Digital Investment Decisions and Service Firm Innovation: Evidence From Tourism Enterprises in Tanzania

Abstract

This study investigates the impact of digital resources (DR) on tourism innovation outcomes (TIO) among enterprises in the Ngorongoro Conservation Area (NCA), Tanzania. We study how small- and medium-sized service firms decide to allocate scarce capital to digital tools and the causal effect of these investments on innovation. Using a unbalanced panel of 2640 firm–year observations with a sample of 280 tourism enterprises registered from 2013 to 2023, we combine fixed effects Poisson and fractional logit models with an instrumental variables strategy. The results indicate that the adoption of DR promotes various aspects of tourism innovation. A one-unit increase in the DR index is associated with a 5.2 average increase in innovation outcomes. The effect is strongest among firms with low initial intensity and among enterprises located outside protected areas. These findings suggest that digital adoption contributes to productivity growth and competitiveness in African service industries. The government should intentionally identify and address the challenges that work against manufacturing competitiveness on the continent. The paper concludes by highlighting the policy relevance of targeted ICT support and grant programs for small and medium enterprises.