The Impact of Digital Transformation on The Growth of Manufacturing Industries in Saudi Arabia

Abstract

Digital transformation represents a key structural driver of industrial sector growth; however, empirical evidence on the dynamics of this effect within the Saudi Arabian context remains limited. Accordingly, this study aims to measure the impact of digital transformation on the growth of the manufacturing sector in Saudi Arabia over the period 1990–2023. To achieve this objective, the study employs an empirical time-series analysis combined with a comprehensive literature review, drawing on the Autoregressive Distributed Lag (ARDL) methodology. A composite digital transformation index was constructed using Principal Component Analysis (PCA) to capture three core dimensions: digital infrastructure, human capital, and technological innovation. The findings reveal a long-run equilibrium relationship among the variables; specifically, digital transformation exerts a positive and statistically significant effect on sectoral growth in the long run, whereby a one-unit increase in the composite index is associated with a 1.24-unit rise in manufacturing value added. Positive effects were also confirmed for foreign direct investment and industrial employment, while inflation exerted a negative effect. The error correction coefficient (−0.757) indicates that approximately 76% of short-run disequilibria are corrected annually, reflecting the high structural resilience of Saudi Arabia's manufacturing sector and its rapid capacity to absorb shocks within the framework of Vision 2030 programmes. The study recommends the adoption of integrated digital industrial policies that support infrastructure development and technology localisation, alongside aligning education and vocational training outputs with the demands of industrial digitalisation, so as to ensure sustainable growth and reduce adaptive transition costs.