International Journal of Innovation and Economic Development

ISSN 1849-7020 (Print)
ISSN 1849-7551 (Online)

Exploring Digitalization Challenges in German SMEs: A Gioia Method Approach

DOI: XXX-XXXXXX-XXXXXXXXXXXXXXXXXXXXXX
URL:XXXX-XXXXXXX-XXXXXXXXXXX

¹Theodor J. Steinhagen, ²Andreas V. Ledwon

¹FOM University of Applied Sciences for Economics and Management, Essen, Germany

²SRH University of Applied Sciences, Heidelberg, Germany

Abstract:

This paper addresses the challenges faced by small and medium-sized enterprises (SMEs) in Germany in adopting digital technologies, focusing on the barriers that hinder their digital transformation. SMEs are crucial to the German economy, yet especially SMEs with a low employee count experience more difficulties in embracing digitalization than SMEs with a larger employee count. This study therefore investigates the factors contributing to this digital divide, with particular attention to company size and its impact on digital transformation efforts. Thus, our research utilizes data from national SME digitalization surveys and further international sources. The data is examined through a qualitative analysis using the Gioia Method. Using this methodology, key challenges such as lack of digital skills, insufficient infrastructure, regulatory constraints, and financial limitations are identified. The results reveal that smaller SMEs, especially those with fewer than 10 employees, experience greater barriers to digital transformation due to limited resources, higher fixed costs relative to turnover, and challenges in accessing finance. Furthermore, smaller firms are more likely to lack the necessary technical expertise to implement and manage digital technologies effectively. The major findings suggest that having a smaller workforce correlates positively with having fewer digital skills and expertise. Hence, smaller SMEs are disproportionately affected by challenges in infrastructure and government policies. Finally, micro and small enterprises face additional barriers due to higher fixed costs for digitalization investments, which lead to increased risk-taking.

Keywords: Digitalization in German SMEs, Digital Barriers for SMEs, Gioia Method in SME Digitalization, Digital Skills Gap in SMEs, Impact of Company Size on Digital Adoption

1. Introduction

99.2% of all private German companies are considered as small medium-sized enterprises (SMEs), employing 53.6% of all German employees and accounting for more than half of the economic output (Braun, 2024). The stated numbers show that SMEs are an important driver of the German economy. Hence, mid-sized firms are described as the “heart of Germany’s economy” (Wehnert, 2020). The European Commission defines SMEs by staff headcount and by either turnover or balance sheet total. A company is considered an SME if it has less than 250 employees and a yearly turnover of less than 50 million or a balance sheet total of less than 43 million euros (European Commission, 2020). To stay competitive and to find new markets, SMEs need to follow new technological trends. Advancements through digitalization have gone from a trend to a general-purpose technology in recent years (Zimmermann, 2023). It is an opportunity for companies to develop new income streams by increasing their market competitiveness and their productivity (Budiarto et al., 2024). The KfW (Kreditanstalt für Wiederaufbau), a German development bank (KFW Group, 2020), conducts a yearly survey of SMEs in Germany, measuring the status of digitalization. In its 2023 report, data is collected from 11,328 SMEs which are categorized into four groups based on company size: fewer than 5 employees, 5 to fewer than 10 employees, 10 to fewer than 50 employees, and 50 or more employees. The survey explored, among other topics, the extent to which SMEs completed at least one digitalization project in 2022 (Zimmermann, 2024). The difference is quite significant: Companies with more than 50 employees are more than twice as likely to complete a digitalization project (62%) compared to businesses with 5 or fewer employees (29%). With digitalization being a driving force to exploit new markets it is alarming that less than 30% of companies with 5 or fewer employees completed one digitalization project in 2022. These concerns increase when considering that close to 80% of German SMEs have fewer than 5 employees (Zimmermann, 2024). Although the report attributes this data to higher fixed costs and limited financing capabilities among small SMEs (Zimmermann, 2024), a more in-depth analysis is required to thoroughly examine the underlying causes.

2. Literature Review

A literature review examines studies that identify factors contributing to the variation in the completion of digitalization projects among SMEs. While the findings do not always directly attribute lower completion rates of digitalization projects to smaller SMEs, they highlight structural disadvantages in areas such as resource availability, technological readiness, and strategic capacity that may indirectly hinder their ability to implement such initiatives. For clarity and consistency, SMEs are classified by employee count based on Destatis (2025), as shown in Table 1. These definitions are used throughout this section to ensure the comparability of findings.

