Promoting the adoption of digital technology: Strategic policy insights from a network effects model

Abstract

This paper examines a dynamic model of digital adoption by firms, incorporating network effects and highlighting the crucial role of government intervention to avoid a low stable equilibrium. The paper presents a strategic policy framework for promoting digital adoption effectively, offering three key insights for policy efforts targeting SMEs.

First, there is a risk of ending up at a stable low equilibrium rate of digital adoption despite an initial surge in interest. Sustaining momentum beyond initial promotion efforts is essential. Second, it is critical to make a significant push when the digital adoption rate is approaching critical mass. This tipping point enables continuous, self-sustaining expansion. Third, understanding technology adoption cycles and allocating resources effectively is crucial. Once the adoption rate passes the critical threshold, further adoption occurs without promotional interventions. Resources should then be reallocated to foster the adoption of new technologies or applications, ensuring optimal use of limited resources to drive ongoing innovation and progress.

The study also reveals that countries with a larger population of SMEs, due to either a large population or strong entrepreneurial environment, may find it relatively easier to promote digital adoption in this sector.