special report | 19 january 2015 technology: … · the three c’s −connectivity, ... the cloud,...

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Special Report | 19 January 2015

Technology: Reshaping the global economy

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19 January 2015 2

Table of contents

Highlights ......................................................................... 3

Executive summary ......................................................... 4

Technology and the economy ........................................ 9

Technology and the economy .......................................... 10

Excitement and worry ...................................................... 10

General purpose technologies ......................................... 11

How technological change affects the economy .............. 12

Jobs and the distribution of income ................................. 17

The new digital technologies............................................ 22

Robotics ........................................................................... 27

Other technologies ........................................................... 31

Digital applications in finance ........................................... 33

Adoption of technologies ................................................. 35

Are we better at innovating? ............................................ 36

On balance, new technologies improve sustainability ...... 39

Technology in developed markets ............................... 40

Technology in developed markets ................................... 41

Life at the frontier ............................................................. 41

Secular stagnation? ......................................................... 43

Countries’ openness to new technology .......................... 45

Optimal policy for developed countries ............................ 50

Conclusion: Innovate or stagnate .................................... 54

Technology in emerging markets ................................. 56

Technology in emerging markets ..................................... 57

The impact so far .............................................................. 57

The Standard Chartered Technology Achievement Index

shows progress ................................................................ 60

Technology — a threat to emerging markets? .................. 65

Threat 1: Technology could widen income inequality ....... 65

Technology − An opportunity for emerging markets? ....... 68

Hurdles to technological advancement in EMs ................. 73

The Networked Readiness Index in emerging markets .... 75

Optimal policies ................................................................ 77

Conclusion: Adoption is everything .................................. 79

Individual economies ..................................................... 80

Australia ........................................................................... 81

Germany ........................................................................... 83

India.................................................................................. 86

South Korea ..................................................................... 90

Taiwan .............................................................................. 94

Thailand ............................................................................ 98

United Kingdom .............................................................. 101

United States .................................................................. 104

Appendix ....................................................................... 109

References .................................................................... 112

Acknowledgements

We would like to thank everyone who generously shared

their insights during research for this report and a special

thanks to Tac Leung, Todd Schofield and Peter Shiau for

arranging the meeting schedule in San Francisco and

Silicon Valley

.

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19 January 2015 3

Highlights

Digital technology is transforming the economy and society

The three C’s − connectivity, zero copying cost and exploding computer power

(potentially rising 32 times by 2025) − are driving digital technologies forward.

In the next few years mobile, the cloud, big data, the ‘Internet of things’ and drones

will lead. AI systems, 3D printing, robots and driverless cars are close behind.

Innovation is likely accelerating due to rapidly expanding research in emerging

markets and more focus and better processes for innovating, including financing;

digital technology itself is speeding up invention and adoption.

Digital technology is changing what, how and where we produce; the

infrastructure, law and regulations needed; and the nature of work and leisure.

Adoption not invention has the most economic impact

For developed markets and especially for emerging markets the adoption of new

technology is more important than new invention.

Adoption is often held back by labour- and product-market inflexibility; Reforms

here are more important than ever. Technology-friendly policies can also help.

Technology can lift developed countries if they embrace change

Singapore, Hong Kong, Korea and Taiwan score best on technological

readiness, along with the US, UK and Germany. Southern Europe lags.

New must-have products and cost-saving technologies could soon bring a surge

in business investment, boosting economic growth. However the low and falling

cost of computer equipment may mute the macroeconomic impact.

Technology should lead a recovery in productivity growth in developed markets

from recent low levels, reducing current fears of ‘secular stagnation’.

Fear of high unemployment caused by technology is misplaced, though

repetitive cognitive and manual jobs will continue to be replaced by machines.

New technologies offer opportunities, challenges for emerging markets

Many emerging markets still need to spread old technologies, such as electricity,

clean water and rapid transport, beyond cities. High investment, improved

education and access to foreign investment and trade remain crucial.

China, Nigeria, Russia, Saudi Arabia and the UAE have made the most progress

since 2000 on our technology achievement index, while other countries in SSA

have made less progress. However, when we compare their 2013 levels with

GDP per capita, Sub-Saharan Africa looks reasonably placed.

Technology is opening up services to rapid productivity growth and for export

opportunities, especially in finance and business services. For emerging markets

such as India and Vietnam, this is a promising new source of growth.

Robotics, 3D printing and smart AI will challenge the EM advantage in low-cost

manufacturing and services eventually. But mobile, the ‘Internet of things’,

cheaper broadband and better video-conferencing including virtual reality will

support the further expansion of global value chains for the next decade at least.

Fast-growing EM economies can incorporate the latest technology in buildings

and processes, giving them an advantage over older countries.

EM economies can sometimes leapfrog: mobile replacing branch networks,

Internet shopping replacing shops, or drones for delivery instead of better roads.

Digital and other new technologies such as renewable energy and

nanotechnology provide optimism that global resource constraints can be

hurdled and that development will be sustainable in the long term.

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Executive summary

1. Technology and the economy

Rapid progress in artificial intelligence (AI), big data, mobile, the cloud, the ‘Internet of

things’, 3D printing and robotics heralds the third stage in the digital revolution; the first

was main-frame computers in the 1960s, the second personal computers combined

with the Internet in the 1990s. While there is much hype, the three C’s of rising

computer power, increased connectivity and the zero cost of copying digital information

are coming together to disrupt business models and bring profound economic change.

Digital technology is a general purpose technology (GPT), meaning it is changing not

just the goods and services produced, but also where and how production is

organised and managed; the infrastructure, laws and regulations needed; and the

nature of work and leisure. In developed markets it has already pervaded life,

transforming office work, retailing, communication and entertainment.

Mobile, the cloud and big data are already expanding rapidly while the ‘‘Internet of

things’’, (linking machines together) and drones are ripe for rapid expansion. Mobile

is changing business models and spreading rapidly as more people in emerging

markets use Smartphones. For some this is their first connection to the Internet.

Close behind are robots, AI that can replace or supplement experts, 3D printing to

make customised products, drones and driverless cars.

The robots are coming; we identify seven promising uses

Robots are likely to be the most visible of the new technologies, as they emerge from

their cages in factories and gradually become pervasive in the work environment,

home and street. Progress in machine learning, helped by the exponential growth of

computer power, is freeing them from the need to be comprehensively pre-

programmed, allowing them to interact safely with people and take on more tasks.

We highlight seven areas where robots are likely to make a big impact over the next

10 years: working alongside people on the assembly line; delivery; consumer robots

including vacuums, mops, lawnmowers etc.; drones (flying robots); elder care; fast

food restaurants; and vehicles (driverless cars).

The pace of technological change and innovation is increasing, propelled by digital

technology itself, which spreads ideas quickly; better innovation linkages between

government, universities and businesses; and the increased number of researchers

in emerging countries. For example, China alone is reported to have over 400 robot

makers and 30 industrial parks for robotics.

Economic impact

Whether technological change drives investment or investment drives technological

change has long been debated. But the US, at least, appears poised for investment

acceleration, with the global financial crisis fading, stock prices high, credit cheap and

businesses both excited and nervous about the opportunities for new technology.

Productivity growth has been disappointing in recent years, though this can be

explained mainly by cyclical factors. The new technologies should help it to increase,

http://app.brainshark.com/standardcharter/vu?pi=zI8zuMHlozJyO7z0

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though they are unlikely to boost productivity growth to the rapid pace seen in the

post-war period when the effects of several GPTs, including electricity, the internal

combustion engine and mass production, combined. The example of electricity in the

early 20th

century suggests that GPTs can bring an initial slowdown in productivity

growth until businesses learn how to use them effectively.

Faster productivity growth implies job losses as automation replaces people in

certain tasks and roles. The jobs most at risk are repetitive jobs, both manual and

cognitive. But we reject the notion that new technologies will create mass

unemployment, as do most economists, though these technologies could continue to

widen income distribution. But they might not; new AI systems could allow people

with middle-level skills to take on more demanding roles. Experts who rely only on

knowledge, experience and logical thinking may find their roles in jeopardy. Human

skills such as problem-solving, interactive communication and situational adaptability,

as well as the ability to work well with AI, will be most important.

2. Technology in developed countries

The US remains at the forefront of technology adoption and innovation, supported by

its relatively flexible, large economy, entrepreneurial spirit and well-developed

innovation clusters, led by San Francisco and Silicon Valley. The US dominates the

list of top quoted IT companies. Technology allied with higher investment should

deliver faster growth in coming years.

Worries about ‘secular stagnation’ will likely prove misplaced as they did in 1938

when the thesis was first proposed. Demographics point to lower growth than before

but most of the other reasons for worrying are likely cyclical. Still, the US may be

losing its dominance in innovation as other countries, particularly in Asia, move up.

The Networked Readiness Index (NRI) from the World Economic Forum finds

Singapore and Sweden at the top, with the US, Hong Kong, the UK, Korea, Germany

and Taiwan just behind. This index looks at 54 indicators to assess the overall

innovation environment, readiness to adopt, actual usage and the impact.

Governments in Singapore, Korea and Taiwan actively promote innovation and have

achieved good results. Korea’s companies leapfrogged on consumer electrical,

printer and mobile technology to take leadership in many areas. The challenge now

is to maintain this lead, which will require a flexible and creative approach.

Southern Europe is lagging

France, Spain and especially Italy perform relatively poorly on the NRI and there are

concerns that Europe may be lagging in the digital revolution. Europe’s notoriously

inflexible labour and product markets are even more of a liability in the face of the

economic transformation brought by a GPT. This situation is not new; Europe was

much slower than the US to adopt electricity in the 1920s and 30s.

Countries are trying to develop a ‘national innovation system’, a combination of

liberalising policies and innovation promotion policies across the business

environment, technology policy and regulation. Competition between countries and

companies is helping to drive change, though for many countries managing the

basics of labour-market flexibility, low taxes and education policy is the most difficult.

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19 January 2015 6

Many governments also recognise the advantages of encouraging high-skilled

immigration, but this is also a politically contentious area.

3. Technology in emerging markets

Emerging countries are still well behind on the adoption of old technologies and the

new technologies offer both challenges and opportunities. New technologies are

being adopted faster in emerging markets (EM) than were old technologies like the

telephone, but the penetration rate beyond main cities is slower.

China, Nigeria, Russia, Saudi Arabia and the UAE have improved the most since 2000

on our technology achievement index (TAI), while India, Pakistan and Kenya have

made little progress. However, a comparison with levels of GDP per capita suggests

that Sub-Saharan African (SSA) countries are doing reasonably well, while Saudi

Arabia, UAE and Nigeria lag in relation to GDP per capita, reflecting their oil wealth.

We also compare the scores on the Network Readiness Index with levels of GDP per

capita and again find Africa performing relatively well. China does well on a range of

indicators but lags on the business and innovation environment. India falls down on

infrastructure, though the Indian government does well on adopting technology.

Threats from new technologies are likely exaggerated

One threat is that new technologies will exacerbate the inequalities within and

between countries. Digital technology favours people with education and high skills.

The spread of Smartphones may help to change this but raising education levels and

increasing familiarity with digital technology are of paramount importance.

Another threat is the risk that 3D printing and robotics undermine emerging countries’

comparative advantage in cheap labour, unravelling the manufacturing supply chain.

But it will take some time for the price of capable robots to fall to the level of wages in

lower-income emerging countries such as the Philippines or Vietnam. And

developed-market (DM) companies would have to reorganise and invest heavily to

bring production back home.

Also, EM suppliers usually offer a complete service, including arranging production,

dealing with suppliers, packaging and delivery, only part of which could be replaced

by robots. Companies in China and other emerging countries are also investing in

robots to keep costs down. Meanwhile, accelerating broadband speeds, improved

video-conferencing, virtual reality and the ‘Internet of things’ will continue to make it

easier to outsource production. We believe the expansion of supply chains has much

further to go, at least for the next decade.

The final threat is that if jobs in low-cost manufacturing dwindle, services will not be

able to provide enough jobs. On balance we see the services sector as an opportunity.

It can be a source of economic growth, especially because the new digital technologies

have brought a revolution in productivity in services, even in traditional services such as

retailing. Digital technology makes it possible to trade many services which were

previously regarded as untradeable. Higher productivity means fewer jobs, at least at

first, a challenge in countries where the labour force is rising fast. This underlines the

importance of providing conditions for fast growth and emphasising education.

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19 January 2015 7

The new technologies provide EM economies with many opportunities

Services as an export platform have the disadvantage of requiring skilled labour,

unlike the unskilled labour often employed in low-wage manufacturing. Moreover, the

skills required are likely to rise as call centres and tech support are increasingly

automated using AI systems that can understand conversations and answer

questions. But the potential for further services outsourcing remains huge, as digital

connectivity continues to improve.

Another big EM opportunity is that the price of digital technology is coming down fast.

This makes it sometimes possible for countries to leapfrog old technologies, reducing

the need for large infrastructure investment. Smartphones, on-line shopping and

mobile banking are already making a big difference. There are hopes for drones and

solar power to help connect remote locations.

New technologies can also help hurdle the resource constraint barrier. New energy

sources, both fossil fuels and renewables at reasonable prices are vital for continued

EM growth. Digital technology can help conserve energy better.

The new technologies can also combat inefficiency and corruption. Governments can

use digital payments to cut out middle men in providing welfare, while several

countries have set up websites to report corruption, such as Stopthebribe in Nigeria.

Online instructional materials ranging from short videos to massive online open

courses (MOOCs) offer affordable access to the best material from developed

markets and could spread ideas between emerging markets. Many children in

emerging markets lack textbooks and teachers are often absent. Translation services

and speaking phones could help with literacy issues.

Hurdles to technology adoption

Technology adoption, old and new, is vital to economic development and the new

digital technologies can help. But there are hurdles too. Lack of electricity is a

problem in many countries, despite opportunities for leapfrogging. More than two-

thirds of the population in SSA lives without electricity. Solar power may be a solution

but requires investment. Lack of education and skills is a key constraint. This is a

particular concern because countries with the weakest performance tend also to be

the ones with the fastest-growing populations, in Africa and India.

Possibly the biggest hurdle is the structural bottlenecks characteristic of emerging

markets, including political instability, limited rule of law, product- and labour-market

inflexibilities, the difficulty of starting a business, and poor intellectual property rights.

Many of these problems existed before digital technologies and have not gone away.

Digital technologies provide some new tools to help solve them, but also make

solutions more urgent. This requires a strong reform agenda.

How far EM governments should deliberately try to boost new digital industries is a

matter of debate. Some countries in East Asia have had great success with such

approaches, while other countries have not been so successful. Any policy that tries

to support domestic industry by restricting imports is very risky. But there is a good

case for trying to build on strong companies and industries. Still, for all countries, and

especially emerging markets, adoption is more important than invention. The main

gains from innovation go to the users, not the producers.

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Figure 1: Internet use in emerging markets still low compared to that in developed countries

% of individuals using the Internet, 2014

Very low Low Moderate High Very high

N.A. <20 20 - 40 40 - 60 60 - 80 80 - 100

Source: WEF GCI, Standard Chartered Research

Technology and the economy

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19 January 2015 10

Technology and the economy

Excitement and worry

The pace of technological advance is creating a rising tide of excitement. Enthusiasts

see the new digital technologies of artificial intelligence, big data, mobile, the cloud,

the ‘‘Internet of things’’, 3D printing and robotics as heralding a new technological

revolution, on some accounts as profound as the adoption of electricity at the turn of

the 19th century or even the industrial revolution itself. There are also exciting

advances in other areas such as new energy sources, genomics and

nanotechnology, which are transforming a range of industries including health care,

energy, materials and agriculture.

Established businesses are paying rapt attention to the new developments,

fascinated by the potential but also nervous about disruptive changes that could

transform markets and deliver business into the hands of digital companies, whether

start-ups or the large technology companies. San Francisco and Silicon Valley are at

the forefront of the innovation wave and many large companies are establishing

‘outposts’ there to study the new developments and organise ‘technology tours’ for

senior managers. Around the world countries are trying to galvanise similar

innovation clusters. Meanwhile, the popular press is full of stories of how ‘the robots

will take our jobs’ while analyses of widening inequality peg ‘skills-biased

technological change’ as a key cause (Special Report, 16 July 2014, ‘Taming the

Gini: Inequality in perspective’).

The paradox is that productivity growth in developed countries, which should be at

the forefront of technology, is relatively weak (Figures 2 and 3). Labour-productivity

growth in the US has averaged only 1.4% over the last five years while other

developed markets, including Europe, Japan and Korea are similarly weak. And,

despite fears of job losses, economists and central bankers in the US and UK have

been bemused by the surprisingly rapid decline in unemployment.

In emerging markets the pace of adoption of old technologies is still crucial. First-

world technologies are typically prevalent in big cities but sparse in other parts of the

country. Still, while finding the right formula for spreading those technologies through

growth, investment and education remains central to development, the new

technologies also offer an opportunity.

Figure 2: Total factor productivity growth

Annual average, % (5-yr moving average)

Figure 3: Labour productivity growth

GDP per person, annual average, % (5-yr moving average)

Source: The Conference Board Total Economy Database (Jan 2014) Source: The Conference Board

US

Europe

Japan

World

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

US

Europe

Japan

World

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

John Calverley +1 905 534 0763

[email protected]

Economics Research

Standard Chartered (Canada) Limited

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Countries can sometimes leapfrog old technologies; for example, using mobile rather

than fixed telephone lines, while new technology can overcome infrastructure

limitations such as poor roads and railways or lack of retail stores or bank branches.

As countries build new infrastructure and buildings they can incorporate the latest

energy-saving and smart technologies, saving on running costs. The newer

developed countries such as Singapore and Hong Kong demonstrate the advantage

countries can gain from modern buildings and infrastructure compared with the

ageing legacy in Europe and the US.

But productivity growth appears to have slowed in many emerging markets too, as

the benefits of past economic reforms fade. There is an urgent need to liberalise

economies and encourage private-sector investment, a path clearly laid out in

reforms planned in India, China and Mexico, though still missing in many other

countries. New technologies increase the importance of relaxing labour- and product-

market rigidities. Investing in both old and new technologies is vital to lifting growth.

General purpose technologies

Digital technology or information and communication technology (ICT) is widely seen

as a ‘general purpose technology’ (GPT), comparable with steam power or electricity,

or − further back − iron smelting, the domestication of animals or the wheel

(Jovanovic, 2005). GPTs do not simply provide new products, but change virtually

everything: the types of goods produced, how production is organised and managed,

where it is produced, the infrastructure that is needed to support it, the laws and

regulations needed to allow and encourage it, and the nature of work and leisure.

One study found 24 technologies in history that can be classified as GPTs (Lipsey,

2005), though there is considerable disagreement over what qualifies (Figure 4).

The impact of electricity was not simply the reduced cost of electric power in place of

steam, or electric lighting in place of gas lighting. It brought a whole host of new

products: kitchen appliances; new entertainment and information products such as

cinema, radio and TV; electric starting motors and control systems for machines and

vehicles; and portable power tools. It also transformed the layout of factories by

facilitating assembly lines and of offices through the use of lifts, electric lighting and

later air-conditioning.

