The Digitalization–Performance Nexus in the European Union: A Country-Level Analysis of Heterogeneity and Complementarities

Abstract

This study investigates the multifaceted impact of digitalization on economic performance across the 27 European Union member states from 2017 to 2023. Using a comprehensive panel dataset, the analysis moves beyond aggregate metrics to dissect how specific digital levers contribute to trade performance and national income. A two-way fixed effects (FEs) regression model is employed to rigorously control for unobserved country-specific heterogeneity and common time-based shocks, with diagnostic tests confirming the suitability of this specification. The results reveal a complex and often counter-intuitive set of relationships. One key finding is a statistically significant negative association between the EU’s headline Digital Economy and Society Index (DESI) and goods exports, a paradox that emerges in the model once specific business-level digital tools are accounted for. This suggests that composite indices can be misleading for granular policy analysis. The marginal benefit of cloud adoption diminishes significantly in countries with higher levels of public investment in Research and Development (R&D), indicating a substitution rather than a complementary relationship between these two innovation channels.