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Published: August 28, 2012
 / Autumn 2012 / Issue 68

 
 

Digitization and Prosperity

Constrained economies (those with a digitization score below 25) have barely begun to develop affordable Internet connections, often because they are held back by political factors or lagging economic development. Internet services remain expensive and limited in reach.

Emerging economies (those with a score between 25 and 29.9) have achieved significant progress in providing affordable and widespread access. However, the reliability of services remains below par, capacity is limited, and usage is low.

Transitional economies (those with a digitization score between 30 and 39.9) provide citizens with ubiquitous, affordable, and reasonably reliable services, and usage is expanding at a relatively rapid pace.

Advanced economies (those with a score of 40 and higher) are in the most mature stage of digitization. These countries have a talent base that can take advantage of digital services.

For the world as a whole, the progression of digitization through these stages is accelerating. Developed countries such as Germany, the United Kingdom, and the United States took nearly four years on average to move from the emerging to the transitional stage; now, countries such as the United Arab Emirates, Kuwait, and Estonia are making that same move in less than two years. Between 2004 and 2007, countries registered 39 stage leaps; between 2007 and 2010, there were 65 stage leaps. From 2004 to 2007, countries moved, on average, seven points up the scale (of a total 100 points). From 2007 to 2010, the average jump was 10 points.

This acceleration stems from a number of factors. Emerging countries are following a path that developed nations have already blazed, learning from their successes and mistakes. Young economies can also take advantage of more mature technologies and markets, along with the corresponding price reductions. When skills are transferred to more countries and better governance structures are put in place, the implementation and usage of new technologies generally accelerate. Some emerging countries, like those in the Gulf Cooperation Council in the Middle East, are bypassing intermediate phases and jumping directly to higher levels of digitization.

Economic and Social Impact

The effect of digitization on a country’s economy is highly visible. In the 150 countries we studied, an increase in digitization of 10 percentage points triggered a 0.50 to 0.62 percent gain in per capita GDP. (See Exhibit 3.) By contrast, access (as measured in studies of broadband penetration) contributes a gain in per capita GDP of just 0.16 percent — approximately half as much impact. The more advanced the country, the greater the impact of digitization appears to be, which establishes a virtuous feedback cycle: A country reinforces and accelerates its own progress as it moves along the line. On the basis of data from 2009 and 2010, we estimate that the total global economic impact of digitization, in terms of added GDP, was US$395 billion per year. (It has, if anything, increased since then.)

Digitization also has a significant impact on job creation: A 10 percent increase in digitization reduces a nation’s unemployment rate by 0.84 percent. From 2009 to 2010, digitization added an estimated 19 million jobs to the global economy, up 5 percent from the estimated 18 million jobs added from 2007 to 2008. This is an especially critical finding for emerging markets, which will need to create hundreds of millions of jobs in the coming decade to ensure that a booming population of young people can contribute to their national economy. Finally, a 10-point increase in digitization has, on average, led to a six-point increase in the country’s score on the INSEAD Global Innovation Index, which ranks countries according to innovation potential. (See “The Innovativeness of Nations,” by Rob Norton, s+b, Spring 2012.) In other words, as a country progresses in its digitization development, it appears to become more innovative.

 
 
 
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Resources

  1. Roman Friedrich, Michael Peterson, and Alex Koster, “The Rise of Generation C,” s+b, Spring 2011: How digitization is fostered by people born after 1990: a connected, communicating, content-centric, computerized, and community-oriented cohort.
  2. Art Kleiner, “Philip Bobbitt: The Thought Leader Interview,” s+b, Spring 2004: A long-range view of the evolution of the concept of government, with immense implications for digitization and business leadership in general.
  3. Karim Sabbagh, Roman Friedrich, Bahjat El-Darwiche, and Milind Singh, “Maximizing the Impact of Digitization,” Booz & Company white paper, 2012: The paper from which this article was adapted, with more detail on the relationship between digitization and measures of quality of life and economic growth.
  4. For more thought leadership on this topic, see the s+b website at: strategy-business.com/technology.