Figure 4: Selected general purpose technologies

Approximate time period

Source: Lipsey 2005, Standard Chartered Research

Domestication of plants 10,000BC

Dom of animals 8,000BC

Smelting of ore 7,000BC

Wheel 4,000BC

Writing 3,400BC

Bronze 2,800BC

Iron 1,200BC Three-masted ships 1400

Steam engine 18th century

Railways 19th century

Internal combustion engine 19th century

Electricity 19th century

Mass production 20th century

Digital technologies 20th century

10,000BC 8,000BC 6,000BC 4,000BC 2,000BC

Printing press 15th century

200 400 600 800 1000 1200 1400 1600 1800 2000

General-purpose technologies such

as steam, electricity or ICT change

virtually everything

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Digital technologies, which have already given us new machines in the form of the

laptop, tablet, Smartphone, digital camera and GPS system, promise smart AI, virtual

reality and 3D printing, among other things, in the next few years. They have also

brought new processes (software and apps) that enhance work and play and connect

and communicate across distances as never before. These technologies have

transformed factories, offices and homes, with more to come. ‘The Smartphone is the

new office’.

Some argue that digital technology will not have as much impact as electricity,

especially since electricity coincided with other technologies which likely qualify as

GPTs, including the internal combustion engine and mass production. Others

suggest that digital technology will prove more influential than a new power source

such as electricity or steam (Ristuccia, 2010). Below we detail the new technologies,

to assess their prospects in the coming decade. First, we investigate how technology

impacts the economy.

Figure 5: ICT innovations in the last 30 years

Hardware Software/communications Business processes

PC Spreadsheets Inventory management

laptops Word processing Information websites

tablets Presentation/publishing e-commerce

Mobile phones Email Internal admin systems e.g., HR, payroll, recruiting

Smart phones SMS Logistics tracking

Digital cameras Search Customer self-booking systems

Scanners GPS Accounting systems

Automation of machines Social networking Security systems

Self-service ATMs/kiosks Media file compression Electronic trading

Bar codes e-marketing

Video-conferencing Home-working

VPN Outsourcing of processes

Source: Standard Chartered Research

How technological change affects the economy

A wave of new investment?

New technologies might stimulate a wave of new investment. If these technologies

bring new must-have products or cost-saving processes, business investment could

surge as companies rush to meet the new opportunity. Economist Joseph

Schumpeter, writing in the 1940s, popularised the idea of ‘creative destruction’, which

he described as ‘’the essential fact about capitalism” (Schumpeter, 1942). In his view

waves of innovation cause a creative destruction process that generates long cycles

of economic activity. The strongest push comes if the technology requires associated

infrastructure, as electricity required generating stations and power lines, while the

car required roads and gasoline stations. Digital technology has stimulated

infrastructure spending on cabling, satellites, phone masts and servers.

There seems to be a good chance that some of the new technologies could spur a

new investment wave in coming years. However this is not to say that there will be a

sudden investment surge in 2015-16. It may take longer. Moreover, because the cost

of computing power is falling so fast, the scale of the investment required may not be

that large. New technologies tend to be relatively small inexpensive items, such as

Technological change could

stimulate a wave of investment

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chips, Smartphones, 3D printers and even robots, in comparison with the large items

of the past, such as cars, turbines and shipping containers (Mokyr, 2014). The earlier

technology required more fabrication, materials and energy.

For businesses the low cost of investment in the new technologies is a worry,

because it implies low entry barriers. Not only are the new technologies potentially

‘disruptive’ in that they can make products, processes and services obsolete, but

they can also be established relatively quickly and easily. For smaller businesses and

start-ups as well as for companies in emerging countries which often have less

access to capital, this is an opportunity. It might also stimulate faster productivity

growth (see below), though with potential consequences for jobs.

The role of animal spirits

Some research suggests that investment surges are not led by new technology so

much as by ‘animal spirits’, a period of business optimism during which business

invests heavily, incorporating the new technology that has accumulated over the

recent period. This provides some reason for optimism, especially for the US, which

is seeing accelerating economic growth now with rising demand. Corporate balance

sheets are strong and the stock market is buoyant. Interest in the new technologies is

intense. Everything seems to be in place for a burst of higher investment. Economies

in Europe and Japan are still sluggish, though the outlook is better than before.

In contrast, many EM economies have slowed, including China, Brazil, India and

Russia (all the BRICs). Slower growth makes it less likely they will incorporate new

technologies rapidly. But new technologies could help new investment there too, as

consumers flock to the new products and companies see new opportunities. For

China in particular, with excess capacity in so many old technology products, the new

technologies could provide a welcome source of investment and growth.

Faster productivity growth

Some observers believe the new technologies will stimulate productivity growth. The

optimistic view is eloquently expressed by Brynjolfsson and McAfee in their book The

Second Machine Age, which forecasts that the new technologies are about to take off

in a very big way (Brynjolfsson, 2014). They emphasise the exponential nature of

improvement in digital technologies, as computer power doubles every 18 months or

so and reproduction costs of digital information and software are essentially zero.

Figure 6: Improvements in living standards, 1870 to 2010

Period Total factor productivity (average annual growth rate)

Main sources of growth

1870-1900 c.1.5% to 2% Transportation, communications, trade, business organization

1900-1920 c. 1%

1920s c.2% Electricity, internal combustion engines, chemicals, telecommunications

1930s c.3%

1940s c.2.5%

1950-1973 c.2% Widespread adoption of cars, consumer durables, telephones, plastics, air travel

1973-1990 < 1%

1990s > 1% Personal computers, Internet

2000s c.1.5%

1870-2010 c.1.6-1.8%

1950-2010 c.1.2-1.5%

Source: Shackleton 2013, Standard Chartered Research

Another view is that ‘animal spirits’

drive investment, which

incorporates new technology

The new technologies could lift

productivity growth, though not all

agree

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However, not all agree. Robert Gordon of Northwestern University, who has studied

productivity and growth throughout his career, is probably the most prominent sceptic

(Gordon, 2012). Gordon is sometimes characterised as a technology pessimist,

though this is unfair. He notes that the US enjoyed much faster productivity growth

from about the 1920s to the mid-1970s and that productivity growth was slower both

before and afterwards (Figure 6). He sees the post-1970 period as a return to

‘normality’ after extraordinary gains from electricity, the internal combustion engine

and the telephone, in particular.

He recognises there will be gains from the new technologies but is doubtful they can

compare with 20th century technologies in their impact. Moreover, the gains from digital

technology already have meant an extraordinary transformation of life brought about by

the personal computer and Internet since the 1980s, which still did not lift US

productivity growth as high as it was before 1973. Gordon’s view is that productivity

growth may pick up from its extremely low levels post-2008, but would have to pick up

enormously to return to the pre-1973 rate, which he doubts will happen.

The importance of adoption

Gordon’s work emphasises that the economic effects of new technologies can last for

decades. The first industrial revolution, which began around 1780, was still working

through in Britain through the middle of the 19th century and took longer still to

permeate Europe and the US. Electricity and the internal combustion engine, invented

well before the end of the 19th century, were driving growth in the US and Europe right

through to the 1970s and are still at the core of China’s growth today. Moreover the

benefits of new technologies accrue far more to the users than to the inventors.

GPTs may be negative for productivity initially

There is some evidence that the initial effect of new GPTs is lower productivity

growth. In the US electrification of factories began in the early 20th century but

productivity growth was low at first, partly because factories often simply replaced

large steam engines with large electric motors, which often were not very efficient or

reliable at first. Productivity growth accelerated only when factories started making

use of the potential for many smaller motors for each machine. This made the

assembly line, used most effectively by the Ford Company from the 1910s, much

more effective. The assembly line using electric-powered machines quickly

transformed manufacturing.

This precedent has been seized upon to explain weak productivity growth in the initial

development of IT during the 1980s when personal computers first came into the

work place, followed by a surge in 1995-2005 as they finally took off, and again the

recent slowdown in productivity, despite the introduction of mobile technology.

Proponents suggest that it takes time for people to learn how to effectively use the

new technologies and they may not be effective or trouble-free at first. Also, because

the new technology makes old technologies obsolete, there are losses to deal with.

Other reasons for slow productivity growth

Productivity growth in developed countries has been unusually slow in recent years,

and in many emerging countries is also disappointing. But this unlikely reflects a

slowdown in technical change. Cyclical factors such as low capacity utilisation, weak

investment or falling wages, which discourage labour-saving innovation, are likely to

blame. Slower productivity growth could also reflect increasing regulation, for

example on the environment, safety or working hours, which may have social benefit

but lower measured productivity.

New technologies often take

decades to work through the

economy

Electrification seems to have

depressed productivity growth at

first

Cyclical factors, increasing

regulation and high energy prices

may have depressed productivity

growth

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High energy prices could also be part of the reason for slow productivity. The last

time productivity growth slumped in developed economies was in the 1970s, after the

first oil shock. This period also saw deep recession and sluggish growth. The recent

fall in oil prices is a welcome relief. Still, the test for the new technologies is whether

they can develop fast enough to transform the prospects for productivity.

Total factor productivity versus labour productivity

Growth in total factor productivity (TFP) is the extra growth an economy achieves

beyond that accounted for by increased hours worked, improved skills and extra

capital (or so-called capital deepening). Growth in TFP is believed to be due to

overall technological progress, understood in a broad sense to include better

organisation, management, supply-chain logistics etc., as well as new machinery and

techniques. The level of technology achievement, measured by the Technology

Achievement Index (TAI, more on this below) is closely correlated with the overall

level of income (Figure 7).

Labour-productivity growth is the change in productivity per hour worked and so

includes TFP gains as well as gains due to higher skills and more machines. As such

it is a good measure of technological adoption (broadly understood), especially for

emerging countries. The implementation of more machinery (capital deepening) and

more skills and training is how existing technologies spread.

That said, the benefits of new technologies are not all captured in either measure of

productivity growth. While it may be reasonable to attribute TFP growth to

technology, it is not a measure of technical change (Lipsey, 2005). Nor is labour-

productivity growth, although it includes capital deepening and higher skills. Both

measures are derived from GDP and GDP does not measure the total value to

consumers of the benefits of production, only the costs. Modest improvements in

production methods or the effectiveness of machines can be measured fairly well.

But large changes in production methods, including the emergence of disruptive new

companies and changes in quality are harder to measure. And completely new

products are not fully captured.

Figure 7: A strong correlation between income and technology levels

Source: World Bank, Standard Chartered Research

AU

BD

BR

CA

CL CN

EG

DE

GH

HK

IN

ID

JP

KE

KR

MY

MX

NG PK

PH RU

SA

SG

ZA

TH TR AE

GB

US

VN

0.0

0.1

0.2

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0.8

0.9

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

TA

I sco

re

GDP per capita (2005 USD)

Both TFP and labour productivity

are relevant for technology

adoption

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The effect of on-line search on productivity

For example, Internet search engines should have significantly improved productivity.

One careful study found that digital searches take about one-third of the time of

searches using a good library (Chen, 2014). How is digital search captured in GDP?

One aspect is the revenues of search-engine companies, from selling advertising and

data. Google’s total revenues in 2013 were USD 55bn, substantial though less than

one-tenth of a percent of world GDP. Cheaper search has also encouraged the

provision of more information. Some of this is charged for and will be included in

GDP. But a surprising amount is provided free; for example, Wikipedia is not

captured. Meanwhile, on-line search has lowered measured GDP by reducing the

need for printed directories and reference books and corporate libraries.

Another way online search affects GDP is that if people can complete a search in

less time they have more time for other things, so this should allow companies to

manage with fewer people, raising their productivity and allowing displaced people to

work at something else. This would be captured in the GDP numbers. But the lower

cost of search is likely also to have brought an increase in the number of searches,

improving the quality of many activities. GDP does not measure quality well.

Moreover, some of it is lost in competition. One business development group may be

able to more effectively understand a new market with the help of better information,

but so will a competitor’s, potentially cancelling out the benefit.

Meanwhile, consumers are likely spending less time looking at reference books or

waiting for information on the telephone. If they work longer hours as a result, this

would be counted as extra GDP but not (if properly measured) in output per hour or

in TFP. If they have more leisure time, this is not counted at all as higher GDP, nor is

the better-quality search experience.

Consumer surplus

Consumers (or businesses) do not buy something unless the benefit to them equals

or outweighs the cost. This excess value is called consumer surplus and ideally

should be added to GDP to assess the value of new products or technologies. This

concept applies to all products and services, but because many of the new

technology products and services are software, whose reproduction cost is

essentially zero, it is likely that consumer surplus is higher than with most traditional

products. The value of a new car to someone is also greater than the cost, but each

car still has to be made.

Figure 8: Percentage of individuals using the Internet

%, 2014 vs. 2008

Source: WEF GCI

0

10

20

30

40

50

60

70

80

90

100

SE GB AE JP CA KR US DE AU FR TW HK SG MY RU SA BR EG ZA TR CN VN MX KE NG PH TH UG ID IN GH PK BD

2014

2008

Internet searches cut search times

by two-thirds but the effects on

GDP are complex

The benefits to consumers of new

technologies likely far outweigh

their costs

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Social savings

The concept behind social savings is that we can calculate the gain from a new

technology by considering the cost saving compared with the next best alternative.

An early application was a study of US railroads in the 19th century (Fogel,1964). If

railroads had not been invented, goods and people would have continued to travel by

water, including via new canals that would likely have been built, and by road, again

with improvements likely. Hence calculating the total savings from using railroads

rather than canals and roads shows the economic impact. Fogel came out with a

comparatively modest figure, 2.7% of GDP.

Calculations of social savings have to assume the new technology does the same

thing as the old, only cheaper. But railways were significantly faster and therefore

offered a benefit to people beyond lower cost. Moreover, the extra speed permitted a

new range of goods, business and leisure transport, opening up new production and

trade opportunities. This in turn made possible the era of mass consumption and

consequent economies of scale as factories grew in size. So the social savings

concept likely also underestimates the value of new technologies, especially GPTs.

Jobs and the distribution of income

The threat to jobs

If new technology does raise the growth of total factor productivity or of productivity

per labour hour it should be welcomed, even if the benefits are not fully measured.

Faster GDP growth means more resources for everything from consumer goods to

education, health care and pollution control. It may also make it easier to mitigate

inequality, since with faster growth it is more likely that everyone enjoys a higher

standard of living over time, even if some groups gain more than others.

Nevertheless fears are high that the new technologies could reduce the number of

jobs, particularly routine jobs. Economists overwhelmingly reject the so-called ‘lump

of labour’ fallacy, the notion that the amount of work needed is fixed, so technological

change or immigration will put people permanently out of work. In a recent poll, 88%

of economists agreed or strongly agreed that ‘advancing automation has not

historically reduced employment in the US’ (Figure 10).

Figure 9: Fixed broadband Internet subscriptions have risen over the last decade

Per 100 population, 2014 vs. 2008

Source: WEF GCI

0

5

10

15

20

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35

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FR KR GB DE CA SE HK JP US SG AU TW RU CN TR MX AE BR MY TH SA VN EG ZA PH ID IN BD PK GH KE UG NG

2014

2008

Railways were found to raise US

GDP by 2.7% compared with

traditional transport, but this may

be a low estimate

Faster productivity growth means

more job turnover but there is no

reason for mass unemployment

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Humankind has lived through rapid technological change in the last 200 years,

leading to the erosion or disappearance of numerous job roles, yet subject to

probably inevitable economic cycles, new jobs have always been created. Moreover,

in general the new jobs have tended towards being better paid, safer and more

pleasant. Sometimes the new jobs are related to the new technology. For example

we lost the millions of jobs looking after horses and driving coaches, and replaced

them with new jobs as mechanics, chauffeurs, car salesmen, etc. Other times the

new jobs arise because as people need to spend less on something, they spend

more on something else.

Pessimists are worried that this time is different. Certainly if robots as capable as

those in science fiction were available suddenly, they could take over all or practically

all jobs. But robots will be far less capable than that for many decades at least. Over

the next decade emerging robots will likely all be specialists, focused on one task,

whether it is vacuum cleaning, greeting shoppers in stores, working flexibly on

production lines, warehouses or kitchens or acting as drones or autonomous cars.

Machines will continue to replace particular jobs and change will usually come in

developed countries first, where wages are higher than in emerging countries.

Repetitive jobs are most at risk

The traditional split is between manual and white-collar or ‘cognitive jobs’. To

understand the impact of digital technology it is more useful to distinguish repetitive

from non-repetitive jobs. Repetitive jobs, both manual and cognitive, are the ones most

at risk of computerisation (Autor, 2003). Non-repetitive jobs require situational

adaptability, visual and language recognition and in-person interactions, while cognitive

roles require abstract thinking including problem solving, intuition, persuasion and

creativity (Acemoglu, 2011). Machines are becoming better at some of these skills but

have a long way to go and still struggle to combine them effectively.

The automation of repetitive jobs in manufacturing goes back to the industrial

revolution, and has continued with industrial robots and other machines. Automation

of office jobs has been the major trend of the digital era, especially over the last 25

years. Production jobs and office and administrative jobs have declined while the

numbers of professionals and managers in the US have grown rapidly (Figure 11).

Figure 10: Automation has not historically reduced employment in the US

Survey of economists %

Source: Autor 2014, Chicago Initiative on Global Markets

0% 4%

8%

63%

25%

0%

10%

20%

30%

40%

50%

60%

70%

Strongly disagree Disagree Uncertain Agree Strongly agree

Non-repetitive jobs require

situational adaptability, visual and

language recognition and in-person

interactions

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A study by Frey and Osborne looked at the skills and requirements of different roles

to estimate their probability of being automated. Manual repetitive jobs such as

drivers, cooks, counter attendants, waiters and security guards show up with high

probabilities. So do some cognitive repetitive jobs such as tax preparers, insurance

claims processors, credit analysts and paralegals. This is not to say that all these

jobs are at risk. In practice, some jobs will go, while other people will work with the

machines in a supervisory role, but often this may require greater skills (Figure 12).

Manual non-repetitive jobs such as recreation workers, athletic trainers and flight

attendants cannot be easily automated and may be one of the growth areas for jobs

in the future. Cognitive non-repetitive jobs such as managers, engineers and many

professionals will likely continue to see increased demand, though some jobs will

likely be taken over by AI. The ones most likely to continue for the long-term will be

ones where relating to people, mobility and abstract thinking are most needed.

New jobs for old

The digital age has created a host of entirely new jobs, including computer

programmers, software engineers, technical support, website designers, desk-top

publishers and bloggers, among others. The new technologies will create many

more, though sometimes they are not easy to predict in advance. Robots, once they

start to move about in the environment, will need supervisors and repairers. 3D

printers will require operators and may create an explosion in design as products are

increasingly customised. Smart AI systems will require managers too. These roles

could provide a swathe of new jobs for people at all skill levels.