Table 1: Companies defined by number of employees (Destatis Federal Statistical Office, 2025)

Size Class	Employees
Micro SMEs	Up to 9
Small SMEs	Up to 49
Medium-sized SMEs	Up to 249
Large enterprises	More than 249

 

Numbers from the Eurostat Database 2024 show that 15% of small SMEs employ ICT (Information and Communications Technology) specialists compared to 47% of medium-sized SMEs (Eurostat, 2024a) (data collection: 2024). The number of SMEs offering ICT training for their employees also differs between their sizes. 22% of smaller SMEs offer ICT training compared to 45% of bigger SMEs (Eurostat, 2024b) (data collection: 2024). In the European Commission’s 2022/2023 annual EU-wide SME report, SMEs are asked about the availability of skilled staff or experienced managers. On a scale of 1-10 micro-SMEs, answer with an availability of 6.0/10. Small SMEs 7.2/10 and medium-sized SMEs 7.5/10 (Di Bella et al., 2023) (data collection: 09-10/2022). The KfW research report (No. 277) states that smaller SMEs find it more difficult to compensate or substitute for employees that are absent due to training or other activities unrelated to daily operations (Leitfels, 2020). Romero and Mammadov (2024) conclude from a survey done on the digitalization of SMEs in Spain that medium-sized SMEs prioritize more advanced digital technologies, while smaller businesses concentrate on developing basic digital capabilities. Additionally, smaller SMEs tend to rely more on the personal characteristics of the owner or manager than on knowledge resources for digitalization efforts. The authors indicate that a spontaneous and unplanned approach towards digitalization from owners or managers is not an effective strategy. Research demonstrates that developing a deliberate strategy for digitalization contributes to success (Romero & Mammadov, 2024) (data collection: Q2/2022). The KfW SME Digitalization Report from 2023 presents similar findings. Smaller SMEs do not allocate sufficient attention to developing a digitalization strategy (Zimmermann, 2024) (data collection: 02-06/2023). The report “SMEs going Digital” from the OECD (Organization for Economic Cooperation and Development) highlights that owners of smaller enterprises are often unaware of the potential benefits that new digital tools can bring to their operations. Furthermore, smaller SMEs view the initial costs of adopting advanced digital technologies as prohibitive (Kergroach, 2021). The KfW SME Digitalization Report from 2022 observes that, in comparison to smaller enterprises, larger enterprises typically exhibit a higher level of automation and engage in a broader variety of activities. Consequently, larger SMEs already have a more extensive IT infrastructure, providing a stronger foundation for implementing additional digitalization tools (Zimmermann, 2023) (data collection: 02-06/2023).

A similar evaluation from the European Commission is conducted with respect to access to finance. Micro-SMEs rate their access to finance 4.1/10. Small SMEs 4.2/10 and medium-sized SMEs 4.3/10 (Di Bella et al., 2023). In the KfW research report (No. 277) it is stated that smaller SMEs financial hurdles are slightly higher than average (Leitfels, 2020). While smaller firms require lower absolute investment, their expenditure relative to annual turnover is higher (Zimmermann, 2024). In contrast medium-sized SMEs benefit from allocating the fixed costs of digitalization across a higher sales volume, which allows them to better absorb financial risks. Moreover, external financial resources are more readily available. Smaller businesses therefore face higher fixed costs due to minimum project sizes, placing further strain on their resources and leading to delays in digitalization projects. It is also highlighted that smaller SMEs struggle more than larger enterprises in securing external financing for their digitalization efforts (Zimmermann, 2023). In a survey commissioned by the European Commission (Flash Eurobarometer), companies of various sizes were asked to identify their most serious challenges. Among 13,253 SMEs and 855 large European companies, 21% of micro-SMEs cited limited access to finance as their primary issue. This was reported by 19% of small SMEs, 13% of medium-sized SMEs, and 10% of larger enterprises (European Commission, 2023) (data collection: 09-10/2023). An assessment of the challenges SMEs face due to regulations such as European or national laws or industrial regulations reveals that micro-SMEs rate these issues at 5.1/10, small SMEs at 5.3/10, and medium-sized SMEs at 5.4/10 (Di Bella et al., 2023). In a survey taken by the European Commission, regulatory obstacles or administrative burdens were identified as the most serious problem by 34% of micro-SMEs, 30% of small SMEs, 29% of medium-sized SMEs, and 26% of larger enterprises (European Commission, 2023) (data collection: 09-10/2023). According to an OECD report, smaller SMEs face greater challenges than larger enterprises in adapting to changing requirements, managing security and privacy issues, and accessing reliable digital infrastructure (Kergroach, 2021). Data from the German federal statistics reveal that smaller businesses face greater challenges regarding broadband speed in Germany. A minimum speed of 100 Mbps is available to only 55% of micro-SMEs, 63% of small-sized SMEs, 78% of medium-sized SMEs, and 90% of large enterprises (Destatis Federal Statistical Office, 2024) (data collection: 2024).

