry of Economic Development and Technology, the Faculty of Economics in Ljubljana, the Faculty of Mechanical Engineering in Maribor, the Chamber of Commerce and Industry of Slovenia, the Slovenian Business Club, the Confederation of Trade Unions Pergam, the Digital Coalition and the Slovenian Enterprise Fund took part.