Figure 11: Production and administrative jobs in decline

US jobs, 000s

Source: Bureau of Labour Statistics, Standard Chartered Research

2013

1990

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Installation, maintenance, repair

Construction and extraction

Transportation

Production

Sales etc

Management

Service occupations

Office and admin

Professional

New AI systems and robots will

require supervisors and repairers

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The new technologies will also probably make some products and services cheaper

and therefore more in demand. For example robotics will likely cut the price of

manufactured goods and fast food restaurants, so people will buy more goods and

eat out more often. In most cases, automation will not eliminate all jobs in the

business. Indeed, as long as computers and humans have complementary skills,

there should be jobs.

Equally importantly, as costs fall for some things, people can buy more of other

things. This will increase the supply of jobs in roles that are not easily mechanised

such as interior designers, flight attendants, chiropractors, event planners, landscape

architects, etc. And, while many of these require cognitive skills, remember that smart

AI systems will be able to help people with this far more than today. For example,

good interior design systems could enable people who are not necessarily top

designers to work with clients to come up with very good designs. Limited systems

have been used for many years in kitchen design. Virtual reality techniques will make

them even better than the 3D displays available now.

Another way to think of this is to imagine that everyone could have the standard of

living of the top 10% or top 1% of the population, including a nicer house, more

holidays, more meals out, personal trainers, massage therapists, etc. There is plenty

of demand, provided people have the money. But some worry that the income gains

will only go to the top 1% or 10%, who tend to save more, and therefore demand may

be inadequate.

Income divergence

We argued in a 2014 report that changing demand for skills is one of the main reasons

for widening income distribution (see Special Report, 16 July 2014, ‘Taming the Gini:

Inequality in perspective’). Globalisation is a factor too, but technology has reduced the

number of jobs requiring only repetitive manual skills and middle level cognitive skills.

This may account for the stagnation of low and median wages in the US over the last

20 years. The rise in the incomes of the top 10% and especially the top 1% seems to

be because they are the people able to make most use of computers currently.

As digital technologies develop, incomes may continue to diverge for a while but not

necessarily indefinitely, depending on the supply and demand for different skills. A

large number of manual jobs are at risk from further automation such as robots and

driverless cars, though we would emphasise that this is over decades. And some of

the more routine cognitive jobs will continue to go as computer systems improve. But,

as already noted, smart AI will also allow people with lower cognitive skills to take on

jobs that are currently filled by high-paid professionals.

Changing demand for skills is one

of the main reasons for the

widening distribution of income

https://research.standardchartered.com/configuration/ROW%20Documents/Taming_the_Gini__Inequality_in_perspective_16_07_14_10_07.pdfhttps:/research.sc.com/Portal/Assets/DownloadReport/2236-54139-1

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Figure 12: How susceptible are jobs to computerisation?

Occupations ranked according

to their probability of

computerisation

Rank Probability Occupation

1 0.28% Recreational therapists

15 0.42% Physicians and surgeons

19 0.44% Dentists (general)

41 0.78% Secondary school teachers

59 1.30% Sales managers

63 1.40% Mechanical engineers

70 1.50% Chief executives

93 2.20% Interior designers

99 2.70% Biochemists

115 3.50% Lawyers

130 4.20% Software developers

137 4.70% Farmers and other agricultural managers

176 11.0% Hairdressers

192 15.0% Electricians

204 18.0% Airline pilots, co-pilots and flight engineers

217 23.0% Financial analysts

248 34.0% Radiation therapists

249 35.0% Plumbers, pipefitters, steamfitters

250 35.0% Flight attendants

282 43.0% Economists

293 48.0% Computer programmers

303 51.0% Dental assistants

314 55.0% Commercial pilots

315 55.0% Customer service representatives

337 61.0% Market research analysts and marketing specialists

350 63.0% Construction and building inspectors

360 65.0% Librarians

380 69.0% Light truck or delivery service drivers

381 69.0% Maids and housekeeping cleaners

391 71.0% Opticians, Dispensing

398 72.0% Carpenters

422 77.0% Bartenders

430 79.0% Postal service mail sorters, processors, and processing machine operators

442 81.0% Word processors and typists

458 83.0% Railroad brake, signal and switch operators

478 84.0% Security guards

499 86.0% Maintenance workers, machinery

504 87.0% Carpet installers

512 88.0% Construction labourers

531 89.0% Taxi drivers and chauffeurs

562 92.0% Pharmacy technicians

592 94.0% Waiters and waitresses

599 94.0% Couriers and messengers

609 94.0% Paralegals and legal assistants

628 96.0% Receptionists and information clerks

632 96.0% Counter attendants

641 96.0% Cooks (restaurant)

657 97.0% Cashiers

664 97.0% Telephone operators

674 98.0% Driver/sales workers

677 98.0% Credit analysts

686 98.0% Loan officers

689 98.0% Insurance claims and policy processing clerks

695 99.0% Tax preparers

702 99.0% Telemarketers

Note: The table above ranks occupations ( 1-702) according to their probability of computerisation (from least-to-most computerisable);

Source: Frey and Osborne 2013, Standard Chartered Research

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The new digital technologies

Mainframe computers were ubiquitous in developed countries by the 1980s and had

already transformed industries such as finance and travel. In the 1980s the personal

computer began to appear on desks, though initially confined mainly to word-

processing and spread-sheet programmes. In the 1990s networks of personal

computers became stable and reliable and, with the adoption of the Internet, email,

search and Internet commerce took off.

In the last decade a new clutch of digital technologies has emerged with the help of

greater computing power, mobile and cloud technologies. So-called ‘Web 2.0’ refers

to sites that allow users to collaborate and interact to create user-generated content.

Activities such as social networking, blogging, video-sharing, tagging and mashups

(combining feeds into a webpage) have transformed the ways people spend time and

interact, compared with the static websites of ‘Web 1.0’. AI, robotics, the ‘Internet of

things’ and 3D printing are on the way.

Computing, connecting and copying

The digital revolution is being driven by the 3 Cs: computer power, connectedness and

the (virtually) zero cost of copying. ‘Moore’s law’, the observation dating back to 1965

that computing power doubles every two years or so, is intact so far. Simplistically this

means that computing speed in 2015 is 16 times that in 2007 and could be 32 times

greater than today’s by 2025. This speed of improvement also seems to be holding for

memory capacity, sensors and the size of pixels in digital cameras.

Cautious observers note that there is actually no ‘law’ to Moore’s law and it likely will

fail, or at least pause, at some point, possibly sooner rather than later. Certainly,

simply adding more transistors to a flat integrated circuit no longer works, but

engineers have so far found new ways to increase capacity such as stacking the

circuits. Still there must be a natural limit when the width of wires in a transistor

declines to only a few atoms, though experts still put that some years away.

Others argue that new advances in 3D computing, nanotechnology, optical, quantum

or DNA computing could keep the exponential growth rate on track for a very long

time yet (Kurzweil, 2013). Also, better software could make computers more powerful

even if acceleration slows. In any case, most agree that computing power will

continue to increase at a rapid rate at least for the next decade.

The second ‘C’ is connectivity, as people and machines are linked via the Internet,

wifi, phone networks, radio-frequency identification (RFID), etc. In principle

everything can be expressed digitally and the cost of sending and receiving data

automatically over short and long distances continues to be reduced.

The third ‘C’ is copying. Anything digital can be copied and transferred at virtually

zero cost (Figure 13). Non-digital objects can be scanned with 3D scanners.

Information, including new and real-time information can be simultaneously viewed

by people and devices anywhere, while new software can be made available to any

number of people at no cost. There may be a charge but the incentive to innovate

remains if an app is bought for even a few cents if enough people buy, or if there are

advertising or other data information possibilities as a result. The open-source model

is helping to rationalise platforms and processes and is stimulating innovation.

The new wave of technologies is the

third after mainframes and personal

computers combined with the

Internet

The 3 Cs are driving the digital

revolution

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Rising computing power is driving technologies such as artificial intelligence,

robotics, autonomous cars, drones, and genomics. Connectivity is driving mobile

technologies and applications, the ‘Internet of things’ and improving control of

machines and processes. The two combined are important for 3D printing and big

data and a range of other applications, from social networking to messaging to

hailing taxis. The ability to copy at zero cost is fundamental to all these technologies

as well as providing the incentive to innovate and keeping sales cost down.

Artificial intelligence (AI)

Until recently computer applications were limited by the need for comprehensive, pre-

programming covering every possible eventuality. Advances in AI now allow

computers to ‘learn’ rules and concepts based on examples or by examining vast

amounts of data to find patterns. They can improve and develop over time, as they

take on more data. Combined with better speech recognition (also a result of

improved AI) these systems require much less programming and promise to

automate an increasing amount of knowledge work as well as power robots.

Computers will increasingly be able to perform tasks that require complex analysis,

subtle judgements and creative problem-solving (McKinsey, 2013).

Early systems are already being used to supplement or even replace call centres. In

time, more functions will be taken on, particularly in clerical and administrative

support functions where data and information requests and simple analysis can be

done by systems. User experience of early systems has been mixed but with greater

computing power, they can be expected to improve.

Education is another area where AI can help enormously, supplementing teachers

with learning systems geared to the speed of the user, using game technology to

improve engagement and systems to grade papers (essays as well as multiple

choice). The ability to search and the availability of on-line videos have already made

it much easier to find out how to do anything as well as to access a huge range of

technical and educational material. Massive online open courses (MOOCs) are

expanding rapidly and provide the opportunity for more people to gain formal

education and degrees, even in remote areas. For people in emerging markets this is

expected to prove a major benefit.

Figure 13: US semiconductor prices have fallen significantly since 1990

US producer price index, semiconductors and related device mfg NSA

Source: Bloomberg

0

20

40

60

80

100

120

140

160

180

1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Computers no longer require

comprehensive pre-programming

but can learn from experience

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AI in health care

AI systems can supplement doctors and nurses in medical diagnostics and are often

better able to keep up-to-date with all the latest research as well as search over vast

databases of similar cases. Such systems have the potential to supplement or even

replace experts’ knowledge and experience and to find new treatments. What they

cannot do well is interact with people, especially if people do not give precise

information or instructions. Sometimes also they can lack common sense. They

therefore require input from professionals to accurately record patients’ symptoms.

Initially they are likely to be used by doctors as a back-up or second opinion.

Increasingly they may be used by less-high-level professionals, for example general

practitioners could take on care that would otherwise be referred to a specialist, or

nurse practitioners could save doctors time. Good people skills and common sense

do not necessarily require the years of training and education that go into becoming a

doctor, much of which is focused on knowledge and logical thinking, better done by a

computer. Such systems can almost instantly produce a full care plan and generate

drug prescriptions as well as information for the patient, again saving the

professionals time.

Cloud computing

Cloud technology allows the delivery of computer applications and services through

mobile networks or the Internet, instead of storing data and applications on a personal

device. In some ways it is a return to the 1980s when travel booking systems or

Reuters machines were relatively dumb terminals to access mainframes via dedicated

cables. Cloud technology is central to the mobile Internet, the ‘‘Internet of things’’ and

artificial intelligence. Cisco projects that global data-centre traffic will grow nearly three-

fold during 2013-18 and that by 2018 76% of all data centre traffic will come from the

cloud. In 2013 the cloud was split 78% to 22%, private versus public. The public cloud

is expected to expand faster in coming years, though remain less than half.

Internet search, social networks and streaming media already mostly operate via the

cloud. For users this makes smaller, lighter devices possible and also means they

can be easily synchronised, an important advantage as people acquire more devices

and link them together (the ‘Internet of things’). The cloud also facilities storage of

digital information, which is likely to be a much safer option than hard drives.

For business, the cloud changes the economics of IT to benefit small companies.

Instead of needing to buy and maintain expensive servers and install local

applications, companies can rent what they need and adjust quickly to a growing

business. For start-ups it is a huge bonus, dramatically simplifying and cheapening

building a business. Many large companies are still cautious, partly over security and

privacy issues, partly because their legacy systems may be hard to transfer to the

cloud. But cloud technology means that computing capacity can be much more fully

utilised and user companies do not have to worry about technical obsolescence.

Big data

Big data brings together improved AI with mobile and often social data. In some

industries such as insurance and credit cards, companies have long had huge

databases. But the range and scale of data available now from search engines, social

networking platforms and Smartphone activity is dramatically expanding the potential

data. Much of this is consumed and created by individuals (Gantz, 2012). Meanwhile

computing power has increased such that it is feasible for systems to consider millions

of people and billions of data points to find connections and correlations.

AI systems can supplement or even

replace experts’ knowledge and

experience

The cloud is central to the mobile

Internet, the ‘Internet of things’ and

artificial intelligence

Systems could consider millions of

people and billions of data points

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In the pharmaceutical industry computers can search over big data helping to narrow

down possibilities for potentially successful drugs. For lawyers, AI systems are

already searching through thousands of documents to assist in pre-trial research. In

the financial industry big data is being used to identify suspicious transactions or

spending patterns and to guide investment and credit decisions (more on financial-

sector applications below).

Mobile

Smartphones and tablets have become computers-on-the-move, able to offer full

computing power and connectivity with real-time and local information. At work they

are immensely useful in roving occupations such as sales, repair and transportation.

They are also changing the nature of work as people are less tied to a desk or fixed

computer: working and virtual working are made even easier. This allows employees

to spend their time more flexibly and makes it easier for companies to use

consultants and contract employees, creating a networked flexible structure. In some

industries, such as transportation, there are signs of radical transformation. New

companies such as Uber not only offer an alternative and often better taxi experience

for users but also make it much easier for drivers to work whenever they want and for

pricing to reflect demand.

Mobile permits monitoring of people, goods and vehicles moving around in real time.

For example, users of the new taxi systems should experience improved security

because the identities and location of the driver and passenger are in the system and

allow driving behaviour to be monitored. The Internet has already radically changed

the advertising industry, and with mobile businesses can start to send local ads to

people nearby, encouraging them to stop in and buy. Mobile payment systems are

also being offered, while Smartphones are increasingly being used to photograph

cheques for bank deposit.

Mobile can combine people’s personal connections, activities, searches, information,

shopping and payment systems all in one place, convenient for the user but also

offering the big data opportunities described above. Enthusiasts believe the mobile

will develop into an all-purpose personal assistant able to offer advice (text or verbal)

on things such as upcoming meetings, birthdays, traffic congestion, approaching

trains or special offers nearby. With voice recognition improving it will be able to

provide capable dictating and instant translating services. Finally it could also be the

controller for home equipment, utilising the ‘‘Internet of things’’ technology.

Figure 14: Mobile broadband subscriptions in emerging markets are still low compared to the developed countries

Per 100 population, 2014 vs 2012

Source: WEF GCI

0

20

40

60

80

100

120

140

160

SG JP AU KR SE HK US AE GB RU TW FR TH BR SA DE CA GH TR ID EG ZA CN PH VN MY NG UG MX IN KE PK BD

2014

2012

Mobiles have transformed society in

the past 10 years

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Mobile has developed rapidly in emerging markets partly because the availability and

reliability of landlines is often limited. Initially only basic phones, there is now a rapid

proliferation of Smartphones, often cheaper, stripped-down models compared to the

latest in the developed markets but nevertheless capable machines. This brings

many people without access to a more complex computer into the digital age.

The ‘Internet of things’

The combination of tiny powerful chips, wifi, RFID, dramatically cheaper bandwidth

and improved and cheaper sensors opens up the possibility for every machine and

even product to be connected to the Internet, in the so-called ‘Internet of things’

(IOT). After the Internet in the 1990s and mobile in the 2000s, the IOT is the next

wave of connectivity. New products such as fitness wearables and connected

thermostats have emerged already and proponents believe a lot more is on the way.

Each machine can monitor its environment, communicate its status or location and

take instructions. Central AI systems are able to track and coordinate and also have

vastly more data available to optimise processes, using the big data approaches

discussed above. The technology is particularly useful for anything that ‘flows’ in a

broad sense, including production lines, utilities such as electricity and water (so-

called smart grids), traffic and agriculture.

Business is already using sophisticated IOT in some high-value production processes

and supply chains and it is likely to be increasingly adopted as costs fall and capability

increases. Controllers can monitor inventory and know exactly where everything is in

the chain and whether machines are working properly. As well as increasing efficiency,

IOT also can reduce problems such as fake parts; Genuine parts can be connected

and tracked, rendering fake parts, without the right credentials, unusable.

IOT could make traffic management easier, provide better real-time information to

drivers and allow autonomous cars to coordinate or even form a ‘convoy’,

progressing down the highway. Sensors, especially linked up, could also reduce the

number of low-speed collisions, which waste time and incur relatively high costs. It

could also optimise traffic-light timing and allow smart road pricing.

For health care, IOT could allow people to be monitored at home rather than in

hospital, ensure drugs are taken as prescribed and reduce the problem of counterfeit

drugs. Early warning of illness (from the monitors) would allow out-patient health care

and reduce the incidence of emergency admissions. In agriculture, satellites, drones

and fixed sensors (even attached to plants) could provide a huge amount of

information on growing performance and conditions.

At the consumer level the Smartphone is expected to be the central controller. Home

security could be easily networked using wifi and IOT technology so that consumers

can monitor what is happening while they are away. It is also becoming much simpler

to control heating and air-conditioning remotely to save energy. Zipcar makes use of

remote sensors for its pay-as-you-go rental pricing structure.

Proponents argue that eventually the Smartphone will be all that people need with

them. Along with the personal assistant role described above, it could take on

payments, keys, identity cards, club memberships, coupons and voucher

management, home controller, security passes, etc. Costs of chips and sensors are

coming down, but a move towards common standards or interoperability between

computers, sensors and actuators would help. Progress could be hampered by

security or privacy concerns.

Each machine can monitor its

environment, communicate its

status and take instructions

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3D printing

The latest 3D printers can create almost anything by building up plastic, metals or

even human tissue (known as bioprinting) via ‘additive manufacturing’ according to a

digital blueprint or from a 3D scan. The product can include moving parts (already

inside and working) and can make some items traditional or ‘subtractive’

manufacturing cannot. A key advantage is the ability to customise. However the

process takes time (many hours, though it is speeding up) and is usually limited to a

handful of copies so it is unlikely to replace mass production for many goods. Still,

many observers believe that with prices coming down and the technology developing

considerably, 3D printing is at an inflection point.

Worldwide shipments of 3D printers are forecast at 217,350 units in 2015, up from

108,151 in 2014 according to Gartner, an IT research company (Gartner, 2014).

They are expected to continue to double annually over the next few years, reaching

2.3mn by 2018. Most of these will be for consumer use, with machines now available

for well under USD 1000. For industrial use, printers typically cost much more, but

are also falling in price rapidly. 3D printers are already being used for customised

consumer products such as ear-pieces for hearing aids and artificial limbs. The

process is also widely used for testing prototypes and designs, which previously

required an expensive ‘workshop facility’ or else cost time while the plans were sent

outside (sometimes abroad) for producing.

3D printing may have important implications for emerging markets. Some argue that

it facilitates re-shoring back to developed countries as it makes it cheaper and easier

to marry design and manufacturing (with the help of robots for assembly-line

manufacturing). However it also makes it easier for companies to obtain spare parts.

A problem in many emerging countries is down-time when a machine breaks.

Sometimes bureaucracy at customs can hold up delivery of a spare part for days or

weeks in addition to the transit time required. 3D printing allows the part to be

produced on the spot, or at least in the country, with an overnight turnaround time.

