The enabling role of ICT to improve productivity and Industrial Competitiveness Dr. Hasan ALKAS ICT for Competitiveness and Innovation IIC Telecoms and Media Forum, Brussels 25 March 2009

Economic forecast 2050 China, India and US might represent some of the largest markets by 2050. By 2050 Indonesia might be larger than Germany. Brazilian economy would be of similar size to that of Japan by 2050. By 2050 Turkey would grow strongly due to its younger population, being of similar size to Italy. China, Turkey and Brazil will be on a par with the leading G7 in per capita GDP terms (PPP based). By 2050 the E7 economies (BRICs plus Indonesia, Mexico and Turkey) will be around 25% larger than the current G7; in PPP terms even 75% larger. By 2030 the per capita income gap between East Asia and other emerging economies compared with the high-income countries will still be considerable (WorldBank, 2007). Projected relative size of economies in 2005 and 2050 Note: relative sizes expressed as percentage of their sum in 2005 and 2050, respectively. GDPs are expressed in PPP terms. EU-5: sum of Germany, UK, France, Italy and Spain. Source: calculation using projection results by PriceWaterhouseCoopers (2006) "The World in 2050. How big will the major emerging market economies get and how can the OECD compete?" March 2006; Competitiveness Report (2007).

China, India and US might represent some of the largest markets by 2050.

By 2050 Indonesia might be larger than Germany.

Brazilian economy would be of similar size to that of Japan by 2050.

By 2050 Turkey would grow strongly due to its younger population, being of similar size to Italy.

China, Turkey and Brazil will be on a par with the leading G7 in per capita GDP terms (PPP based).

By 2050 the E7 economies (BRICs plus Indonesia, Mexico and Turkey) will be around 25% larger than the current G7; in PPP terms even 75% larger.

By 2030 the per capita income gap between East Asia and other emerging economies compared with the high-income countries will still be considerable (WorldBank, 2007).

Impacts of the crisis on manufacturing Source : Eurostat In December 2008 manufacturing output was 11.5% lower on yearly basis. Highly cyclical industries are: construction, motor vehicles, office machinery, computers, radios, TV and other consumer durables. Whilst these sectors tend to decline sooner and more steeply during the recession, they also respond more quickly to a general economic upturn. Manufacturing production growth rate 1991-2008 - 12 -10 -8 -6 -4 -2 0 2 4 6 8 10 1990m12 1991m06 1991m12 1992m06 1992m12 1993m06 1993m12 1994m06 1994m12 1995m06 1995m12 1996m06 1996m12 1997m06 1997m12 1998m06 1998m12 1999m06 1999m12 2000m06 2000m12 2001m06 2001m12 2002m06 2002m12 2003m06 2003m12 2004m06 2004m12 2005m06 2005m12 2006m06 2006m12 2007m06 2007m12 2008m06 2008m12 sharp decline in last quarter 2008

In December 2008 manufacturing output was 11.5% lower on yearly basis.

Highly cyclical industries are: construction, motor vehicles, office machinery, computers, radios, TV and other consumer durables.

Whilst these sectors tend to decline sooner and more steeply during the recession, they also respond more quickly to a general economic upturn.

Impacts of the crisis on exports Source : Eurostat and OECD Information Technology Outlook 2008. EU exports in manufacturing to non-EU countries were 5.8% down in value terms on average in November and December 2008 from the previous year, whilst intra-EU trade was 13.7% lower. Nearly all sectors are affected by the decline in exports Extra-EU Export Value Growth Scientific and other instruments Chemicals & chemical products -30 -20 -10 0 10 20 30 Other transport equipment Electrical machinery and apparatus n.e.c. Publishing & printing Machinery & equipment n.e.c. Food & beverages Leather Fabricated metal products Wearing apparel EU manufacturing Wood & of products of wood Other non-metallic mineral products Basic metals Furniture; manufacturing n.e.c. Rubber & plastic products Textiles Office machinery & computers Pulp, paper & paper products Motor vehicles Radio, TV and communication equipment Coke & refined petroleum average growth 2001-6 average growth 2007 data Nov-Dec 2008

EU exports in manufacturing to non-EU countries were 5.8% down in value terms on average in November and December 2008 from the previous year, whilst intra-EU trade was 13.7% lower.

Nearly all sectors are affected by the decline in exports

ICT trade balance in the EU Source : Eurostat and OECD Information Technology Outlook 2008. Europe continues to be a net importer ICT goods. The trade deficit in the EU15 decreased slightly from €63 billion in 2006 by 6% to €59 billion in 2007. In 2007, the largest exporters of ICT goods were China (€ 238 billion), EU15 (€ 120 billion) and the United States (€ 86 billion). After the United States (€ 185 billion), the largest importers of ICT goods in 2007 were the EU15 (€ 179 billion) and China (€ 173 billion). The consumption level in Europe was 16% of the semiconductor world market ($256bn in 2007), whereas the manufacturing was only 11%, which resulted in a trade deficit of $12,8bn in 2007. ICT Trade Balance in the EU 15

Europe continues to be a net importer ICT goods.

