Productivity effects of process vs. product digitalization

Digitalization is considered an important driver of upcoming societal and economic transformations. However, holding both promises and challenges, its effects on the performance of individual firms are still underexplored. In this paper, we disentangle the phenomenon into two distinct factors: the digitalization of processes and the digitalization of product offering. We analyse the effects of the two digitalization factors on firm-level productivity. This analysis is based on a large European-wide unique dataset combining structured information from ORBIS and PATSTAT with web-scraped information on the firms involved in high-tech manufacturing. Building on a triangular structural equation model -- including a patenting equation and a productivity equation -- we find that digitalization boosts productivity both directly and indirectly. The direct effects occur through immediate effects on productivity, while the indirect effects occur through increased patenting. However, the positive effects occur largely for product digitalization, while process digitalization on average does not significantly contribute to productivity. Interestingly quantile regression estimates show that the effects of product and process digitalization show significantly contrasting patterns across the productivity distribution. While the effects of product digitalization are largest for highly productive firms, there are mildly positive effects of product digitalization for lowproductivity firms