Robotics

Industrial robots have been around for decades and, depending on how robots are

defined, many other automated products exist (Figure 15). Most robots in factories

today are programmed to follow entirely pre-set movements and are often kept in a

cage for safety reasons, as they will keep on doing the same thing even with a

person in the way. But increased computing power, improved sensors, better motors

and hydraulics and in some cases greater connectivity are opening up the potential

for machines that do not need comprehensive pre-programming and are able to learn

as they go along. These would be able to move around in the work place, home or

even street and interact safely with people. Costs are coming down rapidly. The

International Federation of Robotics (IFR) thinks, on a quality-adjusted basis, robot

prices are falling at about 10% p.a.

The IFR estimates that there are between 1.3mn and 1.6mn operational industrial

robots, with sales of 178,132 units in 2013. About 150,000 professional service

robots have been sold worldwide, mostly in recent years, with sales of 21,000 in

2013. Service robots are defined as robots used by businesses other than on

production lines. Outside the auto industry, which still accounts for the largest

numbers of robots, the largest business category is farm milking machines, counted

as service robots. In addition to robots bought by businesses, consumers have

purchased millions of robotic vacuum cleaners; robotic mops, window-cleaners and

gutter cleaners are also becoming popular.

A key advantage is the ability to

customise

Robots are expected to be able to

move around successfully in the

work place, home or even street

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Korea has the highest density of industrial robots, calculated at 437 per 10,000

manufacturing workers in 2013, with 323 in Japan, 282 in Germany and 152 in the

US. The IFR projects that the operational stock of industrial robots globally will rise

from 1.33mn in 2013, to 1.95mn in 2017, or 10% p.a. While fast, this growth is not

going to revolutionise the world short-term. Even assuming robots replace three

shifts of workers and accounting for the fact that they do not take vacations or

celebrate holidays, the number of human jobs replaced would still be fewer than

10mn, compared with c700 million industrial jobs worldwide.

Cost has been a barrier to robot adoption. Most industrial robots still cost six-figure

sums and so require considerable capital investment as well as process revision.

Prices are falling (for the same capability) but most functions they can take over are

currently occupied by low-wage workers, so it will take time. Adoption is fastest in

dangerous or heavy jobs, ranging from bomb disposal to radioactive clean-up. However

cheaper, more capable robots are expected to emerge in the next few years.

Figure 15: Korea leads the way in robots

Multipurpose industrial robots in manufacturing per 10,000 employees, 2012

Source: World Robotics 2013, Standard Chartered Research

0

50

100

150

200

250

300

350

400

KR JP DE SE IT DK BE US ES FR TW FI AT CA NL CH AU GB

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Seven areas where robots may soon make a big difference

1. The assembly line

Robots are being developed for the assembly line that can be trained simply by

moving their arms, ‘showing’ them what to do, or even with verbal instructions, rather

than requiring reprogramming every time a task changes. This makes it feasible to

use robots for much more limited batches of items than was typical before. Such

robots can also be introduced piece-meal, not requiring the complete reconfiguration

of assembly lines that full automation would require.

2. Warehouse systems

Robot delivery systems for bringing parts to the assembly line or goods items to

packers in warehouses are a current growth area. Amazon uses robots to pick up

whole racks of items (including the one item required), bringing them to a human

packer who then selects the one required and packs it. The robot then removes the

rack and goes looking for the next one (or a charger). Humans are still needed but

some of the process can be automated, given careful planning and sufficient scale.

3. Consumer robots

The effectiveness of robots for vacuuming, mopping and mowing is steadily

improving and, since they do not need to be especially smart, they may be close to a

tipping point where adoption becomes widespread. They have proven they can

navigate the house or garden effectively; arguably the challenge now is for them to

clean or mow better.

4. Drones: Flying robots

Drones have the advantage over ground-based robots in that there are fewer

obstacles to navigate. They have potential applications in security, surveying

(including monitoring pipelines and managing traffic) and goods delivery. Consumers

seem to be keen, with products for taking ‘selfies’ and ‘selfie’ videos already popular.

Safety and privacy concerns mean that drones above a certain size will require new

regulations in most countries.

5. Elder care

Another area where robots may soon take off is in elder care, particularly given the

ageing populations in the industrial countries and China. Robots can help elderly

people with tasks such as getting out of bed and walking while being on hand to call

help if needed. As well as saving money spent on care givers, they can help people

to remain in their own homes and give them greater independence. Coupled with

Smartphone technology, robots could also make it easier for family care givers to go

out to work and still care for an elderly person at home.

6. Fast-food restaurants

Automation can replace people who are order takers as well as food preparers.

Machines are available now that perform the whole process of making a hamburger

and proponents argue that they are faster, more hygienic and can be designed to use

freshly cut ingredients (in contrast to the pre-preparation frequently employed).

Coffee machines are making better coffee too and could replace barristas. Conveyor-

belt sushi has become a common sight and these restaurants are automating more

and more of the process, including ordering, delivering and making the sushi.

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7. Robot cars

An exciting area of robotics is driverless or autonomous cars. The Google car is the

most famous, though prototypes from several manufacturers are already in testing.

Proponents believe that cars that do not require human driving will be on sale by the

end of the decade and become widespread in the 2020s. Enthusiasts argue that they

will be safer than human-driven cars and will be able to travel closer to other cars

(perhaps in a ‘convoy’ arrangement) reducing traffic congestion. Some believe that

eventually humans will not be allowed to drive, or at least will need to pay much

higher insurance premiums to do so.

Sceptics argue that driverless cars still struggle with some situations, such as mixing

with pedestrians as they turn; current versions sometimes fail to make ‘reasonable

progress’ in busy cities as they tend to stop any time a pedestrian is on the road.

They may also be poor at dealing with unusual situations such as police directing

traffic. Enthusiasts believe that rising computing power can deal with these situations,

though it is possible that traffic rules and procedures may have to be modified; after

all, they were substantially changed when cars took over from horse-drawn vehicles.

Before they become completely autonomous for all driving, there will likely be a

period when they drive themselves only on highways, rather than on city roads.

The economic consequences of driverless cars

Once humans can safely leave the car in control, they could work or play while

travelling, freeing up enormous amounts of time. For some this would make car travel

more attractive than trains or planes for short to medium distances and could enable

or encourage longer commutes. Perhaps cars with desks or beds will be the must-

have products of the 2020s. Driverless cars could lead to a huge demand surge at

some point from those currently stuck with a long commute, though the first models

are likely to be priced initially with a large premium over standard cars.

Longer-term, autonomous cars could lead to fewer cars. Already, car clubs are

encouraging many city dwellers to rent cars by the hour or journey rather than own a

vehicle. If a driverless car can be summoned to pull up at your door, in effect, the car

club and taxi converge into one business model, leaving little justification for having

your own in the garage.

The driverless vehicle could eliminate many jobs for commercial drivers including taxi

drivers and many truck drivers. Delivery and courier drivers may still have a role (but

not the actual driving), though a change in protocols such as requiring the recipient of

a delivery to go to the vehicle to retrieve the object (upon notification via

Smartphone) could eliminate this need.

The net consequences depend both on how widely such cars are adopted and what

knock-on effects they have. Car sales could surge at some point, but not likely before

the early 2020s, though partially autonomous cars that offer an ‘autopilot’ option on the

highway could be available earlier. These may still require the driver to be ‘in charge’

and not talking on their mobile or asleep. Eventually the car industry could be smaller

than today, as fewer cars are needed. This decline might be partially offset by the

likelihood that travelling by car becomes more attractive for many people if they do not

have to drive and if ‘convoy’ systems speed up traffic. Productivity could increase, with

fewer drivers and more free time for other activity. Proponents believe that driverless

cars will reduce the economic cost of car accidents including the costs of deaths and

injuries as well as car repairs, and insurance claims will be much reduced.

Driverless cars could be the must-

have products of the 2020s

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In addition to the seven areas discussed above there is also a range of specialised

areas where robots will gain importance including robotic surgery, robotic prosthetics

and exoskeletons (for use with paralysed people), military drones, bomb disposal,

underwater exploration, etc. While these are important and useful there will be limited

economic effect until a product becomes very widely used by consumers or business.

What is a robot, anyway?

The Oxford English Dictionary defines a robot as “a machine capable of carrying out

a complex series of actions automatically, especially one programmable by a

computer”. Based on this definition, modern washing machines could be robots. But

most people would not think so because they imagine robots as more mobile, and

possibly resembling humans. There are surgical robots, though some are more like

avatars, directly manipulated by human surgeons. Neither these, nor the robot arms

on the assembly line are anything like R2D2, C3P0, or Wall-e, favourites from

science fiction that inform our images of robots.

Eagerness to use the word robot has blurred the distinction between automation and

robotics; it would probably have been better to reserve the word for machines that

actually move through space, independently of human direct manipulation, though

even this is a slippery concept. The good news is that robots are going to begin to

resemble the robots in science fiction over the next few decades. Meanwhile

automation of all forms will continue to expand.

Other technologies

ICT-based technologies are themselves transforming other technologies, for example

through better computer control systems, using the cloud or ‘Internet of things’, or by

enhanced methods of research such as computer simulation. Partly for these

reasons, but also often reflecting their own internal dynamics, several other fields of

technology look very promising.

Energy

Research and development in the energy sector received a huge boost from high oil

prices over the last decade as well as government efforts to reduce carbon

emissions. New supplies of oil and gas from shale, using enhanced fracking,

horizontal drilling and deep-water technologies have exploded onto the scene in

recent years, taking many by surprise. As recently as 2009 the US was starting to

plan for liquid natural gas terminals to import gas; now permits are being issued for

export terminals. And the sudden expansion of oil production has played a significant

role in the current over-supply in the market.

Renewable energies including wind, solar and biomass have also taken significant

leaps forward, with costs declining and technology improving. Hybrid engines and all-

electric vehicles have been developed while technology is once again working to

dramatically reduce fossil fuel consumption in vehicles and buildings, as it did during

the last oil price cycle in the 1970s and 1980s. Digital technologies play an important

role here in monitoring performance and adjusting machines to conditions.

One key area of research is battery technology, where improvements could make

electric vehicles more attractive as well as support the investment in intermittent

renewables like wind and solar. There are improvements in train, though unlike digital

technology, chemistry is not subject to Moore’s Law.

High energy prices and government

action to combat climate change

have driven progress in energy

technologies

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All these developments are very encouraging. That said, the high cost of energy due

to high market prices and, in many developed countries, government choices to use

cleaner energies (paid for with subsidies or higher consumer prices) have imposed

significant costs on the economy over the last decade and likely damaged

productivity growth.

Ultimately energy is the key to everything. If sufficient energy is available at a low

price, without negative environmental effects, many problems are more easily solved.

For example modern agriculture is largely about applying energy in the form of

fertilisers to grow food. And if energy prices are low enough, desalination becomes

less costly, helping solve the problem of water shortage.

Genomics, another digital technology

Life in the form of DNA is expressed digitally. In the long run this means that digital

technologies and biological technologies are likely to converge. Right now it means

that progress in computing power is transforming genomics, with important

implications for health care and agriculture. In particular the cost of sequencing a

person’s DNA has come down from around USD 100mn in 2001 to a few thousand

dollars currently. Indeed the cost has fallen far faster than implied by Moore’s Law in

recent years and it looks to be on track to go below USD 1000 before long.

Genetic variations are associated with a significant number of conditions including

heart disease, cancer, schizophrenia, and Crohn’s disease. The next step is to

develop treatments based on an individual’s genome. For example currently cancer

patients are often given a cocktail of five or more different drugs. Each one might

effect a cure for a few patients but there is no way of knowing which one will work for

any particular patient. Knowing would save money and also reduce side effects.

That said, early hopes that the linkages would be simple, in the form of a gene for

each condition have proved overly simplistic except in a few cases. Often many

genes are involved in human variation and the connections are complex. Now hopes

are turning to big data as a way to understand these linkages better.

Genomics also has important applications in agriculture. Genetic engineering or

genetic modification is controversial in Europe and China but is routine in North

America. Enthusiasts believe that it will hold the key to increasing the world’s food

supply to meet increasing needs. And that it can also help improve nutrition by

‘adding’ vitamins or minerals or other good things to crops.

The economic impact of genomics is hard to evaluate. In agriculture it could be

considerable in raising yields and lowering labour and energy inputs. In the health-

care field there is an argument that the new treatments will mainly benefit the old,

who are often already retired and so the effect will be to add costs to health care and

to pension requirements, without adding to productivity. There may be something to

this, but some of the treatments will doubtless benefit younger people, while many of

them could lower costs of health care by targeting treatments more effectively.

Digital technologies and genomics

will eventually converge

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Nanotechnology

Nanotechnology refers to techniques to manipulate matter at the level of atoms or

molecules, i.e., far smaller than normal. Materials using nanotechnology often have

better properties than traditional materials and are lighter for the same strength.

Nanotechnology is expected to allow improvements across a broad spectrum of

products and processes including new materials (with graphene a famous example),

improved manufacturing methods including use of less material but also different

processes, new water purification methods, nanomedicine, improved food production

and physical enhancement.

Digital applications in finance

Financial institutions have been early adopters of digital technology since

mainframes replaced ledgers. The new digital technologies are fuelling a surge of

activity in three main areas − mobile, big data and payment protocols. They offer the

potential to reach customers more effectively, to offer more individualised or tailored

products and to better monitor customer activity. But as well as requiring major

spending on technology they also raise issues around security and privacy.

Users, both consumer and business, now expect real-time access to their accounts

and to be able to make transactions on mobile devices. Many predict that this will

eventually lead to a dramatic reduction of bank branch networks and an increasing

number of ‘virtual’ banks, though this remains to be seen. Retail bank customers are

also engaging in an increasing range of specialist services from foreign exchange to

mortgages to investment products, many of which do require or at least go more

smoothly at a branch. Small businesses often require branch services too. But the

branch could be small and make use of video-conferencing or virtual reality

technology enabling specialists in a central office to ‘meet’ the client.

Big data provides an opportunity for firms to know and understand far more about

their clients than before, though it may also offer opportunities to data-owning

companies to step into finance. While this may be a threat to established institutions

in some cases, frequently the pattern is that new companies partner with existing

financial institutions with the expertise, infrastructure and licenses required.

There are experiments where companies are offering personal loan underwriting

services based on analysing the data on a person’s Smartphone, (with their

permission). By analysing phone calls, texts, emails, social network friends and

searches, etc., it is possible to build up a picture of a person, to authenticate that they

are who they say and to assess whether or not they are a good credit risk. The

system is built not by guessing what the links might be or testing for possible patterns

but by making a set of loans, seeing who pays and who doesn’t and then allowing the

AI system to identify the patterns and work out its own algorithm, which can then

continuously improve.

For payment protocols, mobile payment is one area of activity. Many institutions are

also very excited about the technology behind Bitcoin – the distributed ledger or

block-chain approach. Most financial transactions are about tracking the movement

of money from one ledger to another and currently each ledger is held in a set of

computer servers somewhere (with one or a few backups). Distributed ledger means

that ledgers are not held in one place but across thousands of computers. The block-

chain system then provides a verification process, almost equivalent to a notary’s

stamp, to confirm that the transaction is valid. It is early days but such technology

could be cheaper and also less vulnerable to hacking than existing approaches.

The small technology that could

eventually be very big

Mobile, big data and payment

protocols are the main focus

currently

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For emerging markets, the new technologies in finance have already brought mobile

payment systems to some countries as well as Internet banking. Together with the

use of agents (such as general stores) they have allowed financial products to

spread more quickly and more widely than otherwise might have happened. The use

of video-conferencing and later virtual reality could bring sophisticated products even

to the most remote branch.

Big data will also likely allow banks and insurance companies in EMs to more quickly

acquire information about clients and potential clients, again potentially reducing the

time required to build up a financial infrastructure. Moreover, digital technology

makes it cheap to experiment with new products across a subset of clients, perhaps

exploring the ideas generated by big-data analysis.

New technologies at the tipping point

Technology optimists argue that many of the technologies discussed above are at

the tipping point. The speed of decline in costs of computing power and

communications has already set Smartphones and the cloud on a steep adoption

path, following personal computers and the Internet in the 1990s. They argue that

smart AI, drones, robotics, the ‘Internet of things’ and 3D printing – all of which are

small now but growing quickly – are set to take off.

In a fascinating study, McKinsey attempted to measure the likely relative importance

of the new technologies out to 2025, offering a low estimate and a high estimate

(Figure 16). Its estimate is intended to include consumer surplus as well as GDP

impact. The most important technologies based on their estimates are mobile

Internet, the automation of knowledge work, the ‘Internet of things’, cloud technology

and advanced robotics. Autonomous vehicles, genomics and advanced materials are

seen as likely smaller in that timeframe. That said, McKinsey is sensibly cautious

about interpreting these estimates, suggesting that there are numerous applications

for each technology that they have not sized, which likely means the impact is much

greater for each and the relative rankings may not be comparable.

Figure 16: McKinsey estimates for the impact of new technologies

Impact including consumer surplus, USD tn

Source: McKinsey 2013, Standard Chartered Research

Low High

0 2 4 6 8 10 12 14 16

Renewable energy

Advanced materials

Advanced oil and gas recovery

3D printing

Energy storage

Genomics

Autonomous vehicles

Robotics

IOT

Cloud

Automation of knowledge

Mobile Internet

Gains in computing power and

improved sensors are driving rapid

change

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Adoption of technologies

Just because something is technically possible does not mean it will be widely

adopted. Otherwise we might all have our own personal helicopter by now. Adoption

is a function of usefulness, price and practicality. Even then, a new technology only

has a major economic impact if it either boosts productivity significantly or becomes

widely distributed.

The pace of adoption also depends heavily on the overall economic and business

environment. There are a number of factors that are important for influencing the rate

of innovation (Figure 17). Compelling new products or sharp declines in the price of

existing products are important. For companies, production technologies that reduce

costs in a major way are highly likely to be introduced, though only if companies do

not already have large ‘sunk costs’ with low marginal costs. Many large companies

today are struggling with when and how to replace ‘legacy’ computer systems with

new ones, perhaps using the cloud or built more directly around mobile. The problem

is complicated by the need to continue to meet immediate demands, even if it means

grafting new systems onto the old, and the fear that systems are changing so fast

that anything adopted today could be outdated in a few years. But fear of disruptive

new companies − either start-ups or backed by the large technology companies − is

a powerful motivator.

An ‘innovation bias’ is a powerful driver and seems to have emerged recently, with

the strong business and media focus on technology and current boom in Silicon

Valley, echoing that in the late 1990s. A healthy start-up environment is important,

not just for developing new technologies but also for adoption. A common pattern

today is that new business models appearing in one place are quickly replicated

around the world, helped by the easy transmission of ideas, especially digital ideas.

Sometimes they may need adapting in different environments; for example, in some

emerging markets credit cards are not widespread, so Internet shopping companies

use a cash-on-delivery model.

