Digitalization and Productivity: Central and Eastern Europe Facing Under-Exploited Potential

# Digitalization and Productivity: Central and Eastern Europe Facing Under-Exploited Potential

After two decades of notable economic convergence with the European Union, several Central and Eastern European countries – Bulgaria, Croatia, Poland, and Romania, referred to as the 4CEE – find themselves at a transition point. Their growth model, traditionally based on investment and gradual integration into global value chains, is showing signs of losing momentum. Factors such as the erosion of labor cost competitiveness, a concentration in low value-added segments, skills shortages, and demographic pressures call for a reorientation towards sources of growth focused on innovation and productivity gains.

Digital transformation represents a major lever for this evolution. A World Bank Group report, published in March 2026, estimates that Bulgaria, Croatia, Poland, and Romania could increase their labor productivity by 10 to 15% through broader adoption of digital technologies, particularly software and artificial intelligence-based tools. Yet, this opportunity remains largely under-exploited, hindered by insufficient investment, lagging adoption by small and medium-sized enterprises, and gaps in skills and regulatory frameworks.

The region is thus confronted with the necessity of moving beyond its current model to avoid being "stuck" between low-wage economies and innovation leaders. The adoption of digital technologies, coupled with a coherent innovation strategy, represents a path to stimulate growth, create skilled jobs, and improve living standards, as highlighted by the World Bank report « Innovation Rising: Lifting Central and Eastern Europe’s Jobs and Growth Potential ».

Labor Productivity: A Persistent Gap with Advanced Economies

Labor productivity in the 4CEE, although progressing, remains low in absolute terms. Between 1995 and 2019, productivity per hour increased by 50% in the United States, compared to only 28% in the Eurozone over the same period. This gap indicates a different growth dynamic and a reduced capacity to generate added value per unit of labor. Real GDP growth in the 4CEE rebounded to 2.4% in the second quarter of 2025, which is a positive sign, but does not resolve the structural issue of productivity.

This disparity is all the more concerning as productivity is a key driver of economic growth and improved living standards. Anna Akhalkatsi, Division Director for the European Union at the World Bank, stated that sustaining the region's economic progress "will depend on boosting productivity—through wider use of digital technologies, stronger investment in skills, and clear, predictable rules that help businesses innovate, grow, and compete" according to a World Bank press release. The ability of businesses to integrate digital technologies, particularly software and artificial intelligence-based tools, is identified as a key factor to reduce this gap and achieve the estimated productivity gains.

R&D and Intangible Asset Expenditures Below the European Average

Investment in research and development (R&D) and intangible assets is an indicator of an economy's capacity to innovate and modernize its production processes. In the 4CEE, R&D expenditures are below the EU average, standing at less than 1.5% of GDP, compared to an average of 2.2% in the Union. This low level of investment limits these countries' ability to develop their own technologies or adapt existing innovations to their specific contexts.

Similarly, investment in intangible assets, such as software, databases, in-house R&D, and brands, is also lower, particularly in Poland, where it represents 26% of total investment, compared to an EU average of 37%. Yet, these assets are essential drivers of digital transformation and productivity improvement. Insufficient investment in these areas makes it difficult for businesses in the region to fully integrate modern digital tools and compete in high value-added markets.

Lagging Digital Adoption by Small Businesses Hinders Growth

Small and medium-sized enterprises (SMEs) form the economic fabric of the 4CEE, but their adoption of digital technologies shows a notable lag. This phenomenon is particularly pronounced in Bulgaria and Romania. Many SMEs struggle to invest in digital infrastructure, train their employees in new skills, or integrate advanced software solutions. This gap has direct implications for the region's overall productivity.

While large enterprises can often afford larger investments in digitalization, SMEs face constraints in resources, skills, and access to finance. The World Bank report emphasizes that the gap in digital adoption between large enterprises and SMEs is a major impediment to increasing productivity. Without further digitalization of this economic segment, the 4CEE's growth potential, particularly through the integration of software and AI-based tools, cannot be fully realized.

Brain Drain and Skills Mismatch Limit Human Potential

Despite often high levels of education, including in science, technology, engineering, and mathematics (STEM) fields, the 4CEE face difficulties in translating this human capital into productivity gains and innovation. One of the major problems is brain drain: nearly one in five skilled workers leaves their country in Romania, Bulgaria, and Croatia. This exodus of talent weakens the local skills base and reduces the capacity of businesses to innovate and adopt advanced technologies.

Concurrently, a mismatch exists between the skills taught by educational systems and the actual needs of the labor market. Training programs do not always adapt quickly enough to the rapid evolution of digital technologies and the demands of the innovation economy. This mismatch, combined with the migration of skilled workers, creates a skills shortage that hinders digital transformation and limits the effectiveness of technological investments. Productivity does not result solely from tools, but also from the ability of individuals to use and develop them, as the World Bank report reminds us: "Productivity and innovation do not simply result from increased research and development, but from the effective functioning of a comprehensive system of interactions."

Dependence on EU Funds for R&D and Limitations of Local Venture Capital

The 4CEE are heavily dependent on European Union funds to finance their R&D and innovation projects. While these funds are essential, this dependence raises questions about the sustainability and autonomy of national innovation strategies. Furthermore, the absorption capacity for these funds is not always optimal; Bulgaria, for instance, absorbed only 79% of the cohesion funds allocated for the 2014-2020 period. This indicates deficiencies in planning, project management, or local administrative capacities to fully mobilize these resources.

Moreover, the venture capital market remains underdeveloped in the region. Innovative companies, particularly tech startups, have limited access to the private funding needed to grow and commercialize their innovations. This weakness in venture capital forces many companies to seek funding abroad or to curb their growth, which limits the creation of local added value and the development of a dynamic innovation environment. Diversification of funding sources and strengthening local venture capital capacities appear as avenues to support more endogenous innovation.

The Risk of a "Middle-Technology Trap" and the Need for a Systemic Approach

The 4CEE are confronted with the prospect of a "middle-technology trap." The World Bank report describes this situation as "an economy 'gets stuck' producing and assembling moderate technology goods." This production model, which enabled initial convergence, shows its limits in the face of eroding labor cost competitiveness and competition from low-wage economies. The region risks no longer being able to compete on price while being excluded from high value-added markets, dominated by actors with strong innovation capacity.

To avoid this trap, a systemic approach to innovation is necessary. This implies more effective coordination among various stakeholders – governments, universities, businesses, research centers – and a long-term strategic vision. Institutional fragmentation, characterized by a lack of coordination between ministries and agencies, as well as sometimes inadequate regulatory frameworks, hinders the development of a coherent innovation environment. Escaping this trap requires a profound transformation of economic and institutional structures, beyond simple increases in R&D spending.

AI and Climate Technologies: Opportunities Requiring Strategic Frameworks

The rapid emergence of artificial intelligence (AI) and climate technologies offers new prospects for the 4CEE. In the first quarter of 2024, these areas accounted for 45% and 26% of venture capital investments in the region, respectively, signaling significant interest and growth potential. These technologies can enable the 4CEE to leapfrog development stages and position themselves in future markets, provided the right conditions are in place.

To capitalize on these opportunities, it is necessary to implement agile regulatory frameworks and innovation-specific support. This includes policies promoting training in new skills, access to financing for startups, and the