Guest column: Sizing the Internet economy in emerging countries

By Olivia Nottebohm, James Manyika and Michael Chui
Guest column: Sizing the Internet economy in emerging countries

If we measure the Internet as a sector, Internet-related consumption and expenditure is now bigger than agriculture or energy. And the Internet is now penetrating emerging economies at a rapid speed with the promise of rich economic benefits, write Olivia Nottebohm, James Manyika and Michael Chui in the Financial Times.

The Internet supports a vast mosaic of economic activity, ranging from millions of daily online transactions and communications to smart phone downloads of TV shows. However, the world has known little about how the Internet contributes to global growth, productivity, and employment.

The fact is that, if we measure the Internet as a sector, Internet-related consumption and expenditure is now bigger than agriculture or energy. And the Internet is now penetrating emerging economies at a rapid speed with the promise of rich economic benefits.

We now have a wide-ranging view of the powerful economic impact of the Internet around the world, but this is a phenomenon that is still growing, particularly in the emerging world. McKinsey research has examined the impact of the Internet in 43 countries that account for more than 80 percent of global GDP and over 75 percent of the world’s population.

In 2011, McKinsey produced an estimate of the Internet’s economic impact in 13 economies that account for more than 70 percent of global GDP, including the G8 countries, the BRIC countries, Sweden and South Korea. The research found that the Internet generated 10 percent of the GDP growth of the developed countries we studied over the past 15 years and 21 percent over the past five.

But what do we know about the impact of the Internet in the emerging world? Very little research had looked into this question so McKinsey followed up on its analysis of the Internet in the developed world with a study of 30 “aspiring” countries. McKinsey defined aspiring countries as having the economic size and dynamism to be significant players on the global stage and to achieve levels of prosperity approaching those of advanced economies in the near future.

The research showed that the Internet is growing at a tremendous rate in these countries—although with distinctly different paths. Internet penetration has increased at 25 percent a year over the past five years compared with 5 percent in developed countries.

Today, 1bn people use the Internet in aspiring countries, half of the global total, and 535m people use online social networks out of about 957m users worldwide. Mobile technology is allowing millions of people to access the Internet, even without fully developed broadband networks. In 2005, just over half of worldwide mobile subscriptions were in these countries; today that figure is nearly three-quarters. Aspiring countries will, before long, be home to the vast majority of users of the global Internet.

The economic impact of this expanding Internet presence is striking—at $366bn in 2010—but even more so is the tremendous upside if aspiring countries reach developed world levels of access and usage. The average contribution of the Internet as a share of aspiring countries’ GDP is 1.9 percent today—far lower than the average 3.4 percent GDP share in developed countries. Similarly, the Internet accounted for an average of 2.3 percent of economic growth in aspiring economies over the past five years, only about one-tenth of the share in developed economies.

Of all the key users of the Internet—individuals, entrepreneurs, enterprises, and the public sector—it is the first two that have most vigorously adopted the technology. Individuals have been able to garner a considerable consumer surplus that includes access to education, health, government services, and information. For their part, entrepreneurs have been able to access new markets and customers and start businesses that are born global—despite Internet ecosystem constraints.

Although consumers are already enthusiastic Internet users, there is enormous scope for them to reap even more impressive economic benefits. In nine key aspiring countries, we estimate that the consumer surplus ranges from between $9 and $26 per user per month, much lower than the $18 to $28 per user per month we have seen in developed economies.

Today, communication, entertainment, and services enabled by the Internet generate an overall estimated consumer surplus of $135bn per year in aspiring countries. Internet users in these countries are adopting some online activities more quickly than their counterparts in developed countries.

Take social networking: globally Internet users spend 17 percent of their online time on this activity but the number can be much higher in aspiring economies. Mexican users spend 30 percent of their online time social networking and Malaysian users spend 33 percent.

The gap between consumption levels of Web technologies in the developed and aspiring world appears to be closing with younger people leading the trend. In developed economies where mobile penetration is already high, the annual growth of mobile subscriptions has been fairly modest—7 percent in the UK between 2000 and 2010 and 9 percent in the US. But over the same period, subscriptions increased by 22 percent a year in Argentina and 19 percent in Malaysia.

Growth is even more dramatic in countries with significant challenges in their physical infrastructure. During the same decade, mobile subscriptions increased at an annual rate of 67 percent in Vietnam and by 109 percent in Nigeria. Mobile phones are the key to rising Internet penetration thus far. For example, 70 percent of people in Egypt access the Internet in this way.