Figure 17: Drivers of technological adoption

Compelling new products

Sharply lower prices

Competitive pressures for cost reduction

Fear of disruptive new competitors

‘Innovation bias’

Scale – large companies can more easily finance new investment

Scale – start-ups may be more likely to innovate

Absence of ‘sunk costs’

Healthy start-up environment

Entrepreneurial talent Easy to start a business Venture capital available Low stigma to failure

Fast economic growth and high investment – easy to include new technologies

Flexible labour and product markets

Government support Specific incentives Support for research in universities Constructive/permissive approach to new technologies

Growth of cities

High level of education


Adoption is a function of

usefulness, price and practicality

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The ease of starting a business, and the availability of entrepreneurial talent and of

skilled people are also important. Finance is a problem in many countries, though it

may be more easily available if the model is clearly working elsewhere. Still, there are

typically several companies aiming at the same model and often only a few will

succeed. One advantage commonly asserted for the US is the lack of stigma for

failure; indeed in Silicon Valley, failure is almost a mark of success.

Fast economic growth and a high investment rate are important drivers, if innovation

is to be important at the macro level. Innovation can drive economic growth, but very

often the direction is the other way round: new investment incorporates innovations.

The overall business environment is also important. Economists have long argued

that rigid labour and product markets impede economic growth. Arguably these

rigidities matter even more in a period of rapid technological change. If factories are

not able to easily reorganise working patterns or make workers redundant, they are

much less likely to embrace new technologies. While this may give workers

protection in the short run, it implies lower living standards in the long run.

The controversy over ‘picking winners’

The role of government is controversial. Governments as well as companies see

technological innovation as a competitive issue and so often provide special

incentives. The social benefits of innovations, in the form of lower prices and new

products, are generally much greater than the producer gains (profits and wages of

those employed) so there is a case for incentives to encourage investment, such as

investment depreciation allowances. The controversy arises over the extent to which

governments should try to ‘pick winners’. Identifying and trying to encourage

innovation clusters in fields where the country already has a base or which is highly

relevant to other successful industries in the country may make sense, but trying to

create something from scratch is questionable.

Government approaches to regulating the new technologies also matter. Digital

technologies have given rise to issues of privacy, data protection and intellectual

property. Drones, genomics, genetic modification and nanotechnology have raised

safety fears. Rules and procedures around electronic hailing of taxis have hit the

headlines in recent months. Legislation around the requirements and limitations for

flying drones is a key issue currently while the rules around the sale and use of

autonomous cars will likely arise soon. Technology is generally going to be adopted

faster where regulations are permissive and where issues are settled relatively quickly.

Are we better at innovating?

For a variety of reasons we may have become better at innovating. Just as

Gutenberg’s printing press accelerated the spread of knowledge and helped drive the

scientific revolution in the 16th

and 17th

centuries, so the spread of information via the

Internet may be another significant accelerator. Globalisation, including the opening

up of former Communist countries and the development of global supply chains, with

greater specialisation of production also helps. The power of computers to analyse

and simulate as well as to provide prototypes via 3D printing is improving rapidly with

the development of AI. Video-conferencing, now a fast-growth industry and virtual

reality technology could also lead to greater productivity in research.

Digital technology itself, policy

changes and the growth in EMs

have all boosted innovation

Building on existing clusters can be

a good strategy but trying to create

a new one is risky

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The open source model for software has jump-started software development. There is

also a move towards the ‘open innovation’ model, the idea that given the increasingly

disbursed and fast-changing innovations, firms should not try to develop everything in-

house but instead collaborate and share technology with partners, even competitors. A

related concept in publishing is ‘open research’ where new papers are provided free,

with the government paying the costs. As well as reducing development costs these

approaches make it easier to be at the forefront of technology, though many companies

will probably still think it valuable to protect intellectual property.

Organisational changes

There are also organisational changes. Many governments have learnt how to

incentivise universities to work with start-ups and venture capital to commercialise

new ideas, something only the US was good at a few decades ago. Meanwhile

governments and companies are spending more on research and development than

ever before, reflecting the rise in GDP and the increased number of countries at

middle income or above. The number of researchers in so-called STEM fields –

science, technology, engineering and maths – has ballooned in the last 20 years.

Governments are targeting the new technologies. For example China is reported to

have over 400 robot makers and 30 industrial parks for robotics. Japan recently

established a ‘robot revolution realisation council’ to boost Japan’s industry. The US,

Germany and Korea are also focusing heavily on robotics.

Governments, companies and philanthropists have also become cleverer at

stimulating research. The US Defense Advanced Research Projects Agency

(DARPA) has been prominent in encouraging and helping to finance competitions, for

example in autonomous vehicles and in robotics. The Xprize foundation offers prizes

for challenges including developing a moon rover, a Star Trek style ‘tricorder’ medical

device and a global learning prize – free apps to spread reading, writing and

arithmetic skills in Africa. Of course prizes are not new: Lindberg collected the Orteig

Prize for his non-stop flight from New York to Paris. But more and more countries are

following the US example. And the impact is magnified by digital connectivity.

Investment is the key

Invention and innovation are ultimately based on investment, whether it is the

gentleman inventor of the 19th century, the student in the garage, or the university or

the large corporation with its research and development facilities. People have to

spend time and money on research, experimentation, design and development. More

investment, as we are seeing, and the greater effectiveness of this investment, as

just argued, should accelerate innovation. Finance also has a role to play and there

is an increasingly sophisticated system of venture capital and start-up support.

The Silicon Valley start-up process

Developing start-up businesses has been taken to a sophisticated level in California’s

Silicon Valley and the model is spreading to other innovation clusters. First, an

entrepreneur or founder must come up with an idea and start initial research and

experimentation to develop the concept, probably self-funding or with the help of an

‘angel investor’, often family or friends (frequently successful entrepreneurs). At some

point the founder likely takes the business to an ‘incubator’ a company that specialises

in helping new companies by developing the concept and providing guidance for the

necessary programming, design, legal, accounting and other work that will be

necessary. Incubators typically provide training modules as well as facilities.

Founders, incubators, accelerators

and funding rounds all play a role

Incentivising universities and

offering prizes have become

effective ways to stimulate

innovation

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Later the start-up may use an ‘accelerator’, a company that specialises in helping the

founders present the idea to investors. The first round of funding, ‘Round A’, will

typically provide enough money to allow the company to develop further for 12-18

months, e.g., USD 1-2mn. If the idea survives to Round B, (by which time it will

usually be operating and growing) a multiple of that money may be available.

Typically around this time companies will either fail, evolve into niche or lifestyle

businesses (i.e., a comfortable living for the founders) or start to look like a potential

IPO or private-sale candidate. Incubators and accelerators usually take equity stakes

in the business, as do the venture capitalists in the financing rounds, and each is

looking for a big winner 10-20% of the time.

The venture-capital business itself has been fuelled by the spectacular success of a

number of tech companies in the last 20 years as well as the speed with which it has

been achieved. Silicon Valley is full of wealthy founders of successful firms, often

relatively young and keen to be involved in the next big start-up. With so much

emphasis on starting new companies and with executives from large companies

trawling for ideas, there is a huge focus on innovation. Those with experience of the

process emphasise two things. First, the eventual business is often significantly

different from the first idea, a phenomenon known as ‘the pivot’ in Silicon Valley.

Second, failure is a normal part of the innovation process and is regarded as good

experience.

‘Gamification’, the ‘flipped classroom’ and ‘mastery learning’

The new technologies are both an opportunity and a challenge for education. On-line

video has already transformed the delivery of educational material, and interactive

learning programmes including ‘gamification’ and testing are growing rapidly. The

cost of learning is coming down and the new technologies are particularly valuable

for people in remote areas.

The education sector is debating how best to use the new technologies. One concept

is the so-called ‘flipped classroom’. Instead of being introduced to a topic through

formal group teaching and then reinforcing the learning with homework such as

solving problems or answering written questions, students can watch a video or

engage with an interactive learning system at home, then use the classroom for the

follow up. The teacher’s role then is to coach, answer questions and ensure the topic

is understood. Students can also help each other in class.

Another concept is ‘mastery learning’. Instead of the whole class moving on to the

next topic according to a timetable, each student has to first master the topic, using

interactive materials to teach and test. This concept works best alongside the flipped

classroom and materials for gauging mastery are being developed. Neither of these

approaches is entirely new; students are routinely asked to look at textbooks before

classes, while mastery teaching was popular during the 1920s. But digital technology

has opened up far greater possibilities than before and many new systems are being

developed.

What to teach?

There is also a lively debate over what to teach. If computers are good at arithmetic,

grammar and spelling, is there so much value in the old ‘3Rs,’ reading, writing and

arithmetic? It seems unlikely that reading will become obsolete, though Smartphones

can now speak and also translate simultaneously. Learning to type may become

Education is being transformed by

the new technologies

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redundant as voice recognition becomes increasingly capable. The discussion on

jobs above suggests that problem-solving and interactions with people may be

especially important to develop in future. Creativity is also going to be even more

important as the number of jobs in design of all forms is likely to rise.

On balance, new technologies improve sustainability

There are important concerns about the impact of new technologies on sustainable

development. The technologies bring economic growth (implying more resource use),

extra energy use (all those machines) and a widening distribution of income. They

also are distributed very unequally currently, with many people having no access to

computers, though this is changing rapidly as Smartphones proliferate. ICT is

estimated to account for about 2.25% of total carbon emissions but emissions are

growing at 6% p.a., faster than other emissions (Souter, 2012). Also, digital hardware

often includes toxic materials as well as batteries, which may be hard to keep from

harming the environment.

But many of the new technologies also offer promise for improving sustainability. For

example taking advantage of the ‘Internet of things’, new sensors and big data can

radically improve energy use in buildings and vehicles. Telecommuting, video-

conferencing or virtual reality may also reduce the number of journeys people make.

However, the telephone clearly did not reduce the number of journeys overall

because it opened up new possibilities for trade and commerce. Digital technologies

could also reduce goods transport (saving energy) if 3D printing and robotics lead to

a major revision of global supply chains, though we believe this is a long way off.

New materials technologies will be important in making goods lighter, which saves

energy in use and in transport, as well as lowering the need for metals. Renewable

energy itself will be a critical technology for the long term in reducing greenhouse gas

emissions and enabling continued economic growth and catch-up in emerging

countries.

There are both good and bad effects

Technology in developed markets

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19 January 2015 41

Technology in developed markets

Life at the frontier

To remain at or near the technology frontier, developed countries need to

continuously adopt new technologies and, through invention and innovation, help to

push the frontier outwards. The new developed economies of Singapore, Hong Kong,

Korea and Taiwan are taking the lead in many areas, challenging the old developed

economies, particularly in southern Europe where some countries are in danger of

being left behind. The US is still a strong dynamic innovator, though there are

concerns it is losing its edge.

The new technologies make a dynamic and flexible economy more important than ever,

an area in which many European countries fall short. Countries also may require new

policies to encourage adoption and innovation. But fears of job losses and worries

about privacy and safety sometimes discourage innovation and constrain policy. That

said, life in developed countries has already been transformed by digital technology in

the home and workplace and is now being transformed by mobile. And, high education

levels foster an enormous amount of research, development and innovation.

The productivity puzzle

Despite the spread of digital technology, productivity growth in developed countries

has been weak in recent years. Both TFP growth and labour productivity growth have

been on a declining trend since the global financial crisis (Figures 18 and 19). US

productivity growth peaked in the early 2000s and has slowed since (Figure 20),

while Europe generally performed relatively poorly throughout the 2000s. Is weak

technological progress to blame or are other factors? To the extent that other factors

are responsible, could a surge in technological innovation provide some relief?

There are still considerable differences between the levels of productivity among

developed countries, with the US well ahead. Europe, Japan and Singapore

narrowed the gap with the US from the 1950s to 1990s but have stagnated or fallen

back since then. Over the past decade, the US has increased labour productivity

14% while the UK and Germany have increased productivity by less than 7%. Spain

has shown a better performance in recent years but Korea is the only country to have

continued to narrow the gap throughout the last 20 years, though it is still behind

(Figure 22).

Figure 18: Total factor productivity growth

Annual average, % (5-yr moving average)

Figure 19: Labour productivity growth

GDP per person, annual average, % (5-yr moving average)

Source: The Conference Board Total Economy Database (Jan 2014) Source: The Conference Board

US

Europe

Japan

World

-1.0

-0.5

0.0

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1.0

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1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

US

Europe

Japan

World

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1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

DMs need to continuously adopt

new technologies to push the

frontier outwards

Samantha Amerasinghe +44 20 7885 6625

[email protected]

Economics Research

Standard Chartered Bank

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19 January 2015 42

The US has long been in the lead

The US took the overall lead in technological adoption in the late 19th century and

drew well ahead of Europe in the first half of the 20th century. For example, in 1938

the average US employee in manufacturing was using more than twice as much

electricity as the average German employee (Ristuccia, 2010). In 1938 German

electricity use was at the same level as the US in 1921, 17 years behind; Britain and

France were slightly behind Germany while Japan was still far behind.

Rapid US adoption was likely partly due to the combination of relatively expensive

labour encouraging labour-saving technologies, and cheap land which made it easier

to reconfigure factories and cities. But it also reflected greater economic dynamism,

encouraged by the US’ size, entrepreneurial spirit and (relatively) laissez faire

regulatory environment.

Higher US labour productivity reflects both more capital per worker and more

advanced capital per worker. The US is far from being ahead in all areas of

technology but it usually catches up relatively quickly when it falls behind in a major

area, as we have seen for example with mobile over the past 10 years.

Figure 20: US labour productivity

Annual output per hour %, 5-yr moving average

Source: Bloomberg

Figure 21: Top IT companies globally

Within the global Top 100 companies 2014

Company Country Rank 2014

Market cap (USD bn)

2014

Market cap (USD bn)

2009

% Change 2009-14

Apple Inc United States 1 469 94 399

Google Inc United States 3 409 110 271

Microsoft Corp United States 4 318 163 95

IBM Corp United States 24 193 130 48

Oracle Corp United States 27 176 90 96

Facebook Inc United States 29 175 n/a -

Tencent Holdings Ltd China 38 149 13 1046

Qualcomm Inc Untied States 47 127 64 98

Intel Corp United States 49 123 84 46

Cisco Systems Inc United States 59 112 98 14

SAP AG Germany 73 99 44 125

TSMC Ltd Taiwan 82 92 39 136

MasterCard Inc United States 83 92 22 318

Source: Bloomberg and PwC analysis

0.0

0.5

1.0

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2.0

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3.0

3.5

4.0

1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 2012

The US is well ahead overall on

labour productivity

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19 January 2015 43

The US is also the clear leader for quoted technology companies. 13 of the top 100

global companies by market cap are in technology and 10 of those 13 are US

companies including the 6 largest (Figure 21). However some of the fastest-growing

large technology companies are now in China, including Tencent Holdings (Internet,

mobile, e-commerce, etc.) and Alibaba (Internet infrastructure, e-commerce, online

financial and Internet content), which raised USD 25bn in September 2014 in the

largest-ever US IPO.

The golden age of US productivity growth was from the 1930s to 1973. Productivity

growth slumped after 1973 in the wake of the oil crises and only picked up for a while

during 1995-2004 before falling back again. One reason could be the shift of IT

manufacturing from the US to foreign locations; IT manufacturing has seen

extraordinary productivity growth. It could also be because by 2004 the initial benefits

of personal computers and Internet connections had worked through (Byrne, 2013).

Secular stagnation?

In late 2013 former US Treasury Secretary Larry Summers suggested that the US

and other countries might be facing a period of ‘secular stagnation’. This term was

first used in 1938 by leading US economist Alvin Hansen. He argued that the US

economy then was facing a difficult period due to underinvestment and poor

aggregate demand owing to declining population growth, a restrictive immigration

policy, slowing technological change and a tendency to a Keynesian-style under-

employment equilibrium (Crafts, 2014). The thesis was hotly disputed at the time and

history proved it unfounded as the population rose with the post-war baby boom and

the US enjoyed several decades of fast growth.

Today, many of the reasons for worrying about secular stagnation are similar: slower

population growth, low productivity growth and an inadequacy of demand. In addition,

two growth-supporting trends of the last few decades, the rise in female work-force

participation and the increase in numbers of people with a college degree, have now

been achieved. Some also argue that higher welfare payments, government health

insurance and higher minimum wages in the US are lowering the participation rate

(Glaeser, 2014). The US may be becoming more like Europe, though the risk of

secular stagnation may be even greater in Europe, with its less favourable

demographics and greater burden of fiscal consolidation.

Figure 22: Labour productivity

GDP per hour worked (% of US), PPP, 2013 USD

Figure 23: ICT goods exports from developed markets

% of total exports

Source: The Conference Board Source: WDI

DE

IT ES GB

JP SG

KR

0

10

20

30

40

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100

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

DE ES

GB

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JP

KR

SG

US

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

The risk of secular stagnation may

be even greater in Europe than in

the US

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19 January 2015 44

The slowdown in labour-force growth in the US and other developed countries seems

to be unavoidable and it is unclear how to encourage higher participation, unless via

greater participation of older people. Hence most forecasts of ‘trend’ or potential

growth now are lower than 10-20 years ago. But what to forecast for productivity

growth is a big uncertainty.

Slowdown in investment

Developed countries have seen a fall in the share of investment in GDP since the

early 1980s (Figure 24). And not just because the share is depressed after the global

financial crisis; it was already lower by several percentage points for most developed

countries in 2007. Korea is the main exception. Since the crisis US investment has

risen, but remains below pre-crisis levels while European investment has been very

sluggish. In contrast, Korea and Singapore have seen a nice lift. Hopes for faster

growth in developed countries in 2015-16 rest heavily on strong investment.

The slowdown since the early 1980s may be partly due to the lower cost of new

capital. IT hardware and software is cheaper than old-technology factory equipment,

while globalisation means that much old-technology heavy investment has gone into

emerging markets such as China. Digital equipment and software have been

continuously falling in price. The slowdown could also be due to lower government

investment in infrastructure. Some argue it also reflects ‘short-termism’, particularly in

the US and UK, where corporate managements are rewarded by raising profits in the

short term rather than the long term (Smithers, 2012). Finally it could also be due to

poor measurement of investment. In a digital service economy the investment

required to expand or offer new products is often more in staff training than in new

hardware or software equipment. Training and coaching, especially ‘on the job’, is not

well measured.

As noted earlier there are grounds for optimism on investment. As well as

opportunities to invest in new technology there are signs of resurgent optimism or

higher ‘animal spirits’ in the US. And short-termism could be trumped by fear, if

companies recognise they must invest just to stay in business, as new technologies

and business models transform their markets. Governments are also moving towards

higher infrastructure investment, recognising the legacy of under-investment, though

this might only emerge slowly.

Figure 24: Investment trends in DMs

% of GDP

Figure 25: European countries lag behind the US in ICT

investment (% of total investment)

Source: IMF WEO Source: OECD (2014)

DE

JP

KR SG

TW

GB

US

10

15

20

25

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1980 1984 1988 1992 1996 2000 2004 2008 2012

DE IT

JP

KR

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GB

US

0

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1985 1989 1993 1997 2001 2005 2009

Hopes for faster growth in DMs rest

heavily on strong investment

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19 January 2015 45

Businesses in Europe and Japan do not appear so confident however; they are still

concerned about underlying weak demand and geopolitical uncertainties. Some

countries, such as Spain and Greece, are making progress on reforms while others,

such as Italy and France, are beginning to try harder. The fall in oil prices, if

sustained, could be an encouraging factor for business.