3. Research Methodology

In this paper, it is chosen to employ an explanatory qualitative case study approach to gain a deeper understanding of the factors influencing the variation in completed digitalization projects among SMEs. Sources to answer the research are based on research papers, reports, and studies from known institutes such as the annual report on European SMEs by the European Commission or the German Federal Statistical Office. Although the research question focuses on data from German SMEs, this study incorporates findings from international SME research due to the generally limited availability of data on digitalization in Germany (Fritsch & Lichtblau, 2021). In a nutshell, the data analysis in this study follows the Gioia Method, a systematic approach to qualitative research that facilitates the development of grounded theory (Magnani & Gioia, 2023). Since its original publication, the foundational paper on the Gioia Method has been cited 8,932 times, demonstrating its academic credibility (ResearchGate, 2025). Recent publications that applied the Gioia Method are (Weniger & Jarchow, 2024), (Fehrer et al., 2024) and (Van Offenbeek et al., 2024). Furthermore, this method enhances the transparency and traceability of the analysis process. In this study, the Gioia Method deviates from its traditional approach of analyzing primary data, focusing instead on the application of publicly available secondary data. While this adaptation may constrain the development of entirely novel theories, it still offers valuable insights into the subject matter. The method consists of three key steps to ensure a structured and transparent analytical process (Gioia et al., 2013). In the first step, first-order concepts are identified by extracting relevant factors from literature that influence digitalization in SMEs. These concepts are derived directly from existing research, maintaining the original wording to preserve their intended meaning. In the second step, these first-order concepts are synthesized and categorized into second-order concepts. This process involves grouping similar ideas and rewording them in a self-developed manner to reflect emerging patterns within the data. In the third and final step, these second-order concepts are further refined and consolidated into overarching theoretical frameworks, resulting in self-developed theories that provide a deeper understanding of the phenomenon under investigation. To enhance the transparency and traceability of this analytical process, a visual representation is provided in the form of a tree diagram, illustrating the progression from first-order concepts to final theoretical constructs (Gioia et al., 2013). Strengths of the Gioia Method include depth of analysis and structured data visualization, which enhance understanding and facilitate theory building. However, the methodology is time-intensive and has a risk of subjectivity in interpretation (Schembri, 2024).

4. Results

To provide a clearer overview, a condensed version of the Gioia Method tree diagram is presented in Table 1. This diagram omits the first step of the Gioia Method. The complete tables can be found in Appendix A (Table A1, Table A2, Table A3, Table A4). Four categories are developed, representing the high-level factors that lead to the differences in completed digitalization projects among German SMEs, based on their employee size. The analysis reveals that smaller SMEs have limited access to digital skills and expertise, as evidenced by fewer management personnel and employees with an ICT background. Additionally, these SMEs tend to offer less ICT training. Another essential point is that smaller SMEs exhibit comparatively lower levels of technology adoption and awareness. The implementation and adoption of new digital technologies is slower in these firms. Studies show that these SMEs are often unaware of the potential of digitalization and are hesitant due to concerns about high investment costs. This lack of engagement in digitalization results in the absence of a clear digitalization strategy, which is essential for successful implementation. Furthermore, the limited workforce in these companies reduces the time available to integrate digital technologies alongside regular business operations, thereby prolonging the digitalization process. Additionally, smaller SMEs deal with financial constraints. Having fewer financial resources to invest in digitalization can appear in the form of insufficient financing options or limited access to external financing. When investing in digitalization, smaller companies must deal with higher fixed costs compared to larger SMEs. Higher fixed costs lead to increased total costs in the digitalization process. Elevated total costs, in turn, raise the investment risk associated with digitalization. Infrastructure and government challenges also have an influence on the digitalization of smaller SMEs. Smaller businesses face comparatively more difficulties accessing quality infrastructure. Also, studies show that smaller SMEs comparatively deal more with regulatory obstacles or administrative burdens when digitalizing. Digital security is one of the observed obstacles.

