MILAN — Small Italian car filter supplier Ecofiltri took out a state-backed loan last year, just like thousands of other businesses fighting to keep afloat during the pandemic.

But instead of burning through the cash to pay overdue rent and bills, Ecofiltri is investing the money on a technological revamp of its business. Already facing a longer-term switch to electric transport, the company was spurred to act after the virus crisis cut the number of drivers on the road.

“We’ve expanded our facilities, bought high-tech equipment, and even created an R&D department where we are working on three projects we hope we can patent to provide more intelligent products and services,” Ecofiltri co-founder Simone Scafetta told Reuters over a video call.

Italy ranked fourth to last in the EU for digital competitiveness in 2019, according to the Digital Economy and Society Index (DESI). By forcing a huge technological acceleration on the country, the pandemic is offering Italy a one-off chance to boost its feeble productivity and economic growth.

Faster economic expansion is essential for Rome to sustain the world’s third-largest public debt which the pandemic has inflated to 1.6 times gross domestic product (GDP).

Research by Milan’s Politecnico University shows Italy could add 1.9 percentage points a year on average to its GDP growth if its small- and medium-sized enterprises (SMEs) bridged a 40% gap versus Spanish peers measured by indicators ranging from e-commerce capabilities or electronic invoicing to use of big data.

“But the trick only works if businesses switch from a (crisis-driven) reactive approach to technology to a strategic one, and the environment where they operate evolves with them,” said Giorgia Sali who heads Politecnico’s research hub on SMEs and digital innovation.

Italy estimates its businesses in recent years fell behind the rest of Europe in terms of digital investment by an amount roughly equal to 2 percentage points of GDP.

The pandemic has brought a welcome shift, with 86% of Italian respondents in a survey of mid- to large-sized firms commissioned by Dell Technologies saying they sped up digital transformation plans in 2020, above a 75% European average.

“The pandemic has forced Italian companies to confront the country’s huge digital gap,” said Francesca Moriani, CEO of IT services provider VAR Group, adding Europe as a whole lags the United States and China.

The euro zone’s digital economy is only two-thirds the size of that in the United States.

Encouragingly, 92% of SMEs polled by VAR Group expect to invest in digital capacity in the next two years, despite the blow to sales from the pandemic.

Italy’s digital deficit has a number of roots.

In a country where broadband access is below the EU average, large companies which can sustain programs of technological investment make up only a tiny proportion of businesses.

Many firms are family-owned and run, meaning they tend to lack managers with the right skills to lead a digital transformation.

A European Central Bank study also highlighted funding constraints when businesses rely mostly on bank financing like in Italy, saying traditional lenders often struggle to evaluate the risk involved in projects based on complex technologies.

Add to that an aging population, and a very low share of ICT graduates—around 5,000 a year compared with around 18,000 in smaller Spain, according to Eurostat figures—and Italy has fallen behind in the digital race.

To support the adoption of cutting-edge technologies by its companies and ultra-high-speed connectivity, Rome has earmarked 46 billion euros in yet-to-be disbursed EU recovery funds for digital investments.

It also offers tax breaks to firms seeking to boost digital spending and appointed former Vodafone CEO Vittorio Colao as its technology czar to oversee efforts in coming years.

Like in Greece, the modernization push also targets public services which Ecofiltri’s Mr. Scafetta said set a bad example.

“We’ve given our staff palmtops and screens to share information non-stop and interact with customers … people don’t add value by walking next door to carry paper documents, like you see state employees do,” he said.

Located in the central Abruzzo region, Ecofiltri has found success by developing a process which gives a second life to diesel particulate filters.

To fund its projects, which include sensors to more easily detect issues with its filters and a digital warehouse management system to feed information to its website and liaise with e-sellers such as Amazon, Ecofiltri last September borrowed 100,000 euros from Credimi, a fintech lending firm.

Credimi says digital innovation is an important driver of credit demand it faces from SMEs.

“With a few exceptions, the pandemic has caught small- and mid-sized Italian businesses unprepared, sending them scrambling to catch up with digital progress,” Fabio Troiani, CEO Italy and Global digital services at Milan-based BIP Consulting, said.

“For some it’s become a matter of life and death.”

Many smaller Italian businesses are rising to the challenge.

The share of SMEs using e-commerce in 2020 rose 50% to a third of the total, as first-time e-shoppers surged by 2 million during a nationwide lockdown last spring, according to data by Politecnico and e-commerce lobby Netcomm.

Politecnico data also point to a 42% jump in cloud services for SMEs as remote workers increased by 11.5 times to 6.6 million.

So far, Italian government programs aimed at fostering digital investments have been mostly taken up by larger companies.

The challenge is to bring onboard companies like Ecofiltri, which is one of more than 4 million Italian businesses with fewer than 10 staff, or 95% of the total.

Small firms find it hard to attract people with the necessary skills in a country where ICT graduates make up only 1% of the total, the lowest in the EU, contributing to Italy scoring last in the DESI human capital index.

“It wasn’t easy but we’ve brought in an engineer and the next person we hire must also be an engineer or they wouldn’t fit our development plans,” Mr. Scafetta said.

Diego Ciulli, senior public policy manager at Google, warned that a failure to fill Italy’s digital gap when consumers globally have turned to online channels would be more than a missed opportunity.

“The real risk is falling further behind,” he said.

“If Italian wine producers wait for trade exhibitions to resume to find new foreign customers, while French ones get really good at selling their wine online you don’t just lose a chance to grow, you lose market share.” — Valentina Za, Elisa Anzolin, and Elvira Pollina/Reuters