Does Europe have a productivity problem?

Europe’s poor productivity performance is a serious threat to economic stability. With

government debts high in many countries and the labour force set to stagnate or fall,

Europe urgently needs higher productivity growth to make debt burdens sustainable.

Some of the recent weakness is cyclical. But some is likely structural and related to

weak take-up of new technologies.

European countries tend to invest far less in ICT capital than does the US (Figure

25). The UK is an exception: its share of ICT capital has risen since the 1980s to a

level closer to that in the US. Europe’s disappointing ICT investment is likely due to a

number of factors – excessive regulation of product and labour markets; tax policy (a

high consumption tax on ICT products); the fragmentation of European markets,

which limits economies of scale; and possibly less effective management styles than

in the US, where good management is facilitating IT transformation (Crafts, 2014).

Regulating product markets limits competition, particularly in the services sector.

Regulating labour markets is likely also an important factor in technology adoption. If

workers have a high degree of security they may be less open to change, while

employers will be reluctant to implement major changes in work practices because of

the difficulty of handling redundancies. Countries with more flexible labour markets

can manage change more effectively via switches in headcount and job roles. They

can also more easily make use of temporary and contract workers and outsourcing,

utilising the ability of the networked digital economy to manage these more flexible

arrangements.

Continental European countries perform poorly on the WEF’s measure of labour-

market efficiency (Figure 26). Italy’s score is particularly low, though Spain and

France are also much less efficient than the US or UK. Prompted by the euro crisis,

countries are trying to reform labour markets; Spain in particular has made good

reform progress, though the improvement has not shown up in this indicator yet.

Singapore and Hong Kong score best on this measure, with the US and UK not far

behind. Worryingly, quite a number of countries have seen a significant drop in

labour efficiency since 2007, including Japan, Australia and Korea among developed

countries. Several emerging countries have also been going in the wrong direction,

including Thailand, Indonesia and India.

Countries’ openness to new technology

The Networked Readiness Index

The World Economic Forum produces a Networked Readiness Index (NRI) to

measure ICT readiness, using 54 indicators to assess the overall environment, the

readiness to adopt, actual usage and the impact. While most items are specific to IT,

such as mobile network coverage, broadband coverage and Internet; some are more

general environmental factors such as judicial independence and the time taken to

start a business. The indicators are listed in the table below, showing also which of

our 36 countries comes in first in each category (Figure 27).

Continental European countries

perform poorly on labour-market

efficiency

Europe tends to invest far less in

ICT capital than does the US

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19 January 2015 46

Singapore, Hong Kong, Sweden, Korea and the UK take the bow for first place most

often. In many ways it is unfair to compare cities with countries; San Francisco, New

York and Tokyo would doubtless appear high in a ranking of cities. Nevertheless, this

measure underlines the attractiveness of the business environments in Singapore

and Hong Kong.

Singapore and Sweden are the top two countries on the overall index, with the US,

Hong Kong, the UK, Korea, Germany and Taiwan a little way back (Figure 28).

France and Spain lag while Italy is far behind, ranking slightly below Turkey in the

overall list. Italy ranks even lower on the environment sub-index, which covers the

political, regulatory, environment, business and innovation environment, next to

Russia and below China.

Figure 26: Labour-market efficiency

Score (1-7), 2014 vs 2007

Source: WEF, Global Competitiveness Index

2007

2014

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

SG HK US GB NZ CA AE MY SE JP KE UG TW DE CN NG RU VN AU FR SA TH KR PH ES BR ID IN ZA MX BD TR PK IT EG

Singapore and Sweden are the top

two countries on the NRI

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19 January 2015 47

Figure 27: The top-ranked countries in the Networked Readiness Index

Ranked out of our 36 country list (including 12 developed economies)

INDICATOR Top-ranked

1st pillar: Political and regulatory environment

Effectiveness of law-making bodies* Singapore

Laws relating to ICTs* Singapore

Judicial independence* Hong Kong

Efficiency of legal system in settling disputes* Singapore

Efficiency of legal system in challenging regs* Hong Kong

Intellectual property protection* Singapore

Software piracy rate, % software installed United States

No. procedures to enforce a contract Singapore

No. days to enforce a contract Singapore

2nd pillar: Business and innovation environment

Availability of latest technologies* Sweden

Venture capital availability* Hong Kong

Total tax rate, % profits Hong Kong

No. days to start a business Australia

No. procedures to start a business Canada

Intensity of local competition* Japan

Tertiary education gross enrolment rate, % Korea

Quality of management schools* United Kingdom

Gov’t procurement of advanced tech* Singapore

3rd pillar: Infrastructure and digital content

Electricity production, kWh/capita Canada

Mobile network coverage, % pop. Hong Kong

Int’l Internet bandwidth, kb/s per user Hong Kong

Secure Internet servers/million pop. Korea

Accessibility of digital content* United Kingdom

4th pillar: Affordability

Prepaid mobile cellular tariffs, PPP $/min. Hong Kong

Fixed broadband Internet tariffs, PPP $/month United States

Internet & telephony competition, 0–2 (best) Australia

5th pillar: Skills

Quality of educational system* Singapore

Quality of math & science education* Singapore

Secondary education gross enrolment rate, % Australia

Adult literacy rate, % Australia

INDICATOR Top-ranked

6th pillar: Individual usage

Mobile phone subscriptions/100 pop. Hong Kong

Individuals using Internet, % Sweden

Households w/ personal computer, % Sweden

Households w/ Internet access, % Korea

Fixed broadband Internet subs./100 pop. France

Mobile broadband subscriptions/100 pop. Singapore

Use of virtual social networks* United Kingdom

7th pillar: Business usage

Firm-level technology absorption* Sweden

Capacity for innovation* Germany

PCT patents, applications/million pop. Japan

Business-to-business Internet use* Sweden

Business-to-consumer Internet use* United Kingdom

Extent of staff training* Japan

8th pillar: Government usage

Importance of ICTs to gov’t vision* Singapore

Government Online Service Index, 0–1 (best) Korea

Gov’t success in ICT promotion* Singapore

9th pillar: Economic impacts

Impact of ICTs on new services & products* Korea

ICT PCT patents, applications/million pop. Japan

Impact of ICTs on new organisational models* Sweden

Knowledge-intensive jobs, % workforce Singapore

10th pillar: Social impacts

Impact of ICTs on access to basic services* Singapore

Internet access in schools* Singapore

ICT use and gov’t efficiency* Singapore

E-Participation Index, 0–1 (best) Korea

Note: Indicators followed by an asterisk (*) are measured on a 1-7 (best) scale, based on a survey of leaders.

Source: WEF, Standard Chartered Research

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19 January 2015 48

Use of technology in developed markets

Developed markets are ahead of emerging markets in technology to varying degrees

(Figures 29-34). Adoption of fast broadband and Smartphones is quite recent for much

of the population and the economic impacts of recent technological innovations are

still likely to be working through. More than 60% of households have personal

computers or Internet access across all developed countries in our subset. Sweden,

UK and New Zealand are at the forefront of computer and Internet usage. Korea and

Singapore are also among the highest ranking countries on these measures. Italy and

Spain are the laggards.

The World Economic Forum produces a separate innovation index as part of its

Global Competitiveness report (Figure 35). This measures how conducive a country’s

environment is to innovation and the level of support from both the public and private

sectors. It looks at aspects such as private-sector investment in R&D, the presence

of high-quality scientific research institutions, collaboration in research and

technological developments between universities and industry and the protection of

intellectual property. Japan, the US, Germany and Sweden lead on this index, closely

followed by Singapore Taiwan and the UK.

Figure 28: Networked readiness in developed markets

NRI score (1-7), USD

Source: WEF GCI

Figure 29: Households with Internet access

%, 2014

Figure 30: Households with personal computers

%, 2014

Source: GITR (2014) Source: GITR (2014)

AU

CA

DE

FR

GB HK

JP KR

SG SE

TW

US

ES

IT

NZ

4.0

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10,000 20,000 30,000 40,000 50,000 60,000 70,000

Net

wo

rked

Rea

din

ess

Ind

ex (

1 -

7)

GDP per capita (USD)

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KR SE GB SG NZ JP DE CA AU FR HK US TW ES IT

60

65

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SE NZ SG DE GB CA AU KR FR HK JP US TW ES IT

Japan, US, Germany and Sweden

lead on the innovation index

Over 60% of households have

computers or Internet access

across our DM subset

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19 January 2015 49

Figure 31: Mobile cellular tariffs

PPP USD/min

Figure 32: Individuals using Internet

%

Source: GITR 2014 Source: WEF GCI

Figure 33: Mobile broadband subscriptions

Per 100 population

Figure 34: Fixed broadband Internet subscriptions

Per 100 population

Source: GITR 2014 Source: WEF GCI

Figure 35: Innovation index

Scores (1-7)

Source: WEF GCI

2012

2014

0.0

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Optimal policy for developed countries

Staying at the frontier

A high rate of innovation is a key comparative advantage for developed economies.

In part it arises naturally from a well educated population together with well managed

firms and a competitive environment. Policy plays a key role both in maintaining

these attributes and by directly promoting innovation. Governments aim to create and

nurture a successful national innovation system (NIS) for diffusion of new

technologies (Ezell, 2014). An NIS includes all the economic, political and social

institutions affecting innovation; for example, a country’s financial system,

educational system, labour markets and regulatory policies.

An NIS is sometimes conceived as an innovation success triangle, made up of three

elements – the business, regulatory and innovation policy environments (Figure 36).

Business environment factors include high-quality executive management, strong IT

adoption and vibrant capital markets. The trade, tax and regulatory environment

includes open trade, transparency and the rule of law; protection of intellectual

property; and an effective patent system. A good innovation policy environment

should provide strong support for public investment in innovation infrastructure –

science and technology, digital technology infrastructures, R&D, high-skill

immigration; science, technology, engineering and math (STEM) tertiary education;

support for regional industry technology clusters and so on.

Optimal policies

The innovation triangle outlines where countries want to be. Getting there requires a

mix of policies, some strictly free-market and some interventionist, though there is

disagreement about the best balance of the two.

Figure 36: Government innovation policies

The innovation policy triangle

Source: Ezell and Atkinson (2014) – ITIF

Business environment Regulatory environment

Technology policy environment

Vibrant capital markets

Churn and change are accepted, even embraced

High level of entrepreneurship

Cooperation and collaboration is part of the culture

Strong ICT adoption

Strong managerial skills

Pro-innovation tax system

Competitive and open trade regime

Ease of starting a business

Transparency and rule of law

Support for competitive product and labour markets

Limited regulations on the digital economy

Government procurements based on performance standards

Education and skills

Technology research and commercialisation infrastructure

Digital technology infrastructure and ecosystem

A high rate of innovation is a key

comparative advantage for

developed markets

Special Report

19 January 2015 51

Many of these policies are standard free-market recommendations promoting

competition and the protection of property rights. But some involve government

interventions such as research funding, or special tax incentives. There is a strong

economic case for promoting innovation, because the social benefits of successful

innovations are far greater than the profits achieved by the innovators themselves.

For example it is estimated that only 2-5% of the value of innovations is captured by

innovating firms (Crafts, 2014). Most goes to the users, ultimately consumers, in the

form of lower prices and higher real wages.

At the same time it is easy for governments to waste money since not all innovations

are successful. Nobody can easily pick winners and governments are notorious for

backing losers for too long. Government spending has to come from higher taxes,

which lower living standards and distort incentives. Free-market proponents emphasise

that the government should aim to support general research and provide general

subsidies and not try too hard to target expected winners. That said, especially for

smaller countries, it may be advantageous to identify potential winning areas based on

established companies and industries and to focus government efforts there.

Adoption is more important than innovation

A critical point is that a country can be at the technology frontier, with a very high

standard of living, without necessarily inventing anything, or very much. Smaller

countries are naturally in this position. What matters is that companies and

governments embrace new ideas, processes and technologies, wherever they are

Figure 37: Optimal innovation policies

Policy initiative Wins (to achieve optimal outcomes)

Skills, education and immigration policy

High rates of secondary and tertiary educational attainment

Open immigration policies appealing to internationally mobile, highly skilled workers

Strong support for STEM education

Achieving better labour-skill matching in countries

University policies (innovation vouchers, specialised colleges, cluster-based higher education, entrepreneurial education, professional Masters Degrees, Industrial PhD programs)

Scientific research policies

Governments funding pre-competitive research

Openness to inward FDI

Advance manufacturing innovation – funding public-private research partnerships and innovation clusters

Commercial innovation promotion agencies (with participation open to all firms)

ICT policy Country’s investments in digital infrastructure platforms such as broadband, the smart grid, ITS, mobile

payments etc

All national policies designed to promote the adoption and use of technology

Tax policy

High R&D tax credit levels (to service industries, refundable and collaborative)

Low effective corporate tax rates

Preferential tax treatment for young companies (so long as uniformly available to all start-ups)

Cutting effective tax rates by providing more generous incentives for investment in R&D, new capital equipment and skills

Knowledge tax credits

Trade policy Removing restrictions on trade and foreign direct investment

Allowing markets to determine currency rates

Intellectual property policy Recognising domestic and foreign firms’ intellectual property rights

Patent boxes

Government procurement policy

Fully considering bids from foreign firms when awarding government procurement contracts

Governments leading by example and making performance and innovation an explicit goal of their procurement processes

Standards policy

Membership in the International Standards Organisation

Eliminating standards barriers by aligning technical regulations through trade agreements (e.g., NAFTA, Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, the Government Procurement Agreement (GPA) and the Information Technology Agreement (ITA)

Regulatory policy Aligning countries’ anti-trust policies to address conflicting anti-trust regimes and accelerate time-consuming

approval processes

Source: Ezell and Atkinson (2014) – ITIF, Standard Chartered Research

Social benefits of innovation are

always far greater than the profits

Special Report

19 January 2015 52

created. Otherwise countries fall behind in competitiveness and living standards. Still,

emphasising innovation means in practice that some companies will be at the

forefront, which can generate extra profits and jobs. Even small developed countries

usually have some leading-edge companies and products.

Arguably governments sometimes focus too much on manufacturing. The digital

revolution means that the big improvements in productivity will often come from

greater competition and innovation in the services sector, including the non-traded

services sector. Digital technology has transformed office work and commerce and is

transforming other areas of services too. A key reason for lower income levels in

Europe and Japan compared with the US is over-restrictive rules in services. But

reducing restrictive practices in areas such as legal work, pharmacy, taxis and retail

is often resisted by the companies and workers affected and is hard politically.

The rows over new taxi systems in cities around the world are a good example of

political resistance to technological change. Vancouver city councillor Geoff Meggs

was recently reported as saying, “I don’t think elected officials should be enabling

change that destroys small business” (Macleans, 2014). Yet not accepting such

change, and not changing regulations where appropriate makes it hard to gain the

benefits of new technology. Consumers are usually the best judge.

Immigration can help promote innovation

Another hard area politically is immigration policy. Skilled immigrants play a critical

role in contributing to a country’s creative ability, skills and knowledge base and

hence its capacity for innovation. Evidence from the US also suggests that they are

about twice as likely to start a new business as the general population. Making it

reasonably easy for foreign students to remain and work after graduation also adds

to skills and bolsters the university system, enabling colleges to attract the best

overseas students. Many will return to their native countries at some point anyway,

and this helps to promote innovation and skills globally. For emerging countries it is

particularly helpful to have returnees who are not just academically educated but

have work skills from a developed country too.

It appears that countries such as Japan that have been less open to high-skilled

talent have suffered declining performance of the ICT industry as a result. US ICT

firms have been better positioned due to large-scale importation of highly skilled

labour from foreign countries, though the US system is arguably still unnecessarily

restrictive (Litan, 2015). Countries like the UK and Singapore, now inclining towards

limiting immigration, could lose out. Finding a way to maintain skilled immigration,

even if less-skilled immigration is restrained, is important.

Research and development spending is critical

Tax policies can be structured to encourage innovation, through low corporate tax

rates and R&D tax-credit generosity. In the US, R&D tax credits stimulate

approximately two dollars in private R&D spending for every dollar they cost the

government (Ezell, 2014). Korea, Japan and the UK also provide for collaborative

R&D tax credits against spending with a university, government organisation or

consortium of companies. Meanwhile high corporate tax rates can deter both

production and R&D activities and adversely impact foreign direct investment and

investment rates. Corporate tax rates have been coming down in most developed

countries, with the US now among the highest.

Digital technology has transformed

office work and commerce

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19 January 2015 53

R&D spending as a share of GDP almost doubled in Korea between 2000 and 2012

(Figures 38 and 39), while in Japan, Germany and the US, R&D expenditure has

steadily increased since 1996 with a blip in 2009 due to the global financial crisis.

Japan’s success story is one of rapid catch-up, through robust investment in R&D

coupled with a strong focus on high value-added manufactured exports of electronic

hardware and components. Japan’s weakness is in the services sector where

restrictions limit the potential for technology adoption.

Finally, education is a critical area and in most countries is dominated by

government. Digital technology itself is transforming the way education can be

delivered, as discussed above, but this requires innovative and creative approaches.

Further, education needs to provide the skills to create and work with new

technologies. Many countries are putting an increased emphasis on STEM subjects.

Asia’s developed economies are leading

Singapore, Hong Kong, Korea and Taiwan have achieved high-income status

through innovation and knowledge-based economic development. Strong policy co-

ordination from governments has played a fundamental role in Singapore and Korea

especially, aimed at promoting the use of the latest technologies along with a sense

of urgency. A recent Asian Development Bank (ADB) report highlights three key

areas for policy and public investment in becoming a knowledge-based economy

(KBE); ICT infrastructure, human capital and high-quality institutions (ADB, 2014).

Korea is now the leading country for R&D expenditure at 4% of GDP in 2012, up from

2.3% in 2000. Singapore’s R&D expenditure is currently 2.3% of GDP and the

government aims to raise it to 3.4%. The Korean government is currently drawing up

a 10-year plan to promote its 3D printing industry, which is seen as a new growth

engine to bring about innovation in the manufacturing sector. The global 3D printing

market is currently dominated by US firms, with Korea’s share of the global market at

just 2.3%. But, according to government estimates, Korea has the potential to

generate about 15% of global 3D printing output by 2020.

Education reforms have also played a significant role in building the human capital

base. Currently Korea’s higher education enrolment is among the highest globally

(Figure 40). Singapore has invested heavily in higher education, as well as, until

recently, promoted immigration of skilled labour. Singapore has also shifted to giving

the services sector more priority.