The trade deficit in the EU15 decreased slightly from €63 billion in 2006 by 6% to €59 billion in 2007.

In 2007, the largest exporters of ICT goods were China (€ 238 billion), EU15 (€ 120 billion) and the United States (€ 86 billion).

After the United States (€ 185 billion), the largest importers of ICT goods in 2007 were the EU15 (€ 179 billion) and China (€ 173 billion).

The consumption level in Europe was 16% of the semiconductor world market ($256bn in 2007), whereas the manufacturing was only 11%, which resulted in a trade deficit of $12,8bn in 2007.

The competitiveness of the EU ICT sector Competitiveness depends on firms performance, but also on the industrial policy framework Strength ICT Competitiveness The EU ICT sector is successful in producing sophisticated and high-quality ICT products It is particularly strong in chip design, software development and ICT services. One of the key strengths of the EU ICT sector is its human capital. Strategic R&D is performed in the EU while less knowledge-intensive market oriented R&D is located in South-East Asia. Small innovative start-ups hardly grow into global scale. Large parts of ICT hardware production and software coding have been relocated to South-East Asia. The ICT uptake in other parts of the economy is slower than in USA and Japan. Lower investment growth than in emerging economies threatens lower value added activities in the EU. Lower R&D intensity than US or Japan, R&D concentrated in larger companies. Weakness

The EU ICT sector is successful in producing sophisticated and high-quality ICT products

It is particularly strong in chip design, software development and ICT services.

One of the key strengths of the EU ICT sector is its human capital.

Strategic R&D is performed in the EU while less knowledge-intensive market oriented R&D is located in South-East Asia.

Small innovative start-ups hardly grow into global scale.

Large parts of ICT hardware production and software coding have been relocated to South-East Asia.

The ICT uptake in other parts of the economy is slower than in USA and Japan.

Lower investment growth than in emerging economies threatens lower value added activities in the EU.

Lower R&D intensity than US or Japan, R&D concentrated in larger companies.

Conceptual framework for the analysis ICT competitiveness A simplified method to strategically assess industrial competitiveness policies by forward-looking and backward induction… Theory of Industrial Organisation / Microeconomics as analytical tool Structural and strategic entry barriers Market failure, aggravated by financial crisis = Legal entry barriers  Industrial competitiveness Policies =>

The role of ICT for productivity growth Source: e-Business W@tch (Survey 2007). Initial assumption was, that ICT is the main reason for productivity growth Only some sectors have seen upsurge in productivity growth (Nordhaus, 2002; van Ark, 2002), mostly banking, retail and service industries. New organisational structures/changes are necessary for fully exploiting ICT potential (McGuckin and van Ark, 2003). ICT has positive effects on labour productivity and total factor productivity (TFP (Pilat, 2005)). ICT impact on productivity is largest in the ICT industries themselves and selected service sectors To a lesser extent in capital intensive sectors (chemical, paper, steel) ICT has an impact on productivity growth Impact on labour productivity and total factor productivity widely recognised Effects used to be more pronounced in US companies.

Initial assumption was, that ICT is the main reason for productivity growth

Only some sectors have seen upsurge in productivity growth (Nordhaus, 2002; van Ark, 2002), mostly banking, retail and service industries.

New organisational structures/changes are necessary for fully exploiting ICT potential (McGuckin and van Ark, 2003).

ICT has positive effects on labour productivity and total factor productivity (TFP (Pilat, 2005)).

ICT impact on productivity is largest in the ICT industries themselves and selected service sectors

To a lesser extent in capital intensive sectors (chemical, paper, steel)

ICT has an impact on productivity growth

Impact on labour productivity and total factor productivity widely recognised

Effects used to be more pronounced in US companies.

The Enabling Role of ICT for Innovation Source: e-Business W@tch (Survey 2007)

The Key Relevance of ICT at a glance Represents with 670 Billion Euro over 5,3 % of EU GDP and employment in 2007. Software has a share of 11 %, IT services 21 % and Carrier services 44% of the total ICT market value. 50 % of the EU productivity growth, (1,1% between 2000-2004) comes from ICT. EU ICT Sector Relevance of ICT Impacts the competitiveness as an enabling technology. Enables process and product innovations. Improves business processes along the whole value chain. According to a recent study* “Money spent on computing technology delivers gains in worker productivity that are three to five times those of other investments”. ICT as General Purpose Technology *Study by the IT and Innovation Foundation

Represents with 670 Billion Euro over 5,3 % of EU GDP and employment in 2007.