Table 2: Extract of Gioia Method (Source: Own representation)

Factors leading to difference in completed digitalization projects regarding employee numbers in SMEs
Developed category	Key features of category	Developed from references
Lack of digital skills and expertise - Smaller SMEs have less availability of digital skills	Small SMEs have less management personnel and employees with ICT background	(Di Bella et al., 2023), (Eurostat, 2024a), (Eurostat, 2024b)
	Small SMEs offer less ICT training for employees
Lack of technology adoption and awareness - Smaller SMEs are less aware and take longer to implement and adopt new digital technologies	Small SMEs have less personnel meaning less spare time to implement digital technologies alongside business activities	(Kergroach, 2021), (Leitfels, 2020), (Romero & Mammadov, 2024), (Zimmermann, 2023), (Zimmermann, 2024)
	Small SMEs are on a different digitalization level and first need to build a foundation to digitalize
	Small SMEs are less likely to have a digitalization strategy
	Small SMEs are unaware of the potential and have uncertainty of high investments
Financial constraints - Smaller SMEs have fewer financial resources	Small SMEs have insufficient financing options	(Di Bella et al., 2023), (European Commission, 2023), (Zimmermann, 2023), (Zimmermann, 2024)
	Small SMEs have limited access to external finance for digitalization projects
	Small SMEs have higher fixed costs, therefore higher risk when investing in digitalization
Infrastructure and government challenges - smaller SMEs deal more with their environment	Small SMEs deal comparatively more with regulatory obstacles or administrative burden	(Destatis Federal Statistical Office, 2024), (Di Bella et al., 2023), (European Commission, 2023), (Kergroach, 2021)
	Small SMEs face more difficulties dealing with digital security
	Small SMEs face more difficulties accessing quality infrastructure

 

5. Discussion

With respect to the research question, the results identify several factors that contribute to differences in the completion of digitalization projects when comparing SMEs based on their employee numbers: a lack of digital skills and expertise, limited technology adoption and awareness, financial constraints, and challenges related to infrastructure and government policies. Similar studies examining the barriers to digital transformation among European SMEs have consistently highlighted key challenges such as a digital skills gap, financial constraints, and inadequate infrastructure (Balkan, 2022). These findings are echoed at the international level, where researchers also identify infrastructure deficiencies, limited financial resources, and a lack of skilled workforce as major obstacles for SMEs (Kang, 2024). A survey conducted by DBS, Southeast Asia’s largest development bank, supports these findings, with 1,000 SMEs identifying high technology adoption costs, the availability of digital talent, and cybersecurity concerns as the top challenges (DBS, 2021). In the U.S. context, financial constraints, limited technical expertise, and data security risks are also reported as prominent barriers (Faisal et al., 2023). A closer examination of these factors reveals notable similarities: each of these issues is, in part, influenced by the number of employees. Specifically, a smaller workforce correlates positively with fewer digital skills and expertise, as well as reduced technology adoption and awareness. Additionally, smaller SMEs often experience greater financial constraints, as they have fewer financial resources available. A reduced headcount also limits the time available for both daily operations and addressing challenges related to infrastructure and government policies. Consequently, the collected and analyzed data suggest that the relationship between the number of employees and the completion of digitalization projects is a key determinant in this context. This relationship between firm size and digitalization capability can be further explained using the resource-based view and dynamic capabilities theory. From a resource-based view perspective, SMEs are constrained by limited strategic resources, which are directly linked to their smaller workforce and lower revenue base (Barney, 1991). In this context, the dynamic capabilities framework highlights that firm size also affects the company’s ability to sense, seize, and reconfigure in response to technological change (Teece et al., 1997). Beyond personnel-related factors, other reasons for lower digitalization levels include higher fixed costs and inadequate infrastructure, which place SMEs at a disadvantage. Moreover, due to lower revenue streams, smaller SMEs are less likely to absorb the risks associated with digitalization investments.

