Companies regard investment in physical capital and cloud computing as substitutes and invest more in physical capital when they have access to financial support from the state. Programmes for promoting investment in new technologies should therefore be extended to digital services so as to include companies that increasingly deal with intangible goods. This is the result of a recent study by ZEW Mannheim in cooperation with the OECD.

Companies regard investments in physical capital and cloud computing as substitutes.
Cloud computing is considered to have great potential in terms of business start-ups and job creation.

“There’s a danger of the state unintentionally slowing down the proliferation of cloud computing – which would have further negative consequences for the proliferation of other data-driven technologies that depend on cloud computing, such as big-data applications,” warns Steffen Viete, co-author of the study, researcher for the ZEW “Digital Economy” Department, and scientific staff member of the German Council of Economic Experts.

Government programmes continue to encourage investment in physical capital

Cloud computing has great economic potential in terms of both new business and job creation. Governments are therefore setting up support programmes throughout Europe in order to advance the digital transformation. Existing funding programmes, however, often still support investment in physical capital thereby discouraging the use of digital services. The study thus asks whether these instruments promote the digital transformation of companies through the use of cloud services, or rather counteract the proliferation of cloud computing.

Based on company data from Germany and Great Britain, the ZEW study examines the effects of two different investment subsidies on the propensity of companies to use cloud computing: the tax incentive “Annual Investment Allowance” in Great Britain, and investment grants from the “Joint Task for the Improvement of Regional Economic Structures” (GWR) in Germany. “In both cases, state funding contributed to the fact that companies were less inclined to use cloud computing,” says Raphaela Andres, researcher for ZEW’s “Digital Economy” Department. As the study also shows, the British programme resulted in subsidised companies investing a total of 64 per cent more. Investments for the acquisition of information and communication technologies (ICT) increased by 34 per cent, and those for the acquisition of hardware increased by 31 per cent. On the other hand, the propensity of companies to purchase cloud services fell by 12 per cent, with a similar picture emerging in Germany.

Digital transformation is increasingly taking place through the use of digital services

Over the past ten years, companies’ access to digital technologies has fundamentally changed. The proportion of companies using paid cloud computing services in Germany, for example, has doubled from 11 to 22 per cent between 2014 and 2018. To benefit from digitalisation, companies initially had to invest primarily in their own software and hardware, but now they are increasingly using cloud computing services for storing and processing data. The providers of cloud services make an IT infrastructure – storage space, computing power, or software applications – accessible to companies via the Internet, the most important prerequisite being the companies’ fast broadband internet connections so that it can make real use of cloud-computing services.

This press release reflects the personal opinion of the authors and not necessarily that of the German Council of Economic Experts.

Date

03.09.2020

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