Economic Impact of the Digital Single Market Modeling of the Digital Economy - Session 1: Quantitative approaches SANKT ANNÆ PLADS 13, 2. 1250 KØBENHAVN K TELEFON: 2333 1810 FAX: 7027 0741 WWW.COPENHAGENECONOMICS.COM
Clients and disclaimer This presentation is based on work for the European Policy Centre (EPC) and its partners within the European Digital Single Market project. >Ericsson >Vodafone >Nokia >Intel >Microsoft >Sitra (Finnish Innovation Fund) >Central Denmark Region The views and opinions are those of the authors. They do not necessarily reflect those of the EPC or any of the organisations participating in the project. 2
Digital single market as next wave of EU integration First wave: The 1992 Single Market Programme > Cechini-report: 4% to 7% GDP growth and 2 million jobs Second wave: The Service Directive > Commission study: 0.6% consumer welfare and 600.000 jobs Third wave: The Digital Single Market > InfoSoc study: 4% to 7% GDP growth and 2 million jobs 3 Partner Martin H. Thelle Brussels 05 NOV 2009
A Digital Single Market (DSM) A harmonised and integrated European market without border barriers, prepared for the future knowledge economy A single market that encourage consumer benefits from crossborder online trade A single market that encourage firms to invest in new innovative online services and applications A single market with a high level of e-skills and e-readiness A single market that encourages investment in digital infrastructure 4
Evidence of a fragmented digital market 1. Little cross-border online trade > EU: 7% shop online cross-border while 33% shop online > Only 21% of EU online retailers are selling cross-border 2. Limited price convergence > See Kuneva Score Board 3. Lack of variety in online services > Many remote and the poorer regions of Europe have no access > Not the same depth and variety of services as in the US 4. Few global EU digital economy firms >In the last decade no EU equivalent of google has emerged >Many EU digital firms has US, not the EU, as second growth market 5
Many barriers Many hurdles before we can achieve the full economic benefits of the Digital Single Market. A DIGITAL SINGLE MARKET Differences in sector regulation, e.g. banking or telecom Differences in taxation and accounting rules and systems Differences in e-business environment TODAY Differences in consumer proctection rules 6 Partner Martin H. Thelle Brussels 05 NOV 2009
Example: e-invoicing E-invoices have passed the one billion mark in Europe E-invoice app. 18 cheaper than a paper-based bill What drives and hinders e-invoicing? Drivers Potential cost savings Pressure from counterparts Joint or open standards Solutions from standard software packages Brakes Critical mass of users needed Ill-prepared billing processes Differences in payment habits and legal traditions Legacy systems Source: Deutsche Bank Research, august 2009 7 Insert names city date in footer
Digital content is a key driver for penetration and bandwidth Reasons for not having internet access: Lack of Content Online content is a key driver for penetration and bandwith. Equipment costs too high Access costs too high 0% 20% 40% 60% Percentage of households, EU27 Content stimulation and creation of new value- added services has an indirect impact on the development of the broadband infrastructure. Source: Eurostat Community survey on ICT use by individuals 8 Martin H. Thelle and Svend T. Jespersen Brussels 10 February 2010
100 Legal barriers to digital single market No. Area Total number of issues Importance of issue 1 = low 2 = medium 3 = high Average importance 1 General 7 3 4 2,6 2 Scope of directive 5 1 4 1,8 3 Applicable law 4 2 2 2,5 4 Privacy & data protection 21 4 10 7 2,1 5 Content & copyright 16 9 7 2,4 6 Liability of online intermediaries 5 2 3 2,6 7 E payments 5 1 4 2,6 8 Electronic contracts 6 6 2,0 9 Net neutrality 9 4 5 2,6 10 Spam 10 7 3 2,3 11 Cybercrime 4 2 2 2,5 12 Dispute resolution 5 5 2,0 13 Self regulation 3 3 2,0 TOTAL 100 6 57 37 2,3 Source: Own analysis based on a draft DLA Piper report prepared for the Commission and presented at a workshop in Brussels in October 2009. 9
What does lack of DSM imply for the EU economy? A number of regulatory differences divides Europe into 27 individual markets. As a result: EU firms and consumers are deprived from accessing new online services and trading online across EU borders => this limits consumer choice and increases prices => depressed demand for new online services and business offerings Firms are deprived from reaping benefits of a large domestic market => this limits development of new digital content and new digital businesses => depressed supply of new online services and business offerings With too little demand and too little supply, the EU lack a market for new online services and digital businesses => this implies less usage of ICT in all sectors (inclunding public sector) => economy-wide productivity gains fail to appear => depresses the need for investment in the infrastructure => underinvestment 10
Factors influencing the economic impact of the digital economy Digital Readiness e-skills, e-awareness, ICT equipment Digital Infrastructure Penetration, coverage, bandwidth Digital Content & Services Harmonisation, large markets, innovation The Commission Equation Use of online service = α x Infrastructure + β x Readiness + γ Use of digital services e-government, e-commerce, ERP, e-health, e-learning, Our Equation ECONOMIC IMPACT Firm-level productivity = σ x Use of online service + f ( ) 11
High impact of ICT usage is correlated with good regulation Comparing productivity estimates (y-axis) with indices of good framework conditions (x-axis) shows positive relation ICT impact on firm level productivity 0,35 0,30 0,25 0,20 0,15 0,10 0,05 0,00 0,05 0,10 Overall ICT Competitiveness CZE ITA GER AUT R² = 0,5001 UK NLD FIN SWE NOR 40 50 60 70 80 ICT impact on firm level productivity 0,35 0,30 0,25 0,20 0,15 0,10 0,05 0,00 0,05 0,10 R&D Environment ITA CZE GER AUT NOR R² = 0,6477 UK SWE NLD FIN 0 10 20 30 40 50 60 70 IT industry competitiveness index 2009: Overall score IT industry competitiveness index 2009: "R&D Environment" score 12