The consumer surplus in aspiring countries could potentially grow to $364bn annually if fixed line broadband penetration reached today’s levels in developed economies. Even this estimate is conservative as it excludes the benefit to consumers from being able to research products online even if they purchase them offline.

The key will be to ensure that the Internet “ecosystem” develops. This will require a robust infrastructure, easy and inexpensive access to the Internet, robust platforms for e-commerce, and competition to ensure that users have access to rich and compelling products and services.

There is also tremendous potential for enterprises to use and benefit from the Internet—to a much greater extent than they do today. A McKinsey survey of nearly 2,500 small and medium-sized enterprises (SMEs) found that those using the Web have, on average, increased their revenues, reduced the cost of goods sold, and cut their administrative and operations costs. The survey found that 64 percent of SMEs reported increased revenue, with the average gain of 6 percent. One-third of all revenue gains were linked to benefits from email and instant messaging.

Newer technologies such as smartphones and online payment features are also driving revenue. Those with online payments reported double the revenue gains compared with those who are not leveraging this technology. Those surveyed reported that Web technologies had enabled average productivity gains of 11 percent.

Using the Internet is also creating jobs. SMEs surveyed in the eight aspiring economies McKinsey focused on—Argentina, Hungary, Malaysia, Mexico, Morocco, Taiwan, Turkey, and Vietnam—have created 3.2 jobs for every job lost. The equivalent figure in developed country SMEs is 1.6 jobs. Although multinationals and large companies have been early adopters of Internet technologies, entrepreneurs are playing a key role in the increasing power of the Internet. Today, nearly 150,000 Internet-related businesses start each year in aspiring countries. Many of these start-ups have found innovative ways of adjusting to local constraints such as poor infrastructure by, for example, designing new mobile payments methods or overcoming parcel delivery issues shipping to local grocery stores.

Esoko, an online start-up that began in Ghana and is now used in Nigeria and other African countries, collects and distributes data by text message, sends users price alerts and stock information. Egyptian entrepreneurs, frustrated by Cairo’s traffic congestion, set up Bey2ollak, which is a mobile online application offering real-time crowd-sourced traffic updates. In less than a year, the application had 46,000 registered users. Some of the most vibrant online players in aspiring countries have come from entrepreneurs modifying businesses that have proven successful in developed economies. Tudou, China’s YouTube, serves more than 100m videos each day. Colombia has PagosOnline, its equivalent of PayPal. Argentina launched its own version of OpenTable in 2010.

To reach the full potential that the Internet offers, aspiring countries will need to develop their Internet ecosystems and overcome a range of barriers. A vibrant Internet ecosystem requires four major areas of development—human capital, financial capital, infrastructure, and business environment.

McKinsey has quantified these country-level indicators in an i4F Index. When we assessed aspiring countries’ i4F score, we found that there is a high correlation between the state of these foundations and the vibrancy and maturity of the Internet system. Most aspiring countries have low i4F scores, with the biggest gaps in infrastructure and the business environment.

The picture also varies enormously between aspiring countries. Taiwan scores high on business environment and infrastructure and is the only aspiring country whose Internet ecosystem is as vibrant as those of developed countries (but still lags behind them on human and financial capital). Nigeria lags on infrastructure, suffering from a lack of secure services and low-quality electricity supply, while Argentina needs to improve its access to financial capital and tackle weak protection of intellectual property and irregular payments that drive a weaker business environment.

McKinsey’s SME survey in aspiring countries found that the speed of the Internet was a primary constraint, along with the cost and availability of equipment enabling online access. Hurdles also include a relatively low level of digital literacy among users, a lack of awareness about more advanced Web technologies, and even a lack of trust in the Internet among users. SMEs are also constrained by an underdeveloped venture capital industry and a surfeit of red tape.

If aspiring countries systematically overcome these barriers, it is only a matter of time before they develop a much richer Internet ecosystem. The impact of the Internet has been considerable, but there is much still to do to fully tap its enormous potential to deliver sweeping economic benefits to individuals, businesses and the public sector alike in aspiring countries. Now is the time to seize the exciting promise of this new era.

Olivia Nottebohm is a partner in McKinsey’s Silicon Valley office. James Manyika is a director of McKinsey & Company and director of the McKinsey Global Institute (MGI) in San Francisco. Michael Chui is an MGI senior fellow based in San Francisco.

A compendium of McKinsey & Company and McKinsey Global Institute research on technology can be downloaded here.

This article originally appeared on FT.com Connected Business.

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