Abstract

Artificial intelligence (AI) is increasingly expected to enhance productivity, yet technological adoption alone may be insufficient to generate measurable economic gains. This study examines how AI and digital readiness are associated with productivity across European economies and whether this relationship operates through innovation capacity and human capital. Using a balanced dataset covering the EU-27 in 2021, 2023, and 2024, we estimate a Partial Least Squares Path Modelling (PLS-PM) model linking AI/Digital Readiness, Innovation Capacity, Human Capital, Productivity, and Inclusive Growth, with country-cluster bootstrap inference. The results indicate an indirect-only mediation pattern: AI/Digital Readiness is strongly associated with Innovation Capacity but has no significant direct relationship with Productivity, whereas Innovation Capacity is strongly associated with Productivity and generates a significant indirect effect. Human Capital neither mediates nor moderates this relationship, and Productivity is not significantly associated with Inclusive Growth. The innovation-mediated pathway remains significant across several alternative specifications, although it becomes statistically indistinguishable from zero when business R&D expenditure is excluded from Innovation Capacity. Leave-one-country-out cross-validation also indicates substantial predictive relevance for Productivity. Overall, the findings suggest that the relationship between digital readiness and productivity in European economies is closely associated with the innovation capabilities through which technological opportunities can be translated into economic value.

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