As economies continue to emerge from the pandemic and its economic effects, they need to consider how to transform their industries to be competitive in the new normal. ICT will be at the forefront of any organisation’s strategy from now on. It is Imperative that policy makers understand how the competitive landscape has changed and how to build a national competitive advantage. American economist Michael Porter argues that an economy’s competitive advantage is driven by a differentiating combination of basic and more advanced national factor endowments nurtured in the context of local demand and related local suppliers, all working together for the national good. Basic factor endowments are typically hard to develop or acquire. Basic factors are inherited and require little or no new investment to be utilised in the production process. Factor endowments are not static. With education and training, for example, the characteristics of the labor force can change. Basic factors alone do not explain how countries such as Singapore, Japan, and Ireland can grow their economies beyond the advantages that basic factors confer. In contrast to basic factors, advanced factors are human made. They are then upgraded through reinvestment and innovation to become specialised factors. According to Porter, these form the basis for the sustainable competitive advantages of a country. Countries with limited basic factors can (and are often forced to) outcompete their peers by developing advanced factors. Government policies play a key role in developing advanced factors. Investments in selected advanced factors are needed to help an economy boost productivity and product quality and move into higher-value sectors that will generate economic wealth and jobs in the new normal. This is like how advanced factors can enable a country to enhance its productivity and quality of life and work. Porter outlined the following advanced factor endowments as critical, and noted that their developments need to be carefully coordinated so that the factors build upon each other synergistically: Investments in secondary and university education support the development of skilled labour and technology research, while digital infrastructure supports better national-level communications and enables new technology innovations, spurring further education and research. Not all advanced factor investments are equally effective at promulgating national productivity. In an increasing digitalised world, advanced factor investments in ICT concentrate an economy’s value-add in a self-reinforcing cycle of innovation. Within a few years, we expect that the bulk of global GDP will be driven by digital products and services enabled by ICT. In fact, digital investments catalyse other investments and is a critical lever in leveraging national productivity and competitiveness. Digital spill over happens when technology accelerates knowledge transfer, business innovation, and performance improvement within a company, across supply chains and amongst industries, to achieve a sustainable development economic impact. The digital spill over is crucial to the growth of the digital economy. A study by The Global Connectivity Index, across a sample of around 100 countries over three decades, found that the full impact on the economy of digital investments was much greater than what might be inferred from the direct gains flowing to the investor. This extra impact is driven by the digital spill over, and it makes a considerable difference. The analysis shows that every US $1 invested in digital technologies over the past three decades has added US $20 to GDP, on average. This is an enormous return compared to non-digital investments, which delivered an average return of around US $3 to US $1 invested.3 This result shows that for every US $1 investment the average return to GDP is 6.7 times higher for digital investments than for non-digital investments. The indirect impact of digital investments can often outweigh the direct returns to the investor. Every investment businesses make in digital assets — such as upgrading their computer hardware, building new software solutions, strengthening their network infrastructure — is designed to boost productivity. But zooming out from these case-by-case investment decisions, the true economic impact of digitalisation is much broader, more complex, and far-reaching than this. Over and above the private gains to the investor, a more profound chain of indirect benefits also rolls out when businesses invest in digital technologies. There are three key channels through which it can materialize, namely internal, horizontal, and vertical channels. These elements will be investigated in more detail in my next article. It is obvious from the evidence and literature that digital investments need to be at the core of any economic recovery strategy and vision. A smart country and one that is digital to the core will be the key to ensuring long-term productivity, investment attractiveness and a sustained quality of life. The writer is a co-founding partner of Seed, an international research driven advisory firm with offices in Europe and the Middle East. www.seedconsultancy.com | jp@seedconsultancy.com
