In my article last week, I introduced the concept of digital spill over and highlighted the importance and multiplicative effect of digital investments. Such improvements at firm level aggregate on a sectoral and economy level thus contributing to a snowball effect on productivity, competitiveness, and investment attractiveness. The result is a higher value of output and an improved quality of life.
Data 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. 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.
The internal channel describes how companies can often significantly amplify the initial gains they receive from their technology investment, as they learn more about how to leverage it. For example, the global logistics firm, UPS, invested in Global Positioning System (GPS) tracking and digital maps for all of its delivery vehicles to improve the tracking and efficiency of their deliveries. This initial outlay delivered considerable improvements to the reliability and speed of UPS deliveries, successfully lowering unit costs. But over time, the company discovered new ways to leverage those on-board technologies and the data being produced by deliveries in new, impactful ways. In one example, UPS reconfigured its vehicle routing algorithms to "stop turning left” (in countries with right hand traffi c), which had been identified via analytics as a move that raised the chances of an accident and involved longer periods in standing traffiC. This innovation led to a 10-million-gallon reduction in fuel consumption, 20,000 tons fewer carbon dioxide emissions and 350,000 more deliveries being made, per year. These gains could not have been possible without the initial investment in on- board computers and GPS technology that the company made, but the full effect of early investments took years to come to fruition.
Digital technologies are speeding up our ability to leverage our own knowledge and experience. Advances in AI, analytics and the IoT will speed up our abilities to make sense of the impact new technologies are having. Many companies, especially those with offices scattered around the world, use internal collaborative platform tool to encourage employees to share new ideas that can help to improve business.
The horizontal channel describes the process by which an innovation by one company is emulated by others, leading to productivity gains across a wider sector. This is the hallmark of a competitive market, and you can see examples everywhere you look. The first real estate agents that digitised their property listings, dramatically cutting the cost and time of getting their properties to market, led the way for the whole sector to shift its marketing
activities online. Similarly, the earliest investors in precision agriculture, which developed satellites, software, and pattern recognition technologies to gain valuable improvements in their crop yields, established techniques that were quickly emulated by farmers and producers around the world. Likewise, the banks and fintech start- ups investing heavily in blockchain and instant payment mechanisms today, are devising solutions that will be eventually replicated throughout the financial service sector. Horizontal spill overs depend on information held by one company transferring across to others. This can come from the movement of staff, the publication and sharing of knowledge, or simply by replication.
The horizontal spill over is traditionally best understood as a within-sector phenomenon, but digital technologies extend its scope. The ubiquity of networked computers means that companies across all sectors are increasingly technology-dependent and data-intensive. Information about a technological innovation by one company, in one sector, can be quite valuable across a whole host of sectors, where its success might be emulated. Furthermore, the low cost of information transfer that has been established by global internet coverage and cloud technologies means that information about new innovations can just as quickly spread from Berlin to Bangalore or Boston. The implications of any given technology innovation are now rapidly global.
Finally, the vertical channel describes the process by which the productivity gains achieved in the delivery of digital goods and services are passed down the supply chain from primary producers to end users. Vertical spill overs can occur in any supply chain, but the effect is particularly powerful with digital innovations. This is because a) digital technologies are now so broadly embedded in a wide range of sectors and business activities, and b) improvements have the potential (via systems upgrades, or infrastructure improvements) to roll out extremely quickly across a large network of users. In this new era, the source of technological innovations is widening and growing more complex, and the benefits can spill over to other companies, up and down the supply chain. E-commerce platform is an example of a digital investment in the middle of a supply chain which provided vendors and customers with more efficient channels to connect, instigated producers upstream to digitalize their business models as well catalysing a digital transformation of logistics and transportation networks downstream. Many technology-related innovations are now taking place outside the technology sectors, in financial services, health and manufacturing for example, meaning the number of channels for these supply-chain effects is multiplying.
New technologies can be used at all stages in the operation of different sectors and activities. They are specific sources of value for companies and businesses that require a clear connection between business needs and the impact of the solution and a clear vision of how to use the solution that is going to be incorporated. The potential of these technologies is not common to all economic activities; it depends on each sector, its degree of sophistication and linkage with other activities, the technology incorporated and the capabilities and skills of workers, as well as the context in which companies and businesses operate. The adoption of new technologies entails a reconfiguration of the entire production chain, involving new links, services, and companies, which opens opportunities for sectoral diversification and skills development. All of this can lead to tangible gains from a national level leading to a sustained improvement in the 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
The writer is a senior advocacy manager at GSMA