Figure 38: R&D expenditure in DMs

% of GDP, 2000 vs. 2012

Figure 39: R&D expenditures as a share of GDP

% of GDP

Source: GITR 2014 Source: WDI

2000 2012

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

KR SE JP DE US AU FR SG CA GB ES IT HK

DE

GB

JP

KR

US

SG

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1996 1998 2000 2002 2004 2006 2008 2010 2012

R&D spending as a share of GDP

almost doubled in Korea between

2000 and 2012

Korea has the potential to generate

about 15% of global 3D printing

output by 2020

Special Report

19 January 2015 54

Korea and Singapore achieved a rapid growth in the number of researchers

(Figure 41) and research spending faster than their GDP growth rates

(Fernald, 2014). It is not surprising that Singapore and Korea still have the highest

high-tech exports (% of total manufactured exports), even though it has been on a

declining trend (Figures 42 - 43).

Conclusion: Innovate or stagnate

Developed countries need to encourage adoption and innovation in new technologies

if they are to stay at or near the frontier. In the tradables sector, failure to do so

lowers competitiveness and causes a fall in the exchange rate over time, leading to

lower incomes. In areas which are not traded, failure to embrace change keeps living

standards lower than they could be. Digital technology means more services now are

tradable and some of the non-tradable services face new business models. Countries

with flexible labour and product markets and relaxed regulatory policies will be faster

adopters.

In Japan and in much of Europe, inflexible regulatory and business environments

hinder innovation. In Europe, labour-market rigidities are a particular problem. For

companies to have the incentive to innovate; for example, with robots, AI and even

outsourcing, they need the freedom to reorganise processes. In the US, business

Figure 40: Tertiary education gross enrolment rate

%, 2014

Figure 41: Researchers in R&D

Per mn people

Source: GITR (2014) Source: WDI Note: 2012 or latest available data

Figure 42: ICT goods exports from DMs

% of total exports

Figure 43: High-tech exports from DMs

% of manufactured exports

Source: WDI Source: WDI

40

50

60

70

80

90

100

110

KR US TW AU ES NZ SE SG IT GB HK JP CA FR DE

2000

2012

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

SG KR SE JP CA AU DE GB US FR NZ HK ES IT

DE ES

GB

IT

JP

KR

SG

US

0

10

20

30

40

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60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

1990

2000

2012

0

10

20

30

40

50

60

70

SG KR FR GB US JP HK DE SE AU CA IT ES

Countries with flexible labour and

product markets will be faster

adopters

Special Report

19 January 2015 55

and regulatory environments are reasonably flexible and both companies and the

government are willing to take risks and accept change. Developed countries in Asia

generally offer a similar environment with the added advantage of low taxes. In Korea

and Singapore governments play a very active role in promoting innovation, with a

particular emphasis on education.

Despite fears of technology creating mass unemployment, business is worried that it

cannot find qualified workers, especially with the baby boomers retiring and labour

forces starting to decline. In the US the Conference Board has emphasised this point

while in Europe one study found that in 2015, there will be a shortage of 700,000

qualified technicians and engineers (General Electric, 2014). Competition from the

US and Asian countries as well as the financial crisis has brought proposals for

reforms in Japan and Europe. There have been improvements in some European

countries in labour-market efficiency in recent years.

As well as making the general business environment more flexible, many new

technologies will require changes in regulations, whether it is the regulation of taxi

services, new rules for drones, or for driverless cars. These will create battles with

established businesses. For governments, the bias should be to encourage and

embrace change. For business the trick is to get out in front of change.

Technology in emerging markets

Special Report

19 January 2015 57

Technology in emerging markets

The impact so far

Growth and income differences between countries can be attributed to differences in

capital, labour and TFP of an economy. The consensus view is that while human

capital and physical capital are important, it is TFP that accounts for between 50%

and 70% of the differences in income between countries (Hsieh, 2010). Economists

attribute differences in TFP largely to variations in technological achievement, though

other factors such as culture, climate and geographical location have a role to play.

The creation of new technology remains a limited source of growth and productivity

for emerging markets, even though the number of patents applied for by China and a

few other emerging economies has risen in recent years.

Figure 44: Technology adoption has accelerated over time

Years following discovery until technology reached 80% of reporting countries

Source: CHAT database, Standard Chartered Research

0 20 40 60 80 100 120 140

Rail (passenger)

Vehicle (private)

Telephone

Electrification

Radio

Television

PC

Internet use

Mobile phone

Figure 45: India’s urban and rural teledensity (fixed and mobile)

Number of subscribers per 100 people

Source: TRAI, Standard Chartered Research

Urban

Rural

0

10

20

30

40

50

60

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Adoption of existing technology will

remain the main source of TFP

growth for EMs

Madhur Jha +44 20 7885 6530

[email protected]

Economics Research


Special Report

19 January 2015 58

The adoption of existing technology is much more important for productivity and growth

performance. Historical data on technology diffusion suggests that the technology gap

between advanced and emerging economies has shrunk and technology adoption has

accelerated over time. This is based on data covering 100 technologies in 157

countries during the period 1750-2003 included in the Cross-country Historical Adoption

of Technology (CHAT) database (Comin and Hobijn, 2004).

Emerging markets are adopting newer technologies such as ICT faster than some of

the older technologies such as electricity, roads and railways. For example, it took

nearly 100 years for the telephone to be initially used in 80% of the 156 countries; it

took only 16 years for similar diffusion of mobile phone technology across 150

reporting countries (Figure 44).

There are several reasons for this acceleration. First, the existence of old

technologies makes it easier to introduce new technologies. For example,

electrification has made it easier to adopt personal computers and Internet. Second,

older innovations required huge investment in infrastructure and economies of scale

to be cost effective or even useful. As a result, the adoption of many innovations

depended heavily on government promotion and investment, for example

electrification and the building of roads. Newer technologies are much cheaper in

comparison and are being increasingly introduced by private-sector players. Higher

per capita income levels in emerging markets are also making technology goods

more accessible than before. Finally, improvements in education as well as technical

literacy together with the more user-friendly technological innovations seen recently

(such as Smartphones and laptops) have also made it easier to adopt newer

technology in emerging markets.

The CHAT data shows that adoption lags help explain variations in country income

since the 1800s. But as these lags have fallen, they contribute less and less to cross-

country income differences. Such differences persist because of variations in the

scale of penetration of technologies within emerging markets (Comin, 2010). While

some countries have been quick to adopt newer technology, it has remained

concentrated in the more urban areas, with limited gains for the wider economy.

Penetration rates have fallen for newer technologies. This is very evident for

Figure 46: Net FDI inflows

% of GDP


1990

2013

-1

0

1

2

3

4

5

6

7

8

CL GH UG VN PE CO CN MY CA BR TH AU MX ZA ID EG GB AR VE TR IN PH US LK SA KE BD NG KR DE PK

EMs have been quick to adopt new

technologies but penetration rates

are still very low

Special Report

19 January 2015 59

countries such as India where there is a huge gap between technological

advancements in certain sectors as well as a large gap between urban and rural

areas even in the older technologies (Figure 45).

Technological progress has spurred rapid growth in EMs

Globalisation and the opening up of economies have powered the development of

EMs since the 1980s. As emerging economies opened up, they were exposed to and

adopted technologies existing in the developed world to become more integrated with

global supply chains.

This transfer of technology has happened through three main channels: trade,

foreign direct investment (FDI) and labour migration. In particular, imports of capital

goods and high-tech products have assisted in the development and efficiency gains

of local manufacturing and services sectors, as well as served as the backbone of a

growing export sector in countries such as China.

Countries have also benefited from the transfer of technically advanced goods,

expertise and best practices that has accompanied higher FDI (Figure 46).

Increasing FDI inflows have also facilitated greater investment in capital stock, one of

the major constraints on growth in the initial stages of development of a country.

Finally, the presence of a strong diaspora as well as immigration of foreigners from

developed parts of the world has aided both technology transfer as well as global

best practices to emerging markets. Digital technologies, especially email, search

and social media such as Youtube and Facebook, have helped make this easier.

TFP surged in the mid-1990s

The impact of technological advancement has been felt directly through a sharp rise

in TFP levels in emerging countries beginning in the mid-1990s (Figures 47 and 48).

This rise in TFP growth came as economies opened up, imported, adopted and

competed with better foreign technology. TFP growth was particularly strong in the

erstwhile soviet countries of the Commonwealth of Independent states (CIS) and in

Asia, but other emerging countries in Sub-Saharan Africa (SSA), the Middle East and

North Africa (MENA) and Latin America saw higher TFP levels as well.

Figure 47: TFP growth picked up sharply in the 1990s

Trend growth %

Figure 48: TFP growth by major regions

Annual change %

Source: Conference Board, Standard Chartered Research Source: Conference Board, Standard Chartered Research

Mature economics

World

Emerging and developing economies

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

1997-2006

2007-2011

2012 2013

-3

-2

-1

0

1

2

3

4

5

World OECD CN IN MENA LatAm SSA CIS

EMs access technology through

trade, FDI and labour migration

Special Report

19 January 2015 60

Despite the surge in productivity growth, productivity levels in emerging markets

remain only a fraction of those in the developed world. According to productivity

statistics put together by the Conference Board, labour productivity levels in SSA are

particularly low, less than 5% of the US level in 2013 (Figure 49). MENA and Latin

America have much better overall labour productivity levels but this is partly

attributed to very strong mining sectors that are highly mechanised.

Productivity growth appears to have slowed in recent years

More worryingly, productivity growth has slowed markedly since the global financial

crisis across emerging markets, led by Asia. We believe this is more a cyclical than a

structural story. Strong growth and easy liquidity conditions lowered the pressure on

EMs to continue with structural reforms that aid improvements in productivity. At the

same time, some countries such as China spent heavily in building capital stock

(particularly real estate development and construction) immediately after the crisis,

causing TFP and labour-productivity levels to fall.

For most emerging economies however, a lack of adequate capital stock as well as

still-poor technology levels remain the big constraints on further growth. More gross

capital formation (together with investment in human capital) would help boost not

only labour productivity but also TFP levels.

The Standard Chartered Technology Achievement Index

shows progress

There are various measures of technological development, including the Networked

Readiness Index (NRI) described above. But these measures do not go back very

far. To see the change in technological progress over time we put together a

modified version of the technology achievement index introduced by Desai et al in

2002 (TAI-2002).

The index has four dimensions: creation of new technologies, diffusion of recent

technologies, diffusion of old technologies and human skill development. We include

diffusion of both old and new technology because technological progress is still

largely cumulative. While there is some scope for bypassing old technologies with

new, countries still need basics such as electricity to make use of newer technology

Figure 49: Huge labour-productivity gap in emerging markets compared to the US

GDP per person employed, % of US level 2013

Source: Conference Board, Standard Chartered Research

0

5

10

15

20

25

30

35

40

CN

IN

OT

HE

R A

SIA

ID

MY

PK

LK

TH

VN

BD

LAT

AM

AR

BR

CH

CO

MX

PE

VE

ME

NA

EG

SS

A

AO

GH

KE

NG

ZA

UG

CE

E&

CIS

RU

TR

TFP levels surged in 1990s as EM

economies opened up but have

fallen since the Great Recession

and stay well below DM levels

Developed countries dominate the

TAI , with Singapore, the US and

Korea taking the top three spots in

our index

Special Report

19 January 2015 61

such as computers. Each of these dimensions is specified by two indicators. These

include measures such as patents granted to residents, Internet use, electricity

consumption and mean years of schooling (full details in the Appendix).

Developed countries take top spots in the Standard Chartered TAI

For the latest levels, Singapore and the US took the top two spots. Singapore is ranked

first (Figure 50), scoring strongly on all measures, but particularly on the receipt of

royalties and license fees, high-technology exports and education (see detailed table in

the Appendix). The US is strong in all areas, especially creation of new technologies

and human skills. Korea ranks third and has made progress on almost all components.

Developed countries dominate the TAI, with countries such as Japan, Australia, the UK

and Hong Kong also in the top 10. South Asian and African economies lie towards the

lower end of the index rank, with Bangladesh last. Compared to Singapore,

Bangladesh does poorly on almost all indicators (Figures 51-52), with the exception of

telephone usage. Pakistan and Kenya also perform poorly on the overall TAI score.

India, despite a very sophisticated ICT exports sector, ranks among the bottom five in

terms of technological achievement, with low scores for the diffusion of new

technology and human skill development. Mean years of schooling in India also

remains abysmally low. China lies towards the middle of the chart below, boosted by

creation and diffusion of new technology but constrained by still-poor grades for

education and diffusion of old technology.

Developed countries dominate the creation of new technology, as might be expected,

with Canada, Korea and Singapore showing significant improvements over time

(Figure 55). Emerging countries tend to be closer to developed markets in the

adoption of old technologies than they do with new technologies, suggesting that

while emerging markets have been quick to adopt the new technologies, actual

penetration rates remain low (Figures 53-54).

Significant improvements in emerging markets

While emerging markets still greatly lag behind developed countries in terms of

levels, almost all have made good progress since 2000 (Figures 53-55). Sub-

Saharan African countries have made particularly good progress, more than their

Figure 50: Emerging markets have improved technological achievement scores but still lag advanced economies

Technology achievement Index, 1 is best


2000

2012

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

BD PK KE NG IN GH UG VN ID EG BR MX ZA TR TH CN AE VE PH SA CL AR RU MY HK FR GB CA DE AU SE JP KR US SG

Bangladesh, Pakistan and Kenya lie

towards the bottom of the TAI

Special Report

19 January 2015 62

South Asian counterparts. Nigeria improved the most compared to 2000, followed by

Venezuela, Saudi Arabia, China and Chile, while India and Pakistan have made the

least progress among the South Asian economies. Interestingly, Singapore continues

to be one of the strongest improvers despite being technologically very advanced

already, suggesting that in technology there is no upper bound to improvement. For

countries such as Saudi Arabia and Venezuela, the improvement compared to 2000

largely comes from a comparison to a very low base, a sharp rise in human skill

levels as well as better diffusion of old technology.

Another way to measure how countries have fared over time is to look at the change

in rank for countries for the overall TAI score as well as individual measures between

2000 and 2012. Figure 56 shows a heatmap of which countries have seen

improvements on the ranks of all measures compared to their 2000 levels. China

stands out, improving its rank on three out of four measures (excluding human skills

where it remains similarly ranked as in 2000).

Saudi Arabia improves its ranks on the diffusion of old and new technologies, having

started from a very low base. Nigeria also does well on two measures, with the

improvement in human skills being particularly encouraging. Russia does well with

better education levels (tertiary education) as well as creation of new technology

ranks. The UAE has significantly improved its rank for creation and adoption of new

technology, with the government pushing through its plan to make Dubai a smart city

with a focus on e-services. Brazil and Mexico drop rank compared to 2000, while

India sees no improvement compared to 2000. Among developed countries,

Singapore remains impressive with further improvements in human skills and

creation of new technology, despite its already high level of technological

achievement.

Figure 51: Singapore has improved on almost all

indicators

Technology achievement Index, 1 is best , 2012 versus 2000

Figure 52: Bangladesh versus Singapore

Technology achievement Index, 1 is best , Singapore versus

Bangladesh, 2012

Source: Standard Chartered Research Source: Standard Chartered Research

0.0

0.2

0.4

0.6

0.8

1.0 Royalties

Patents

Electricity

Telephone

Internet

High-tech

Mean years schooling

Tertiary education

-0.2

0.0

0.2

0.4

0.6

0.8

1.0 Royalties

Patents

Electricity

Telephone

Internet

High-tech

Mean years schooling

Tertiary education

China has improved its TAI rank on

almost all indicators compared to

2000; Nigeria, Russia, Saudi Arabia

and UAE also are doing better

Special Report

19 January 2015 63

Figure 53: Emerging countries are catching up in the diffusion of old technologies

Technology achievement Index, 1 is best,


Figure 54: EMs still lag behind in the diffusion of new technologies



2000

2012

0.0

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NG KE BD UG PK GH IN PH ID VN MX EG TR TH CN BR VE AR CL MY ZA GB RU FR DE JP SA SG HK AU KR AE US CA SE

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BD PK GH IN ID KE NG VN TR EG VE UG ZA SA TH BR AR MX CL RU AE CN HK AU CA DE US JP SE FR PH GB KR MY SG

Figure 55: Developed countries dominate the creation of technology



2000

2012

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BD GH VN UG PK NG KE EG IN MX PH SA ID TR AE VE CN BR CL TH RU AR ZA MY FR GB AU HK DE CA SE KR JP US SG

Special Report

19 January 2015 64

Figure 56: Performance on 2012 TAI ranks relative to 2000

Ranks out of 35. Highlights indicate changes

Country TAI Index

Creation of technology

Diffusion of old technology

Diffusion of new technology

Human Skills

SG 4 2 -2 0 9

US -1 -1 0 -4 0

KR 1 2 7 1 1

JP -1 -1 -3 1 -2

SE -3 -1 0 -1 -2

AU 0 1 -1 -2 -1

DE 2 -2 -1 3 6

CA -1 5 0 -3 -4

GB -1 -2 -6 3 2

FR 0 -2 -3 8 -6

HK 0 -1 4 -2 -2

MY 0 1 0 1 -3

RU 1 6 2 2 3

AR 1 1 2 1 2

CL 1 -1 0 5 1

SA 6 -1 5 9 1

PH -4 -13 -2 -3 -7

VE 5 -3 -1 2 6

AE -2 14 0 6 -2

CN 5 7 3 3 1

TH -3 2 1 -9 -2

TR 2 2 -4 -2 5

ZA -4 1 -2 1 -4

MX -4 -6 -3 -3 -2

BR -4 1 1 -4 1

EG 0 -6 1 6 -5

ID 0 5 0 -12 6

VN 0 -2 3 -5 -1

UG 2 -2 0 4 -2

GH 0 -1 1 -3 -1

IN -2 0 -1 -6 2

NG 3 2 0 4 3

KE 0 -4 -1 -1 -4

PK -2 -2 -1 0 0

BD -1 -1 1 0 1

Source: GITR 2014, IMF, Standard Chartered Research

Note, Colour coding based on difference between rank on NRI indicator and GDP per capita

Dark red – worst, dark green – best; a negative number implies a loss of rank in 2012 compared to 2000

Special Report

19 January 2015 65

Technology — a threat to emerging markets?

While emerging countries are still struggling to catch up with developed countries on

existing technologies, new technologies are transforming business and the world

economy. Overall we believe that they provide advantages to emerging countries and

we discuss the opportunities below. First, however, we look at three potential threats.

Threat 1: Technology could widen income inequality

Technology pessimists argue that the link between technology and income growth

between countries has broken. Newer technology has the potential to disrupt the

pace of convergence with the West and slow the absorption of the less productive,

agrarian work force into more productive manufacturing and services.

The concern is that the latest technological advances are perpetuating and possibly

widening income inequality both across and within countries. Newer technology is not

as accessible as electricity and telephones were. Digital technology favours higher

education and skill levels and is dependent upon better infrastructure. As a result, it

favours those that are already rich and well educated and potentially excludes those

that come from less privileged backgrounds. This is evident from the slower

penetration of new technology within countries, with urban areas adopting new

technologies faster than their rural counterparts (Comin, 2010). This has the potential

to perpetuate and widen income inequality within an economy. This is particularly

problematic for emerging markets where a large proportion of the population still

works in the low-skill, low-productivity primary sector.

