» Countries of all income levels nurturing a digital economy
01.02.2018 - Natural Sciences Sector

Countries of all income levels nurturing a digital economy

© Halfpoint / Shutterstock.com, Man wearing virtual reality goggles

The digital market is dominated by 100 or so multinational companies, one-third of which did not exist a decade ago. However, countries of all income levels are developing policies and infrastructure to capitalize on the dynamism of this sector and promote further growth, observes the UNESCO Science Report (2015). To what extent are corporate digital giants driving the development of digital economies around the world?

In the first ranking of its kind, UNCTAD’s World Investment Report 2017: Investment and the Digital Economy, revealed that three countries were home to 75% of the top 100 digital multinational enterprises, including internet platforms, e-commerce and digital content firms. Sixty were from the USA and  a further 15 from the UK and Germany. The report found that digital firms were expanding at a dramatically faster rate than other multinationals.

For its part, the UNESCO Science Report (2015) found that European multinationals were losing ground in the digital economy when it came to innovation. Although EU-based companies accounted for 30% of total spending on research and development (R&D) by the world’s top 2 500 companies in 2014, only two EU companies figured in the top ten for performers of R&D and both were in the automotive sector: Volkswagen and Daimler. The report observed that ‘the principal EU giants specializing in hardware within the digital economy (Siemens, Ericsson, Nokia) have even lost a lot of ground in the past decade in global R&D rankings’, even if the German-based software and IT services company SAP had recently joined the global top 50 for R&D performers.

‘The EU’s attempts to replicate a Silicon Valley-type experience have not lived up to expectations,’ analyses the UNESCO Science Report, citing the example of the technology cluster in central and east London known as Tech City. The EU is attempting to correct this structural weakness through its Digital Agenda for Europe, which sets out to exploit the potential of information and communication technologies (ICTs) better by promoting a digital single market. The Digital Agenda is part of Europe 2020, the EU’s decadal strategy for fostering smart, sustainable and inclusive growth.

Europe 2020 has been echoed by the countries of Southeast Europe, which share a common desire to adopt the EU’s science-oriented innovation model. Their own SEE 2020 Strategy prioritizes smart growth through education and competencies, research and innovation, a digital society and cultural and creative sectors.

France announced its Industry of the Future project in April 2015. The project rewards companies which modernize with tax cuts and advantageous loans. It focuses on nine priority markets: new resources; sustainable cities; ecological mobility; transportation of tomorrow; medicine of the future; the data economy; intelligent objects; digital confidence; and intelligent food. A first call for project proposals focused on future-oriented fields such as 3D printing, augmented reality and connected objects.

France is planning to develop joint initiatives with Germany through the latter’s own Industry 4.0 project, a reference to the fourth industrial revolution. The six guiding principles of Industry 4.0 are: interoperability (between cyber-physical systems and humans), virtualization (through which cyber-physical systems monitor production), decentralization (with cyber-physical systems making independent decisions), real-time capability (to analyse production data), service orientation (internally but also by offering individualized products) and modularity (adapting to changing requirements).

Meanwhile, Europe’s competitors have also been investing in research on the digitization of industry, recalls the UNESCO Science Report. Examples are the Chinese Internet of Things Centre, the Advanced Manufacturing Partnership in the USA and the Indian Cyberphysical Systems Innovation Hub.

USA home to some of the most innovative technology

Some of the most innovative technology is coming out of ICT giants in the USA. The UNESCO Science Report cites the example of Amazon, which has developed services like Pantry to meet consumer needs in almost real time: a pilot scheme allows a user to re-order a household consumable by pressing a physical button.

Another example is Facebook, which is developing virtual reality technology based on its acquisition of Oculus Rift, an approach that will integrate people into the digital environment, rather than the other way round. The small sensors that facilitate this connectivity are also being applied in industry and health care.

New enterprises are also experimenting with the use of data from personal activity trackers to manage chronic diseases like diabetes.

General Electric, meanwhile, is investing in sensor technology to collect more information about the performance of its aeroplane engines in flight, since it relies on service contracts for much of its revenue.

Perhaps the most ambitious project of all is the self-driving car being developed by a number of American multinationals, including Google and Tesla.

Media and entertainment the top digital industry

It is, however, the media and entertainment industry that has become the top digital industry, according to the UNCTAD report, followed by retail and high technology.

