WHEN DOES DIGITALISATION DELIVER PRODUCTIVITY GAINS? DIGITAL CONNECTIVITY, REGULATORY QUALITY AND LABOUR PRODUCTIVITY IN THE WESTERN BALKANS
Keywords:
Digital connectivity, Digitalisation, Labour productivity, Regulatory quality, Institutional complementarity, Western Balkans, Panel dataAbstract
Although digital connectivity has seen substantial progress during the past few years in the Western Balkans, its link with greater productivity is likely dependent on the institutional environment in which digital technologies are adopted and utilized. Our research examines the relationship between digital connectivity and labor productivity in five economies in the Western Balkan region during the 2007-2021 period — Albania, Bosnia and Herzegovina, Montenegro, North Macedonia, and Serbia. Kosovo has been excluded from this study due to lack of sufficiently comparable data. Digitalisation is used in this analysis as a broad theoretical concept, whereas its observable aspect is operationalised through a Digital Connectivity Index (DCI) developed on the basis of internet use, mobile-cellular subscriptions and fixed broadband subscriptions. At the same time, the DCI represents a narrow approach, as all indicators measure accessibility rather than digitalisation process. As panel diagnostics did not yield results indicating long-term cointegration, the final specification is a short-term first-difference model with year fixed effects and Driscoll-Kraay standard errors. Lagged DCI doesn't show a significant unconditional relationship with productivity growth, thus H1 is not confirmed in the baseline scenario. However its interaction with lagged Regulatory Quality was found to be positive and significant (β=0.0342, p=.004), staying robust to equal weighted DCI, quadratic specification, and leave-one-country-out sensitivity tests. The interaction with Government Effectiveness and Rule of Law didn't yield similar results. The estimated relationship grows from 0.030 at low Regulatory Quality to 0.097 at high Regulatory Quality. These findings imply that productivity importance of DCI for Western Balkans economy depends solely on Regulatory Quality, although the small five-country sample implies the need for cautious interpretation
References
Abu Alfoul, M. N., Tajaddini, R., Gholipour, H. F., Bashar, O., & Jamaani, F. (2024). The impacts of ICT on economic growth in the MENA countries: Does institutional matter? Politická ekonomie, 72(3), 446–477. https://doi.org/10.18267/j.polek.1409
Al Shammre, A. S. (2025). Digital adoption and productivity in rentier economies: Evidence from the GCC. Systems, 13(11), 1038. https://doi.org/10.3390/systems13111038
Avgerou, C. (2010). Discourses on ICT and development. Information Technologies & International Development, 6(1), 1–18. http://eprints.lse.ac.uk/35564/
Barbullushi, E., Kalaj, E., & Kastrati, A. (2023). Investigating the effectiveness of digitalisation on SMEs performance: The case of Western Balkans. Proceedings of the 6th International Conference on Economics and Social Sciences, 544–553. https://doi.org/10.24789788367405546-050
Bloom, N., Sadun, R., & Van Reenen, J. (2012). Americans do IT better: US multinationals and the productivity miracle. American Economic Review, 102(1), 167–201. https://doi.org/10.1257/aer.102.1.167
Bresnahan, T. F., & Trajtenberg, M. (1995). General purpose technologies 'Engines of growth'? Journal of Econometrics, 65(1), 83–108. https://doi.org/10.1016/0304-4076(94)01598-T
Brynjolfsson, E., & Hitt, L. M. (2000). Beyond computation: Information technology, organizational transformation and business performance. Journal of Economic Perspectives, 14(4), 23–48. https://doi.org/10.1257/jep.14.4.23
Draca, M., Sadun, R., & Van Reenen, J. (2006). Productivity and ICT: A review of the evidence (CEP Discussion Paper No. 749). Centre for Economic Performance, London School of Economics. https://eprints.lse.ac.uk/4561
Evans, O. (2022). ICT and the provision of social services in low-income countries: The moderating role of institutional quality. Journal of Economic and Administrative Sciences. Advance online publication. https://doi.org/10.1108/JEC-07-2021-0094
Kao, C. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of Econometrics, 90(1), 1–44. https://doi.org/10.1016/S0304-4076(98)00023-2
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2010). The Worldwide Governance Indicators: Methodology and analytical issues (World Bank Policy Research Working Paper No. 5430). World Bank. https://ssrn.com/abstract=1682130
Kelečević, T., & Lesjak, D. (2025). Digital transformation of companies in the Western Balkans. International Journal of Management, Knowledge and Learning, 14, 369–386. https://doi.org/10.53615/2232-5697.14.387-398
Madzova, V., & Velichkovska, K. (2019). Do the Western Balkan countries benefit from the increased competitiveness in their economies? Trends in Economics, Finance and Management Journal, 1(1), 1–9.
Meso, P., Datta, P., & Mbarika, V. (2006). Moderating information and communication technologies' influences on socioeconomic development with good governance. Journal of the American Society for Information Science and Technology, 57(2), 186–197. https://doi.org/10.1002/asi.20263
Milgrom, P., & Roberts, J. (1990). The economics of modern manufacturing: Technology, strategy, and organization. American Economic Review, 80(3), 511–528. https://www.jstor.org/stable/2006681
OECD. (2024). Western Balkans Competitiveness Outlook 2024: Regional profile. OECD Publishing. https://doi.org/10.1787/170b0e53-en
Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61(S1), 653–670. https://web.williams.edu/Economics/wp/pedronicriticalvalues.pdf
Pesaran, M. H. (2004). General diagnostic tests for cross-sectional dependence in panels (Cambridge Working Papers in Economics No. 0435). University of Cambridge. Published version: Empirical Economics, 60(1), 13–50 (2021). https://doi.org/10.1007/s00181-020-01875-7
Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22(2), 265–312. https://doi.org/10.1002/jae.951
Pesaran, M. H., Shin, Y., & Smith, R. J. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94(446), 621–634. https://doi.org/10.2307/2670182
Solow, R. M. (1987, July 12). We'd better watch out. New York Times Book Review, p. 36. (No DOI; original print essay.)
Velichkovska, K. (2025). Labor Market Dynamics and Productivity Trends in North Macedonia. In From Transition to Transformation: An Economic Analysis of North Macedonia, Chapter 9.
Velichkovska, K., Mitić, P., & Kojić, M. (2025). Empowering Sustainable Growth Through Emerging Technologies in Serbia and North Macedonia. Economic Analysis, 58(2), 103–122. https://doi.org/10.28934/ea.10490.
Vu, K., Hanafizadeh, P., & Bohlin, E. (2020). ICT as a driver of economic growth: A survey of the literature and directions for future research. Telecommunications Policy, 44(2), 101922. https://doi.org/10.1016/j.telpol.2020.101922
Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, 69(6), 709–748. https://doi.org/10.1111/j.1468-0084.2007.00477.x
World Bank. (2016). World Development Report 2016: Digital dividends. World Bank Publications. https://doi.org/10.1596/978-1-4648-0671-1
Yong, S.-W., Law, S.-H., Ibrahim, S., & Mohamad, W. N. W. (2024). ICTs and labour productivity nexus in developing countries: Evidence from panel estimation approach. International Journal of Business and Society, 25(2). https://doi.org/10.33736/ijbs.6868.2024
