A new IZA discussion paper by Melanie Arntz, Michael Johannes Böhm, Georg Graetz, Terry Gregory, Florian Lehmer, and Cäcilia Lipowski investigates how German firms adjusted their technology investments before and during the COVID-19 pandemic. The researchers aimed to answer two key questions: Did the crisis accelerate the adoption of advanced, “frontier” technologies (the latest, most integrated tech tools)? Or did it primarily shift investment focus towards solutions like remote work technologies, without boosting overall advanced technology use?
The study defines frontier technologies as state-of-the-art office tools (e.g., cloud computing, automated marketing, AI in business software) and advanced production equipment (e.g., smart robotics, integrated manufacturing systems).
Methodology: A deep dive into firm-level data
The study draws on a large, detailed survey of around 3,000 German firms, enriched by linking survey responses to administrative worker data and other official records. This allowed the researchers to capture:
- When new technology investments were made (pre- or during-pandemic).
- Whether these investments were explicitly motivated by the pandemic.
- How firms’ technology use (office and production) changed over time.
By comparing current practices to data from a 2016 survey, the researchers tracked technology adoption changes over several years.
Key findings: Shifting sands of tech investment
Contrary to expectations, overall investments in frontier technologies actually dropped during the pandemic. For instance, before COVID-19, about 6% of firms annually invested in cutting-edge office technology; this rate nearly halved to roughly 3.6% during the pandemic. A similar, even steeper, decline occurred for production-related technology.
Only a small percentage of firms made their main technology investments specifically in response to the pandemic. Even when COVID-19 was cited as a reason, these pandemic-driven investments were smaller in scope. While additional secondary investments increased the percentage of pandemic-related investments somewhat, they still couldn’t match the scale of pre-crisis investments.
A clear change was firms shifting focus toward technologies supporting remote operations. Investments in communication, collaboration, and remote-work tools significantly increased, becoming crucial for maintaining connectivity and business continuity during lockdowns.
The study also examined the link between technology investments and workforce changes. Firms investing in remote work solutions saw a marked increase in employees working from home. They also relied less on government-supported short-time work schemes. This suggests that while overall tech spending declined, the investments made helped firms adjust and stabilize their workforce during the crisis.
Implications: Long-term growth and policy considerations
The pandemic appears to have slowed the overall pace of frontier technology adoption. Using models to compare outcomes with a no-crisis scenario, the researchers estimate firms lost approximately 1.4 years of technology investment activity relative to normal times. This slowdown indicates that despite the clear need for digital adjustments, large-scale technology investments decreased.
Investments in remote work tools provided an immediate remedy, helping firms adapt to COVID-19 restrictions. However, these changes were typically small-scale and more reversible, not signaling a broader, lasting shift towards a more technologically advanced operating model. The long-term plans of these firms didn’t show a strong, sustained commitment to additional frontier technology investments once the immediate crisis passed.
The findings raise important questions about how economic crises affect long-run growth. In Germany, the slowdown in adopting advanced technologies might contribute to lower productivity growth. The researchers suggest this pattern may call for counter-cyclical innovation policies—policies that boost technology investments during economic downturns to support long-term growth.
Conclusion: A complex picture of technological change
The study concludes that rather than dramatically accelerating advanced technology uptake, the COVID-19 crisis led to an overall reduction in such investments among German firms. While firms did reorient spending toward remote work tools—helping them manage operational challenges—these adjustments weren’t enough to offset the significant loss in broader technology adoption.
Consequently, while short-term adaptations stabilized employment, the long-term trajectory of technological progress may have slowed, with potential implications for future economic growth. This research underscores the complexity of technological change during crises and highlights the need for supportive policies to prevent temporary setbacks from having lasting effects on a nation’s economic dynamism.