Software has a share of 11 %, IT services 21 % and Carrier services 44% of the total ICT market value.

50 % of the EU productivity growth, (1,1% between 2000-2004) comes from ICT.

Impacts the competitiveness as an enabling technology.

Enables process and product innovations.

Improves business processes along the whole value chain.

According to a recent study* “Money spent on computing technology delivers gains in worker productivity that are three to five times those of other investments”.

Due to the economic crises industrial competitiveness policies gains interest Current European industrial competitiveness policies Are based on demand and supply side measures to improve framework conditions, Emphasises on horizontal measures, which applies to all sectors, Try to stimulate investment & foster innovation, Without neglecting sectoral needs. During economic crisis existing measures may not be sufficient to bring Europe’s industry ahead and increase productivity To minimise risks from the current crisis the Commission and Member States are launching impressive rescue packages (some are also related to ICT industries). We need to focus on enabling ICT, which Strengthen the competitiveness via their enabling role, Enable process and product innovations, Improve business processes along the whole value chain, Create multiplier effects, etc. Without an integrated Industrial and Innovation Policy and effective co-ordination rescue packages can trigger traditional protectionist attitudes...

Current European industrial competitiveness policies

Are based on demand and supply side measures to improve framework conditions,

Emphasises on horizontal measures, which applies to all sectors,

Try to stimulate investment & foster innovation,

Without neglecting sectoral needs.

During economic crisis existing measures may not be sufficient to bring Europe’s industry ahead and increase productivity

To minimise risks from the current crisis the Commission and Member States are launching impressive rescue packages (some are also related to ICT industries).

We need to focus on enabling ICT, which

Strengthen the competitiveness via their enabling role,

Enable process and product innovations,

Improve business processes along the whole value chain,

Create multiplier effects, etc.

Without an integrated Industrial and Innovation Policy and effective co-ordination rescue packages can trigger traditional protectionist attitudes...

ICT-related Industrial policy framework Industrial Policy Communication COM (2005) and mid-term Review (2007) 7 new (horizontal) initiatives such as on competitiveness, intellectual property rights, better regulation, industrial research and innovation, skills, etc. 7 additional sector specific initiatives including Information and communication technologies (ICT). A Task Force for the ICT sector  Policy recommendations What is next (?)

7 new (horizontal) initiatives such as on

competitiveness,

intellectual property rights,

better regulation,

industrial research and innovation,

skills, etc.

7 additional sector specific initiatives including

Information and communication technologies (ICT).

Future research trends… Economic analysis of ICT usage and e-business can improve the basis for sustainable industrial policies Evaluate the impact of ICT on reducing energy or row material use Make comparative analysis between ICT-using and non-ICT using firms, to understand its direct impact Evaluate the effectiveness of supply or demand side activities, such as e-Government or Public Private Partnerships for fostering ICT up-take Provide a theoretical and factual basis for the „enabling role of ICT“ for improving Innovation, productivity, competitiveness and economic growth Value adding enabling Role Technology-Intensity Capital Intensity Economic Potential Performance Indicators to assess enabling role and importance of ICT Initial investments Capital expenditure/ Production costs Amortisation rates Investment per employee GDP contribution Employment Market Growth Systemic relevance R&D-Intensity Innovation cycles Know-how intensity IPR/ Patenting High-skill ratio General Purpose Technology Innovation driver Productivity driver Spill-over effects Economic criteria

Economic analysis of ICT usage and e-business can improve the basis for sustainable industrial policies

Evaluate the impact of ICT on reducing energy or row material use

Make comparative analysis between ICT-using and non-ICT using firms, to understand its direct impact

Evaluate the effectiveness of supply or demand side activities, such as e-Government or Public Private Partnerships for fostering ICT up-take

Provide a theoretical and factual basis for the „enabling role of ICT“ for improving Innovation, productivity, competitiveness and economic growth

Initial investments

Capital expenditure/ Production costs

Amortisation rates

Investment per employee

GDP contribution

Employment

Market Growth

Systemic relevance

R&D-Intensity

Innovation cycles

Know-how intensity

IPR/ Patenting

High-skill ratio

General Purpose

Technology

Innovation driver

Productivity driver

Spill-over effects

Further Information DG ENTR unit web site: http://ec.europa.eu/enterprise/ict/index_en.htm Contact European Commission Enterprise Directorate-General Directorate: Innovation Policy Unit D4: ICT for Competitiveness & Innovation B-1049 Brussels fax: +32 2 296 70 19 E-mail: [email_address]

DG ENTR unit web site:

http://ec.europa.eu/enterprise/ict/index_en.htm

Contact

European Commission Enterprise Directorate-General Directorate: Innovation Policy Unit D4: ICT for Competitiveness & Innovation B-1049 Brussels fax: +32 2 296 70 19 E-mail: [email_address]