Are the V4 Enterprises Ready to Join the Digital Revolution?

Whether the Visegrad countries will be able to close the gap towards the more advanced members of the EU in the foreseeable future mainly depends on their success of going digital. Our increasing ability to collect and process data is revolutionizing the economy by bringing new ways of organizing production and creating value. The rising connectivity of people, things, objects, and machines is the foundation of a new ecosystem—the Internet of Things, which may result in the fourth industrial revolution.

During such periods of radical change, old champions are replaced by new ones, as suggested by the Schumpeterian theory of “creative destruction.” Industrial revolutions create opportunities for countries to become more competitive: Germany surpassed Great Britain in key industries during the second industrial revolution at the end of the 19th century.

Countries with strong foundations for a successful digital transformation are most likely to benefit from this paradigm shift. This idea is understood by the European Commission, and with the Digital Single Market (DSM) strategy it supports digitalization EU-wide. The aim of the DSM is to set standards for the new technologies, harmonize the national regulations for digital services, and coordinate the efforts of member states, offering a holistic approach for the digital economy.

However, the “new member states” (EU members with accession following 2003), being further from the technological frontier, must make additional effort to prepare for the digital revolution in order to remain in the game. A passive stance may lead to a loss of economic significance, because the former engines of convergence (the relatively cheap labor force and the European integration) are not enough to reach further prosperity.

Let us analyze some simple statistics showing how digital enterprises in the Visegrad countries are doing. We are going to present data on small and medium enterprises (SMEs) from the Information Society database by the Eurostat. On the figures, V4 stands for the average result of the Visegrad countries, NMS9 is the average of the other 9 “new member states,” while EU15 presents the average of the “old” EU members.

Firstly, the share of SMEs with fast (above 30Mbps) Internet access is examined. Fast and stable Internet connection is the cornerstone for enterprises to join the digital economy, e.g. to sell online or boost productivity with digital services, such as cloud computing.

The data is showing a significant lag of the V4 behind the other regional countries. The highest ratio of SMEs with fast access is in Hungary (20%), but this is still considerably below the regional (25%), or the EU15 level (29%).

The basic requirement for SMEs to remain competitive is a fast adoption of future communication standards. The Internet of Things is going to be based on the 5G network: this next-generation telecommunications system is designed to serve connected objects, machine-to-machine communication, and autonomic vehicles, therefore it is expected to provide a backbone for the industrial production. Key economic sectors of our region will be transformed, including manufacturing and logistics: Visegrad cannot afford not to prepare for these changes.

Next, the participation of SMEs in e-commerce is presented. According to Eurostat, the average EU share of e-commerce in enterprise turnover has reached 17% EU-wide in 2015. The importance of online channels in economic activity is increasing, and due to the technological developments (e.g. smarter parcel delivery systems) it may become the main source of income for business. Furthermore, the Digital Single Market strategy will facilitate cross-border transactions by harmonizing related regulations, creating an important opportunity for V4 SMEs to boost exports.

Analyzing the share of SMEs selling online, V4 countries do not stand out relative to the rest of the EU, their share (13%) is slightly above the NMS9 (12%), but below the EU15 (16%) level. However, Czech SMEs seem to be much more engaged in e-commerce than the other V4 countries: every fifth Czech SME is serving customers online.

We follow our analysis with two major, already available technologies of smart business: ERP (Enterprise Resource Planning System) and cloud computing. ERP systems integrate different functions of the firm (inventory and order management, accounting, customer relationship management etc.), thus collecting data from vertical areas into a single database. ERP solutions allow a more responsive and flexible decision-making, and their possibilities showcase what is yet to come with increasing connectivity: smart, automatic supply chain management, improved products, and the exploitation of data collected during the entire product lifetime.

Are our companies already using ERP? Unfortunately, V4 SMEs are revealing a low adoption, being significantly behind the EU15 and the regional average. Especially Hungary (14%) and Poland (19%) should improve, as the Czech Republic and Slovakia are much closer to the EU15 average of 37%.

Cloud computing is another easily available technology for SMEs. Cloud computing allows access to software, computing power, or storage capacity over the Internet, providing infrastructure for organizations that would otherwise require substantial upfront investments. The role of cloud computing will only increase with smart industry, as on-demand and scalable analytics will be necessary to process data throughout the entire product design and life-cycle.

The presented statistics measure the share of SMEs using any paid cloud computing service. As the numbers reveal, the new EU member states, including the Visegrad countries are a long way from the EU15: the share of SMEs purchasing cloud computing services (12%) is around half of the EU15 level (23%). Hungary and Poland are a long way behind the Czech Republic, and Slovakia in particular: the share of Polish firms using cloud computing (5%) is almost four times lower than the share of Slovak firms (19%).

Finally, we examine the awareness of cybersecurity issues. Cybersecurity is among the major challenges facing the digitalization of the economy, because with the increasing role of IT systems in production are also rising the risks related to vulnerabilities.

The share of SMEs from the Visegrad countries with a formal security policy (22%) is lower than in the NMS9 (28%) or EU15 (34%). Again, Hungarian and Polish firms are way behind the EU average—a Czech or Slovak SME is around 3–4 times more likely to have a cybersecurity strategy than a Hungarian or Polish firm. In fact, Slovakia is even outperforming the EU15 average, with 39% of Slovak firms defining a cybersecurity policy.

Conclusions

V4 countries need to join the digital revolution in order to preserve competitiveness and converge to the more advanced economies. Firstly, the V4 must adopt the 5G standard, as SMEs are lagging behind the EU15 competition in accessing fast broadband Internet. Secondly, the available statistics present the V4 as a heterogeneous group concerning the readiness of SMEs for the fourth industrial revolution. A much lower share of firms in Hungary and Poland is using digital tools—like ERP or cloud computing—than in the Czech Republic and Slovakia. Hungarian and Polish enterprises seem to lag behind most of the other “new member states” as well, therefore there is a lot of space for improvement. V4 enterprises should also focus more on e-commerce, as the Digital Single Market is likely to increase the potential of exporting via the Internet. V4 business participation in e-commerce is below the EU average, except for the Czech Republic, which is among the European leaders in selling online. Finally, SMEs in Hungary and Poland also need to focus more on cybersecurity in order to make the digital transition easier.

To sum up, all V4 countries should make the digital transformation a key priority. Slovakian and Czech SMEs seem to be on the right track, while Hungary and Poland should increase the pace of adopting new technologies.