Is digitalization a source of innovation? Exploring the role of digital diffusion in SME innovation performance

Drawing on strategic management theory, this study examines the relationship between digitalization and innovation performance in small and medium-sized enterprises (SMEs). We hypothesize that SMEs with higher levels of digital diffusion have higher innovation performance, and that absorptive capacity moderates this relationship. To test this relationship, we use a sample of 1100 German SMEs from the Mannheim Innovation Panel of the Centre for European Economic Research. The results of the multinomial and multivariate probit estimations show that digital diffusion is a significant positive trigger of innovation in SMEs. We also find that absorptive capacity moderates the relationship between digital diffusion and innovation only in the case of product innovation and not for any other type of innovation. Finally, we discuss the implications of our study for research and practice. What role does the integration of digital technologies play in the innovation activities of small and medium-sized enterprises? Do firms that prioritize research and skilled human capital benefit more from digital technologies than those that do not? To gain useful insights, we address these questions using survey data from 1100 German small and medium-sized enterprises and various statistical methods. The results show that a purposeful assimilation of digital technologies in business processes benefits the innovation activities of these firms. We also find that firms with high-quality research and human capital make good use of digital technologies to invent new products. The main implication of our study is that small and medium-sized firms should use digital technologies strategically to achieve market success.