Cultural goods have become an economic driver in today’s digital age. UNESCO’s 2016 report on the Globalisation of Cultural Goods observed that global trade in cultural goods had doubled between 2004 and 2013, despite the global financial crisis of 2008–2009 and a massive shift among film-goers and music lovers towards web-based services. The digitization of products has had an enormous impact on cultural industries. Trade in recorded music has declined by 27% since 2004, for instance, and that in movies by 88%, even as audio-visual services as a whole have gained ground.

The Republic of Korea is no exception. After decades of relying on large conglomerates to drive the economy, the country is striving to become more entrepreneurial and creative. The challenge ‘will be to foster a creative culture in small and medium-sized enterprises (SMEs) and to turn the regions into hubs for creative industries,’ observes the UNESCO Science Report.

One example of the government’s approach is the Creative Economy Town, an offline and online platform which allows individuals to share and commercialize their ideas; professionals from relevant fields act as mentors, providing legal advice on intellectual property rights and other issues and connecting budding innovators with companies which have the potential to market their ideas. A second example is the Innovation Centre for the Creative Economy set up by the government in 2014 in Daejeon, which serves as a business incubator.

In Japan, too, the government has been promoting creative industries. The Cool Japan Initiative spawned the adoption of the Cool Japan Fund Inc. in November 2013, created by law to help Japan’s creative industries spread their wings abroad.

With investor confidence low since the global financial crisis in 2008, Japanese firms have been reluctant to raise research spending or take risks. The UNESCO Science Report suggests that ‘Japanese industry can use its technological strength to satisfy global demand with system-oriented, network-based innovation supported by ICTs.’ It cites the potential for Japan to promote creative industries in such areas as digital contents, online services, tourism and Japanese cuisine.’

The government itself is promoting ‘smartization’, ‘systemization’ and ‘globalization’ through its Comprehensive Strategy for STI (2013), which identifies ICTs, nanotechnology and environmental technology as priority cross-cutting areas.

The European Union, meanwhile, has created a European Creative Industries Alliance. Established in 2011 within the EU’s flagship Innovation Union project, the Alliance had provided more than 3 500 small and medium-sized enterprises with financial support by 2015.

Governments are nurturing the digital economy

Governments are nurturing a digital economy in other ways. They are investing in e-governance and smart cities, those futuristic urban centres which use ICTs to improve public services such as transportation, health care, electricity and water provision. In China, for instance, the Ministry of Housing and Urban and Rural Development had selected 193 cities and economic development zones by 2013 to be official smart city pilot sites. Other ministries are also supporting the development of smart cities, including through the development of industrial alliances, in line with the Twelfth Five-Year Plan to 2015.

In Sri Lanka, some 800 telecentres (nensalas) were set up across the country in the decade to 2015 to connect communities of farmers, students and small entrepreneurs to information, learning and trading opportunities.

Governments are also nurturing digital entrepreneurs through technoparks and technology and innovation hubs. All three of Morocco’s technoparks host start-ups and small and medium-sized enterprises (SMEs) specializing in ICTs, along with green technologies and cultural industries. These technoparks are supported by the Ministry of Industry, Commerce, Investment and the Digital Economy.

Kenya, meanwhile, is developing Konza Technology City, which the government has branded the ‘Silicon Savannah’. The government is providing basic infrastructure and supporting policy and regulatory frameworks, leaving it to private investors to build and operate the industrial development. Construction began in 2013 and is expected to take 20 years, by which time it is hoped to create 200,000 jobs in information technology.

By 2014, there were over 90 technology hubs across Africa, including iHub in Kenya, BongoHive in Zambia, SmartXchange in South Africa and Hive Colab in Uganda. These hubs are developing mobile phone applications in sectors ranging from agriculture and health to crowdsourcing weather information for disaster risk reduction. In parallel, African governments are putting infrastructure in place. The Uganda Investment Authority, for instance, works in conjunction with the government to facilitate private sector investment. The ICT sector has seen high levels of investment in recent years to install fibre-optic cables and related equipment, as well as broadband infrastructure.

iHub was something of a pioneer in Kenya. This innovation hub was set up in Nairobi in 2010 by an independent technologist named Erik Hersmen to provide an open space for the technology community. iHub has forged ties with several multinational coporations, including Google, Nokia and Samsung, as well as with the Kenya government’s ICT Board. In August 2013, the government established the Information and Communication Authority to provide centralized management of all related government functions. This is one of the concrete outputs of the Kenya National ICT Master Plan: towards a Digital Kenya, which runs to 2018.

There has been ‘an explosion in ICT activity’ in Kenya in recent years, according to the UNESCO Science Report. Nailab started out as a private company in 2011. Two years later, the Kenyan government partnered with this incubator for start-up digital businesses to launch a US$1.6 million, a three-year technology incubation programme. The funds will enable Nailab to help start-ups in other Kenyan cities and towns to access information and capital.