6. Conclusion

This paper identifies specific factors that lead to the differences in the completion of digitalization projects among German SMEs based on their employee numbers. Through a literature analysis and a subsequent application of the Gioia Method, four primary factors are developed: lack of digital skills and expertise, lack of technology adoption and awareness, financial constraints, infrastructure, and government challenges. Further analysis suggests that a smaller workforce is the primary factor driving the differences in completed digitalization projects. In contrast to similar research, such as DBS (2021) and Faisal et al. (2023), which broadly acknowledges the category “Lack of technology adoption and awareness”, this study uniquely defines it as a key factor in digitalization project completion. While similar concepts like digital maturity or strategic inertia exist, the proposed category captures the specific challenge of SMEs not considering digital technologies at all, either due to limited exposure, insufficient information, or constrained networks. Still, additional research is necessary to validate the results, as they are based on several assumptions. Future studies should focus on directly examining factors that influence the digitalization of SMEs of varying sizes. Another research gap is identifying effective solutions to enhance digitalization in smaller SMEs based on the findings of this paper. This paper contributes to the existing literature by addressing the root cause behind the lower completion rates of digitalization projects in smaller firms. By analyzing these underlying factors, the paper lays the groundwork for potential solutions and further research. The identification of bureaucracy and infrastructure as key barriers to digitalization offers valuable insights for governments. Additionally, policymakers and managers of smaller SMEs can use these findings to inform strategies for improving ICT competence, such as advocating for enhanced ICT education in schools, universities, and through commercial training programs, or by providing internal training to their own employees. Managers should also explore partnerships with local digitalization programs, business associations, or vocational institutions to gain access to knowledge and tools. Starting with low-cost digital initiatives, such as cloud- and subscription-based tools can provide a manageable entry point into broader digital transformation. Furthermore, staying informed about public support programs and funding opportunities can help overcome financial barriers. Similarly, other institutions, such as the KfW, can use the collected information to enhance their offerings for micro- and small-sized SMEs throughout the digitalization process. By leveraging these insights, they can develop more targeted financial products, advisory services, and support programs tailored to the specific challenges faced by smaller SMEs in adopting digital technologies.

The study faces several limitations in formulating the research question based on German SMEs. Due to limited availability of data, international literature and studies were utilized, assuming similar conditions of digitalization in SMEs. Further limitations arise in relation to employee numbers. While the research background is based on SMEs with fewer than five employees, most literature is grouping SMEs in groups with fewer than ten employees. In cases where no employee numbers are given, smaller SMEs are compared with (medium-/large-sized) SMEs, leading to potential inaccuracies. It is assumed that comparisons between large companies and SMEs can be scaled down to smaller and larger SMEs. Additionally, literature is drawn upon where disadvantages in SMEs are not directly linked to digitalization but are assumed to influence the lack of digitalization. The use of qualitative research also introduces limitations, as the findings are based on subjective interpretations and may not be generalizable.

Appendix A
Table A1: Gioia Method displayed part 1/4

Developed category	Key features of category	Direct wording of reference	Reference
Lack of digital skills and expertise - Smaller SMEs have less availability of digital skills	Small SMEs have less management personnel and employees with ICT background	Employees of medium sized companies (50-249EE -> 47%) have more ICT (information and communication technology) competence compared to small sized companies (10-49EE -> 15%)	(Eurostat, 2024a)
	Small SMEs offer less ICT training for employees	Employees of larger SMEs (50-249EE -> 45%) are more likely to offer ICT training for their employees than smaller SMEs (10-49EE -> 22%)	(Eurostat, 2024b)
		Availability of skilled staff or experienced manager in SME EU-Wide assessment on a scale of 1-10: (6.0 micro-SMEs(0-9EE); 7.2 Small SMEs(10-49EE); 7.5 medium-sized SMEs (50-250EE))	(Di Bella et al., 2023)