ICT contribution to productivity growth van Ark, Inklaar and McGuckin (2002) examined international differences in labour productivity performance The key differences between Europe and the U.S. are in the intensive ICT using services, with U.S. productivity growth showing a strong acceleration during the second half of the decade, whereas growth stalled in the EU. ICT contributed to widespread acceleration of US productivity growth In contrast to the US, productivity growth in the EU slowed down > Productivity in ICT producing sectors accelerated > but ICT-using sectors did not improve Technology diffusion is a big part of the story > There has been diffusion of ICT in Europe, but slower pace than in the US > particularly during the second half of the 1990s 13
Europe s productivity gap getting bigger since 1995 70 EU14 Productivity Gap to US Output per hour worked, in 2009 EKS$ 14 60 12 50 10 40 8 30 20 US EU14 6 4 10 2 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Note: EU14 is EU15 except Germany (missing data) Source: Own calculation based on The Conference Board Total Economy Database, Jan. 2010 14
ICT Impact on US Labour Productivity IT accounts for 48% of US labour productivity growth in 1995 04, much larger than IT s share of GDP Dale T. Jorgenson (2005) 15
The US has invested much more in ICT than EU since 1995 6,00 5,00 US 4,00 3,00 2,00 EU 1,00 0,00 1985 1990 1995 2000 2005 Source: Sørensen (2007) 16
The European Digital Innovation paradox We have had more broadband lines than US since 2004 but still a wide innovation gap 70 60 50 57,5 48,0 40 30 20 10 0 37,4 39,1 27,7 23,0 19,2 12,4 12,9 6,2 6,0 1,5 2000 2001 2002 2003 2004 2005 US EU Source: OECD Communications Outlook 2007 Could there be other explanations for the EU gap than investment in broadband? 17 Martin H. Thelle and Svend T. Jespersen Brussels 10 February 2010
The Economic Impact of ICT and Broadband two approaches Traditional approach More Infrastructure DSM approach A large harmonised EU Digital Single Market More online subcribers (firms and households) More incentive to innovate (content, applications, value-added services) More use of ICT (business and pleasure) More use of ICT (business and pleasure) Policy prescription: => Invest in more BB Economic Impact Policy prescription: => Harmonise regulation 18
Stimulating supply is as important as stimulating demand Digital development What to do with the infrastructure? What to provide to the users? Skills development Demand stimulation Content development Supply stimulation Infrastructure development Time 19 Martin H. Thelle and Svend T. Jespersen Brussels 10 February 2010
Economic impact in three scenarios 3 scenarios (2006 2015) with the following assumptions: Base case: the adoption of online services continues regularly at the same pace of 3% a year, on average in Europe. Best case: the adoption of online services across Europe until 2015 speeds up to the current adoption rate in the advanced knowledge societies (4.12%). Worst case: the adoption of online services across Europe until 2015 slows down to the current adoption rate in the countries with less developed broadband (1.82%). 20
We argue: DSM is needed to go from base case to best case An ambitious policy response for the digital economy may increase growth rate, leading to a total gain of 7.7 percent to EU27 GDP between 2010 and 2020 Digital economy related GDP growth (EU27) 2010 2020 114 GDP (EU27), index 2010 = 100 112 110 108 106 104 102 100 98 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 +7.7% +3.5% Source: own calculation based on model from Micus (2009) Impact of Broadband on Growth and Productivity A study on behalf of the European Commission (DG Information Society and Media) 21
What characterise firms that deliver digital innovations? Knowledge intensive Large R&D investments Very low marginal costs Substantial network effects (value increases with number of users) Substantial regulatory costs (each new market add a cost) Requires a large scale market to reward the R&D investment 22
Illustration of business model for innovative firm in US + Earnings pr. additional consumer US Average cost pr. additional consumer in the US Number of consumers 23
Illustration of business model for innovative firm in the EU Earnings pr. additional consumer Foregone earnings Average cost pr. additional consumer in EU Germany France UK Italy Number of consumers 24
A framented market discourages innovation A fragmented market is a significant part of the explanation for the low ICT investment in the EU International markets via x-border e-trade are too small Costs of reaching a profitable scale become too high Profitability of certain innovations may be too low As a result, despite similar market size and similar broadband penetration as US, a fragmented EU market provides less encouragement for innovation than the US 25
A major potential A comprehensive policy response A major potential The digital economy can potentially provide a major boost to EU productivity and growth Around 4 pct of EU27 GDP can be gained by stimulating further adoption of e-services in the longer run. The impact of a succesful policy is similar to 1992-SMP A comprehensive policy response No doubt, we will need more investments in digital infrastructure more online subscribers higher penetration We will also need to upgrade e-skills and e-readiness But we will not achieve the full potential without a framework encouraging innovation and diffusion of new content, services and applications A harmonised and well-regulated digital single market is a prerequisite for delivering the needed innovative push to the EU s digital economy 26