Another developing country ‘going digital’ is Bangladesh. The government created a High-tech Authority in 2010 by act of Parliament as part of a drive to achieve a Digital Bangladesh by 2021. The Ministry of Information and Communication Technology is planning to develop an information technology park and a software technology park.

In Latin America, meanwhile, several countries have followed in Brazil’s footsteps by introducing sectorial funds over the past decade for the software industry, agribusiness and other sectors. These funds receive money via taxes levied on specific industrial or service sectors which are then used to foster innovation in the same sector. FONSOFT in Argentina and PROSOFT in Mexico, for example, provide SMEs developing software with competitive funding to help them improve their productivity and innovative capacity.

How beneficial are foreign multinationals for company growth?

In Israel, some of the most dynamic digital start-ups can be found in an innovation hub called CyberSpark. CyberSpark was set up by the Israeli government in 2014 to promote cybersecurity, after a wave of cyberattacks. Half of the firms at CyberSpark are Israeli and most are SMEs. Within a year of CyberSpark’s founding, several Israeli start-ups had been acquired by foreign multinational companies, including Intellinx, purchased by Bottomline Technologies, and Cyvera, purchased by Palo Alto Networks.

Technology-based start-ups need venture capital to grow. Israel’s venture capital industry is one of the biggest outside the USA and the research centres of foreign multinationals are investing a considerable amount of venture capital in the Israeli economy. Why then are Israeli companies not growing as fast as one would expect? For the UNESCO Science Report, ‘the share of venture capital being invested in the growth stages of enterprises has tended to flourish at the expense of early stage-investments. This trend could penalize the start-ups which are such an integral part of Israel’s innovation system’.

The data are eloquent. The majority of digital patents are being filed by foreigners: almost 80% of applications to the Israel Patent Office since 2002. The UNESCO Science Report observes that, ‘although the Israeli economy benefits from the activity of the multinationals’ subsidiaries through job creation and other means, the advantages are relatively small compared to the potential economic gains that might have been achieved, had this intellectual property been utilized to support and foster the expansion of mature Israeli companies of a considerable size.’

Is hosting digital multinationals good for job and value creation?

‘Digital multinational enterprises make about 70% of their sales abroad, with only 40% of their assets based outside home countries’, according to the UNCTAD report. ‘This results in the creation of fewer jobs directly in host countries’, even if it helps to develop a domestic digital economy.

Costa Rica may be the exception that confirms the rule. The UNESCO Science Report 2010 estimated that the arrival of Intel, Hewlett Packard and IBM in Costa Rica in the late 1990s had generated about 100,000 jobs by 2010, including by fostering the creation of domestic firms specializing mainly in software production. A survey cited by the report found that software firms of Costa Rican origin devoted about 12% of their budget to R&D in 2005. According to the latest UNESCO Science Report (2015), more than 300 companies produce software for local and international markets today, making Costa Rica’s software sector one of Latin America’s most dynamic industries. High-tech goods accounted for about 45% of Costa Rica’s manufactured exports in 2013, far more than any other Latin American country, although this market has been affected by the departure of Intel in 2014.

India is also heavily dependent on foreign digital multinational firms. In 2013, 93% of Indian IT patents were secured by foreign-owned multinationals, up from 85% in 2008. Pharmaceutical companies, on the other hand, tend to be owned by Indians but their contribution to the country’s intellectual property is shrinking. Whereas 32% of utility patents granted in India went to pharmaceutical companies in 1997, this share had shrunk to 9% by 2012. IT patents have gone in the opposite direction, accounting for just under 12% of Indian utility patents in 1997 but as much as 61% in 2012.

Foreign multinational companies have undoubtedly nurtured India’s information technology (IT) industry but the country has also experienced what has been termed ‘jobless growth’ in recent years. The services sector has fuelled economic growth but this growth has not generated mass employment, since only about one-quarter of Indians work in the services sector.

This has prompted the Modi government to prioritize the development of export-oriented manufacturing. ‘Come manufacture in India!’, the prime minister proclaimed in a speech shortly after his election in 2014. The IT industry accounted for just under 10% of industrial investment in research and development (R&D) in India in 2010, behind pharmaceuticals (28%) and the automotive industry (14%). With innovation being concentrated in just nine industries, the UNESCO Science Report underscores the need for India to broaden its innovation culture, if it is to develop export-oriented manufacturing.

Source: UNESCO Science Report: towards 2030 (published in 2015)

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