Guest Column: A great transformer

By James Manyika And Jacques Bughin

The internet is fundamentally transforming the way we work, socialize, create and share information, and organize the flow of people, ideas and things around the globe. Yet the magnitude of this transformation is often underappreciated, James Manyika and Jacques Bughin write in a column on FT.com.

The internet is fundamentally transforming the way we work, socialise, create and share information, and organise the flow of people, ideas and things around the globe. Yet the magnitude of this transformation is often underappreciated.

In just the past five years, the internet accounted for 21 percent of the GDP growth in mature economies, data from the McKinsey Global Institute shows. In the same period, Facebook membership grew from a few thousand students to more than 800 million users around the globe, including many of the world's leading firms, who regularly use this pioneering platform to update their pages and share content.

McKinsey research on the use of Web 2.0 reveals that by integrating the internet into their workflows, large enterprises are reaping significant benefits from this technological revolution. The internet has enabled wholesale changes in how companies design, produce and distribute their products, not just how they are bought and sold. Companies are leveraging "big data" generated and communicated by the internet to make more analytically-driven decisions and generate more competitive insights in real time. The internet challenges firms to constantly rethink how they organise, tap into talent, and engage with their customers. It also challenges firms to innovate their business models, lest competitors do it for them—whether large or small, from within their own sector or outside it, local or from the other side of the world.

Yet the internet has also served as a great leveler, making it possible for "micro-multinational" entrepreneurial firms to be born global from day one, with the international reach and capabilities that once only large companies could command. This technology has also empowered consumers, allowing them to compare prices, locate specific models of motor vehicles or attractive rental properties, and access health and educational information. We estimate that the consumer surplus generated by the internet in 2009 ranged from $10 billion in France to $64 billion in the United States.

So as government officials, tech executives, internet activists and security experts meet at the London Conference on Cyberspace to discuss the management of the internet today, it is vital to recognise and embrace the enormous opportunities the internet is already creating, even as they work to address the potential risks to security and privacy the internet may introduce.

While the internet has already served notice it will be a disruptive force shaping the economy and society of the 21st century, it can be a highly positive disruptor, enabling the creation of whole new industries, new avenues and possibilities for growth to regions of the world that have been disadvantaged, and offering hope and opportunity to millions with its ability to spread knowledge, empower consumers and organise social interactions. These opportunities are especially important as leaders seek new ways to revitalise global growth.

Let's examine the internet's economic influence. Our research shows that using an expenditure approach the internet accounts for, on average, 3.4 percent of GDP across the large economies that make up 70 percent of global GDP. If internet consumption were a sector, its size in GDP would be bigger than the energy or agricultural industries while its total GDP contribution would exceed the output of Canada or Spain. It is also growing faster than the GDP of Brazil.

And while the internet has made some jobs obsolete, the early evidence suggests the internet actually creates many more jobs than it destroys. Not only do new startup firms need to hire engineers, sales and service personnel to design and deliver internet products and services, but traditional firms need new workers to make their businesses more web-savvy and productive. A detailed analysis of the French economy, for example, found that while the internet may have made 500,000 jobs redundant, it created 1.2 million jobs—or 2.4 jobs for every one destroyed. A survey of small and medium enterprises found 2.6 jobs were created for every one that disappeared.

In every country, the internet can help economies grow, but the opportunities are greatest in less developed nations, where the internet can help nations "leapfrog" from subpar to cutting-edge connectedness, just as some developing nations have deployed wireless technologies, rather than upgrading expensive landline systems, to create effective communications systems.

There is no single path to build an effective internet economy. However, our research shows that only a strong and open internet ecosystem—one that fosters competition, encourages innovation, develops human capital, and builds out a comprehensive internet infrastructure and boosts access—enables a country to capture the maximum value this technological transformation offers. As policy makers seek to enhance the positive impact of the internet on their economies and their citizens, a number of key goals can help them steer an appropriate course.

  • Foster competition. Countries that make their markets more open and competitive achieve greater productivity. Such competition ensures that the most innovative and productive companies that create more attractive products and services gain market share over the less productive.
  • Encourage innovation and entrepreneurship to capture internet related growth. Access to start-up capital, protection of intellectual property rights, support for research and development and the availability of world-class "commons research" conducted by universities and government-funded teams are features of such an environment.
  • Develop human capital. Clusters of innovation that form around world-class universities create the dense, interconnected social webs of personal relationships that enable vibrant ecosystems of entrepreneurship to form. Silicon Valley may have been the first such cluster, but other clusters could soon take root. As the power and pervasiveness of the internet grows, talent and skills will be required in ancillary activities as well as in multiple sectors to fully capitalise on innovations such as Big Data and analytics and other activities as more products and services are created and delivered via the internet and information flows of all industries are enabled by the internet.
  • Expand and improve infrastructure. A world-class infrastructure and ease of access is a prerequisite for growth and usage of the internet. It creates the platform upon which users and organisations experience the internet and upon which entrepreneurs and businesses innovate. As the internet continues to expand in an era of cloud computing, "big data" streaming in from objects as well as from people, and the creation of new commerce platforms, infrastructure and access requirements will continue to grow.

Business leaders, even those whose companies are not directly involved in internet industries, must also become proactive in taking advantage of the benefits the internet offers. With technologies changing so rapidly, executives must regularly review their businesses, looking for ways the internet can help them innovate more aggressively or reach new markets more rapidly. They need also prepare themselves to reinvent their business models to capture productivity and performance improvements the internet unlocks. Firms who find this too hard, or who don't want to devote the time and energy to such constant innovation, may well soon encounter a startup nearby or competitor across the globe capable of doing it to them. Never has been the maxim from Andy Grove, the former chairman of Intel, been more true: "Only the paranoid survive."

Governments should also look to the internet to enhance the productivity of the public sector—especially in healthcare, education and other government services. In most countries, the public sector not only lags in productivity, it has been slow to fully capitalise on the benefits that the internet and related technologies can provide. These range from providing effective and transparent information to citizens, to improving the efficiency of government services.

Naturally, certain risks have grown along with the internet's rapid adoption. Concerns about privacy, online fraud, identity theft and hacking of sensitive materials and databases have captured significant attention. The frameworks that govern access, usage, protection of various rights and considerations of security must be constantly reviewed and evolved. Developing standards for legally valid, secure digital identities, for instance, could boost efficiency in online business transactions, while a regimen of appropriate intellectual property rules would further spur internet creativity and open new markets.

But these legitimate policy concerns should be weighed against the opportunity and growth potential the internet offers to enrich lives, build businesses and give consumers enhanced choices in the years to come. Achieving the joint aims of security and protection on the one hand and economic growth and wider participation on the other will require collaboration across the private, public and non-profit sectors.

G-20 members gathering in Cannes later this week to address the effects of the global financial crisis should collaborate in a fact-based, public-private dialogue to assure optimal conditions for the development of a healthy internet ecosystem, within each country as well as internationally. Open discussion between governments and business leaders can help create a constructive environment in which the benefits of the internet can be better understood even as the risks are mitigated.

As the aftermath of the global financial crisis challenges our government and business leaders to innovate as never before, we should not lose sight of the enormous value the internet economy has already brought to rich and poor nations alike and its potential to boost growth across the globe.

James Manyika is the San Francisco-based director of the McKinsey Global Institute (MGI), McKinsey's business and economics research arm. Jacques Bughin, based in Brussels, is a director in McKinsey's Business Technology Office.

This column originally appeared on FT.com The Connected Business.

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