 

Table A2: Gioia Method displayed part 2/4

Developed category	Key features of category	Direct wording of reference	Reference
Lack of technology adoption and awareness - Smaller SMEs are less aware and take longer to implement and adopt new digital technologies	Small SMEs have less personnel meaning less spare time to implement digital technologies alongside business activities	Indicated that employee’s absence from work was a problem, particularly when order books were full and skilled labor was in short supply	(Leitfels, 2020)
	Small SMEs are on a different digitalization level and first need to build a foundation to digitalize	Microenterprises exhibit a more simplistic approach to digital innovation - larger SMEs face higher complexity in digital innovation activities	(Romero & Mammadov, 2024)
	Small SMEs are less likely to have a digitalization strategy	Having no digitalization strategy	(Zimmermann, 2024)
	Small SMEs are unaware of the potential and have uncertainty of high investments	Small enterprise owners are often unaware of the potential new digital tools could offer for improving their business, or they consider the upfront costs of upgrading towards more sophisticated digital technologies too high	(Kergroach, 2021)
		Large enterprises also tend to have a higher degree of automation and a broader range of activities. This means they have more extensive IT equipment which, in turn, more often provides starting points for further digitalization measures.	(Zimmermann, 2023)

Table A3: Gioia Method displayed part 3/4

Developed category	Key features of category	Direct wording of reference	Reference
Financial constraints - Smaller SMEs have fewer financial resources	Smaller SMEs have insufficient financing options	Improving the offer of equity finance and quasi-equity financing instruments for start-ups would help new digital technologies and business models come to market quickly.	(Zimmermann, 2024)
	Smaller SMEs have limited access to external finance for digitalization projects	Limited financial resources - access to finance [SME EU-Wide assessment on a scale of 1-10: (4.1 micro-SMEs(0-9EE); 4.2 Small SMEs(10-49EE); 4.3 medium-sized SMEs (50-250EE))]	(Di Bella et al., 2023)
	Smaller SMEs have higher fixed costs, therefore higher risk when investing in digitalization	Limited access to finance including possibly due to receiving payments late [What are the most serious problems of your company? 13,253 SMEs in Europe and 855 large companies in %: (0-9EE 21%), (10-49EE 19%), (50-249EE 13%), (250+EE 10%)	(European Commission, 2023)
		As they implement their projects, they benefit from the ability to allocate the (fixed) costs incurred to a larger sales volume. That gives them more capacity to absorb the risks involved and makes internal and external financial resources more readily available.	(Zimmermann, 2023)
		For small businesses in particular, minimum project sizes and a higher proportion of fixed costs create a heavier burden, so that they are more likely to delay digitalization projects.	(Zimmermann, 2023)
		Finally, smaller businesses have greater difficulty accessing external finance for digitalization projects.	(Zimmermann, 2023)

 

Table A4: Gioia Method displayed part 4/4

Developed category	Key features of category	Direct wording of reference	Reference
Infrastructure and government challenges - smaller SMEs deal more with their environment	Smaller SMEs deal comparatively more with regulatory obstacles or administrative burden	Regulatory obstacles or administrative burden [What are the most serious problems of your company? 13,253 SMEs in Europe and 855 large companies in %: (0-9EE 34%), (10-49EE 30%), (50-249EE 29%), (250+EE 26%)	(European Commission, 2023)
	Smaller SMEs face more difficulties dealing with digital security	Regulation, for example European and national laws, industrial regulation [SME EU-Wide assessment on a scale of 1-10: (5.1 micro-SMEs(0-9EE); 5.3 Small SMEs(10-49EE); 5.4 medium-sized SMEs (50-250EE))]	(Di Bella et al., 2023)
	Smaller SMEs face more difficulties accessing quality infrastructure	Smaller SMEs have less availability of a sufficient speed of the broadband connection (100Mbps) (1-9EE -> 55%) (10-49EE -> 63%) (50-249EE ->78%) (250-499EE -> 90%)	(Destatis Federal Statistical Office, 2024)
		Smaller businesses often face more difficulties in adapting to changing regulatory frameworks, dealing with digital security and privacy issues or simply accessing quality digital infrastructure.	(Kergroach, 2021)

 

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