In addition, a large part of the urbanisation process in emerging markets happens

through a move from the agricultural to the urban informal sector. These informal

enterprises do not have the skills, ability or funds to deal with new technology,

making it harder for their employees to make the transition to the formal

manufacturing or services sector. For example, a study conducted in the Gauteng

province of South Africa on the use of digital technology in the informal sector

showed very low levels of technology use, bordering on ‘technological starvation’

(Van der Vyver, 2010). The study also found that the technology gap was not just a

result of the infrastructural constraints but also the lack of computing and e-skills that

need to be bridged. The emphasis in many economies has to be to raise education

and skill levels that would make newer technologies more accessible to wider

segments of the labour force. The spread of Smartphones in EMs in the last couple

of years, providing easy access to the web to many people for the first time, could

accelerate this process.

Threat 2: Technology will destroy the global supply chain

Another concern is that disruptive technologies such as additive manufacturing (3D

printing) and intelligent robotics could end the need to set up manufacturing units in

low-labour-cost developing countries, unravelling the global supply chains which

have benefitted many emerging markets.

3D printing allows production on a small scale at the end-user location which can

replace the more complicated current global supply chains (WTO, 2014). So far, 3D

printing has largely been used for prototyping but advances are making it

increasingly possible for wider use (though still on a small scale). 3D printing makes it

easier and cheaper to fill smaller order requirements and is likely to spur a surge in

customisation, shifting demand away from mass-produced goods. However, with low

wages and low transport costs, it will still be far cheaper to make most goods using

mass production methods, for the foreseeable future.

Skill-biased technological change

favours the rich and educated and

could slow the absorption of low-

skilled workers

3-D printing could encourage

customisation, shifting demand

away from mass-produced goods

Special Report

19 January 2015 66

The greater risk is that intelligent robots in developed countries replace cheap labour

in emerging markets. The number of robots sold has risen significantly over the last

few years, with China leading the way in sales of multipurpose robots (20% of total

world supply in 2013), according to the latest data available from the International

Federation of Robotics. Emerging markets lag behind their Western counterparts in

the use of robots, with typically less than 30 per 100,000 employees compared with

closer to 350 in Japan and Korea (Figure 57). This reflects the still-high cost of robots

compared to the abundance of cheap labour in these economies, as well as the

difficulties of operating high-tech machines in the emerging-market environment.

At present even cheap robots such as Baxter cost around USD 22,000 compared

with annual wages in a country such as the Philippines of around USD 3,000. A robot

could work more than one shift, does not need holidays and would not go on strike.

But it could break down, and for the next few years at least will not be as flexible and

adept at many tasks as a human (though it may be stronger and more precise). In

emerging markets, the effectiveness of adopting robots is further complicated by

infrastructure problems such as electricity blackouts, lack of technical skills and poor

organisational design. Robots are likely to be introduced faster in the developed

world; annual pay for a manual worker in the United Kingdom is about USD 44,000.

Middle-income economies such as China and Mexico, with wages in between those

in the Philippines and UK, will need to include robots in production to stay

competitive. For countries with a rapidly growing work-force this will make the

problem of finding enough jobs more challenging. At the same time it is an

opportunity to achieve faster productivity growth. For China, with a shrinking work

force, robotics is a huge opportunity, raising productivity and also providing a major

new area for investment in a country struggling with overcapacity in many sectors.

In practice, the use of robots in the developed world to replace EM labour is likely to

go slowly because of the changes needed to set up a suitable work environment.

This may include reconfiguring production lines, changing suppliers, providing

materials in a certain way and re-designing firms’ infrastructure (MIT 2012).

Moreover, Western firms like to offshore production to firms in countries such as

China because they can provide a whole gamut of services. The Chinese company

organises production, management, logistics, packaging etc., which is still costly to

replicate in the developed world even if production is cheaper with the use of robots.

Figure 57: Number of multi-purpose industrial robots in manufacturing

Per 10,000 employees, 2012

Source: World Robotics 2013, Standard Chartered Research

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World average robot density: 58

Special Report

19 January 2015 67

We expect the expansion in robots to occur alongside a continuing expansion of

global supply chains. According to the WTO, the import content of exports has risen

from 20% in the 1980s to around 40% currently and is expected to rise further to 60%

by the 2030s (Special Report, 9 April 2014, Global trade unbundled). Other

developments in digital technologies, including the spread of Smartphones, greater

broadband speeds, the ‘Internet of things’, greater use of video conferencing, and the

use of virtual reality will make outsourcing manufacturing even easier than before,

facilitating growth in that area.

Threat 3: Services cannot absorb manufacturing job losses

While the widespread use of robots or 3D printing seems to be some years away,

this threat underlines the emphasis in some countries on expanding the services

sector. Another reason for this emphasis is the dominance of China in so many

manufacturing areas. But some economists argue that services cannot replace

manufacturing as an economic growth driver, partly because services are not

tradable and partly because productivity gains in services are not as widespread as

in manufacturing (Rodrik, 2014). Also, as the more modern services are high-skill

oriented, they exclude large sections of the work force that still have low skills.

This is possibly one reason why the large ICT services sector in India has failed to be

a larger growth driver, particularly for employment, as unlike China’s manufacturing

sector, it has not absorbed a huge low-skilled worker pool. Still, India’s services

sector has raised GDP: services account for 60% of GDP, boosted by the value of

traded services even though only 30% of the labour force is in services (Economic

Survey of India 2013-2014).

Other economists argue that the services sector could be a growth and employment

engine (Ghani, 2010). Figure 58 shows that services can be a strong growth driver

across a broad range of countries. Even in terms of employment generation, India is

an outlier. Of the top 15 countries (determined by % of services GDP), with the

exception of India, almost all countries have nearly equal shares of GDP and

employment for the services sector.

Figure 58: Services dominates both GDP and employment in many countries

Services as a % of total GDP and total employment

Source: India Economic Survey 2013-2014, Standard Chartered Research

Employment

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https://research.standardchartered.com/configuration/ROW%20Documents/Global_trade_unbundled_09_04_14_23_33.pdf

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19 January 2015 68

Another concern is that the services sector itself is facing increasing automation.

Many outsourced services such as call centres, medical diagnostics, dictation and

tech support have elements which are repetitive, where people can be trained to

follow processes and scripts. Increasingly, some of this routine work may be taken up

by artificial intelligence. This is a valid concern, but at least in the short to medium

term this trend is likely to be swamped by the benefits of more and more services

becoming tradable as the digital innovations described above make it easier to

conduct business virtually.

Technology − An opportunity for emerging markets?

Opportunity 1: Technology is propelling services-sector expansion

Despite the reservations just discussed, the transformation of the services sectors

through digital technologies could provide a better opportunity for development than

previously. Traditional services such as hotels, retail trade, real estate and public

administration, being labour-intensive, have usually been associated with lower

productivity growth than the manufacturing sector. Economists have worried that a

shift to these areas risks slowing the rate of economic growth during early stages of

EM development – hence the emphasis on developing a strong manufacturing

sector. But the digital developments of the last 25 years are transforming productivity

in traditional services in developed countries and many emerging countries have

enormous scope to follow. What holds many back is inflexible labour and product

markets and low education levels.

Meanwhile modern services such as ICT, finance and professional business services

such as marketing, design and management support have much higher productivity

levels and wages. As these services are either technology-based or use technology

more intensively, moving up the technology achievement index would make it easier

for economies to grow faster in these areas too.

Technological innovations often create new opportunities in related or new sectors of

the economy. For example, the success of mobile money or M-PESA in Kenya (itself

a service) has spawned a host of related businesses. These include mobile gaming

platforms such as Ma3Racer as well as services aimed at helping parents keep track

of school-fee payment schedules. In addition, crowd-sourcing platforms such as

Ushahidi have benefited from the spread of mobile technology (Economist, August

2012).

Figure 59: Services contribution to GDP has grown

% of total GDP

Figure 60: Share of services in employment is growing

% of total employment

Source: World Bank, Standard Chartered Research Source: World Bank, Standard Chartered Research

1990

2012

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Technology is helping improve

productivity in services while also

creating opportunities in new or

related sectors

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19 January 2015 69

Technology-based services trade could be the game-changer

Improvements in technology have allowed services to become more tradable (Ghani,

2014). Services trade is growing faster than manufacturing trade, fuelled by sharp

falls in digitisation costs as well as lower barriers to services trade. At the same time,

manufacturing is yielding lower gains for those countries that are attempting to follow

China, primarily because China is so dominant in the global value chains.

Many emerging markets are now focusing on pushing services trade to drive growth

(Figure 61). Vietnam, for example, is trying to develop its services sector (especially

services trade) through a three-year programme to liberalise the services sector with

the help of a United Nations Development Programme (UNDP). Many new bilateral

and multilateral free-trade agreements now focus on services.

Technological advances are also helping emerging markets to more easily trade

traditional services. Medical tourism is one area of growth. Countries such as Mexico

and Thailand lead in this field but Brazil, Costa Rica, India, Malaysia and the

Philippines are also seeing a strong rise in the number of medical tourists. The key to

how much of a boost the services sector turns out to be for growth seems to be tied

to the level of technological advancement in an economy.

Opportunity 2: Affordable technology lowers hurdles for development

Technological improvement often takes the form of reductions in prices of existing

technology, making it more easily affordable for people living in emerging markets to

reap the benefits. Digital technologies have fallen in price particularly quickly and

lower prices for Smartphones, tablets, computers, displays, etc., make it easier for

them to penetrate emerging markets. New technology lowers the cost of setting up

new businesses, with cheaper computers, Internet, and cloud facilities enabling even

small companies to reach customers in other locations. This also allows these

companies to gather knowledge through access to information and technology and

by connecting them in real time with diasporas. Emerging markets are not as cut off

as they once were. As broadband spreads to rural areas, these can access new

urban centres, even in the absence of infrastructure such as roads.

Figure 61: Services exports can drive economic growth


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Modern services that are more

technology dependent are highly

tradable; technology is also making

traditional services more tradable

Newer, cheaper technology allows

EM integration into the global

economy

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19 January 2015 70

New technologies can link EM individuals to companies in developed countries,

whether it is Ukrainian programmers or Indian web designers. For example, people

with Smartphones in Nigeria collect data to help construct a food-price index (On the

Ground, 7 October 2014, Nigeria – Real-time price trends).

New technologies also can be geared for EM use. For example, ChotuKool, a

portable refrigerator launched in India in 2009, was at the time one of cheapest

refrigerators globally at USD 69. The refrigerator is intended for storage of household

perishables in India’s rural villages. The refrigerator uses high-end insulation to stay

cool for hours without requiring electricity and consumes only half the energy of

regular refrigerators. This is particularly useful for a country such as India where

power shortages have led to huge perishable waste; the FAO estimates that nearly

40% of India’s fresh fruits and vegetables – worth about USD 8.5bn, perishes before

reaching consumers (FAO, August 2013).

Opportunity 3: Leapfrogging stages of development

A big advantage of newer innovations is that they can allow an economy to leapfrog

development stages. This is evident from the low time lag between the launch of new

technology, such as mobile phones and computers, in the developed world and their

adoption in emerging markets. The success of online shopping sites such as Flipkart

and Snapdeal in India are testimony to how retailers are avoiding the huge investment

and related infrastructure costs of setting up retail outlets by using the latest computer

and mobile phone technology. Similarly, the use of mobile money in Kenya has avoided

the need to set up expensive ATMs, bank branches or landline infrastructure.

Some pioneering work is helping to overcome the lack of road and rail infrastructure

for the more rural and landlocked areas of the continent. Independent research by

the Gates Foundation or students at Singularity University (Matternet) is aimed at

initially dropping medicines and vaccines to remote, rural areas in emerging markets

but later should evolve to carry both goods and people. The Flying Donkey Challenge

from Switzerland’s Federal Institute of Technology has created the world’s first

commercial cargo drone network in Kenya, set to be operational in 2016 (the original

date of 2015 was pushed back after security concerns prompted the Kenyan

government to ban all private-sector drones). The drones initially will be used to carry

critical blood supplies and mail, but later to literally replace the work done by donkeys

carrying cargo in areas with limited road and rail connectivity.

Opportunity 4: Hurdling the resource constraint barrier

Using new technology to leapfrog stages of development could prove critical in

dealing with some of the biggest concerns around the EM growth story: resource

constraints and climate change. According to a study conducted by McKinsey Global,

meeting future demand for steel, water, agricultural products and energy would

require roughly USD 3tn of average new capital investment per year (in the absence

of productivity-raising technological innovation).

One response is to more efficiently use available resources by reducing waste, which

can be done through better use of technology. In addition, firms are increasingly looking

to increase innovation to deal with resource constraints (Mckinsey, 2010) (Figure 62).

The network provider Orange is using solar panels at 200 radio stations in rural Africa

where there is no electricity grid, in an effort to power Africa’s telecommunications

networks (Africa Economic Outlook, 2009). Almost all emerging markets are in latitudes

New technology is helping

overcome lack of traditional

infrastructure such as roads,

telephones and retail outlets

Increasingly using new technology

is used to meet EM resource

constraints such as energy, and

deal with climate change

https://research.standardchartered.com/configuration/ROW%20Documents/Nigeria_−_Real-time_price_trends_07_10_14_08_38.pdf

https://research.standardchartered.com/configuration/ROW%20Documents/Nigeria_−_Real-time_price_trends_07_10_14_08_38.pdf

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19 January 2015 71

favourable for solar power. The government in the UAE is trying to reduce its energy

dependence on gas and move towards clean energy with plans to build the largest

solar-powered desalination plant that will process more than 22mn gallons of potable

water per day and generate 20MW of electricity (World Bank, 2014).

It can be argued that being late adopters of technology is advantageous for emerging

markets as they can choose technology and set up infrastructure that is better suited

for sustainable development and growth. Some countries have already recognised

this and are basing their development strategies on more sustainable means.

According to China’s 12th Five-Year Plan for Economic and Social Development, the

country will spend USD 473.1bn on clean-energy investment, with the target of

meeting 20% of its total energy demand from renewable sources by 2020.

Opportunity 5: New technologies can transform agriculture

According to the UN’s Food and Agriculture Organization (FAO), as emerging

markets grow and urbanise, the world’s average daily calorie availability is likely to

rise by around 11% over the 2005-07 level. This means agricultural production must

increase by nearly 60% by 2050 (FAO, 2009), with around 90% of the increase

having to come from developing countries. Most of this production increase (80%)

would have to come from increasing yields and higher crop intensity rather than an

expansion of arable land.

The big challenge and benefit for EMs still lies in faster technology adoption in the

agriculture sector to improve productivity levels and yields. Innovations such as

modern irrigation, disease-resistant crops and pesticides have helped to improve

agricultural productivity. The African Development Bank estimated that the use of

high-yield variety seeds and fertilizers would increase cereal production 75% in Africa

(African Economic Outlook 2009).

Figure 62: Firms are investing more in technology to meet resource constraints

% of respondents

Note: The topic was ‘Actions companies are taking to ensure access to their natural resource needs’; Source: McKinsey Global

Survey 2010 ‘Five forces reshaping the global economy’, Standard Chartered Research

Total firms Manufacturing firms

Energy firms

0 10 20 30 40 50 60 70

Direct investment

Hedging

Building government relationships

Influencing industry standards

Backup sourcing

Developing innovations

Conserving energy

Technology could help meet

growing EM food requirements

through higher yields

Special Report

19 January 2015 72

In addition, new technologies are being used to improve farmers’ income levels. In

Ghana, cashew farmers can use a phone application to compare trader bid prices

under the Peace Corps Ghana Cashew Initiative. And since 2008, the Ethiopia

Commodity Exchange has granted farmers access to real-time information via text

messages, electronic display boards and a website. In Rwanda, mobile services such

as E-Soko allow farmers to check the market price for their products, reducing

potential exploitation by middlemen (GITR, 2013).

Opportunity 6: Technology against inefficiency and corruption

Corruption is a big hurdle in many emerging markets. It not only discourages foreign

investors but also undermines fiscal policies aimed at reducing poverty and

inequality. Many governments are now focusing on using technology to fight

corruption, to improve the ease of doing business and enhance fiscal effectiveness.

In Nigeria, crowdsourcing techniques such as Stopthebribe are being used to report

incidents of bribe or corruption with similar initiatives in Cameroon (No bakshish) and

India, Pakistan and South Africa (ipaidabribe.com). Governments themselves are

starting to use e-governance tools to improve transparency and reduce corruption

such as the Online Procedures Enhancement for Civil Applications (OPEN) initiative

in Seoul in South Korea (Figure 63). Similarly, under the Bhoomi (land) project – an

e-governance initiative of the state government of Karnataka (India) – farmers are

able to obtain a printed copy of their land records online for a nominal fee of INR 15.

Public-sector bureaucracies are often over-staffed with a low-productivity labour force.

The use of new technology can reduce such inefficiencies. At the same time, the

effectiveness of government welfare schemes can be raised by increasing transparency,

cutting out middlemen and paying benefits directly to beneficiaries. The new Indian

government is attempting to push through rapid financial inclusion so that benefits can

reach citizens directly with a lower risk of money being intercepted by middlemen

(Special Report, 4 September 2014, Financial Inclusion: Reaching the Unbanked).

Technology is also increasingly being used to combat crime in developing markets.

The UN Organisation Stabilisation Mission launched the use of drones in the

Democratic Republic of Congo in August 2014 as part of its peacekeeping efforts in

the Central African Republic. In the Indian capital of New Delhi, police plan to use

Figure 63: EM governments’ online services are only just developing

Rank among 142 countries, 1 is best

Source: Global Innovation Index 2014, Standard Chartered Research

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drones are being deployed to

maintain law and order

https://research.standardchartered.com/configuration/ROW%20Documents/Financial_Inclusion__Reaching_the_unbanked_04_09_14_10_18.pdf

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19 January 2015 73

drones for surveillance at night after the huge outcry over lack of security for women.

These drone cameras will be linked to Quick Response Teams that will address any

detected incidents.

Opportunity 7: New technology can save lives and educate the masses

Technology has already brought a big improvement in medical standards and

education for many people in many emerging countries. Yet, both life expectancy and

mean years of schooling remain low compared to the developed world. New

technology, such as the drones mentioned above, could further improve medical and

educational standards in emerging markets. In Zambia, digital phone photography is

being used increasingly as a diagnostic tool for cervical cancer prevention. Mobile

phones in Tanzania are also being used to gather information for redistributing

supplies needed to cure malaria (Guardian, June 2013).

For many emerging countries developing public health systems comparable with

those in the developed world is unaffordable. Nigeria, for example, has only 14% of

the doctors per capita of OECD countries. To reach OECD levels by 2030, Nigeria

would need 12 times as many doctors or to spend 10 times its current annual public-

health spending. E-learning courses for nurses in Kenya or the ability to use video

conferencing to get second opinions from doctors and medical practitioners in the

developed world are helping to bridge the gap in medical skills in EMs (WEF, 2014).

E-learning is also increasingly being promoted across emerging countries, both

formal courses such as the massive open online courses (MOOCs) and informal

how-to-do-it videos. For students, these offer a huge new resource in countries

where schools often lack textbooks and even teachers.

Hurdles to technological advancement in EMs

Why have some countries been more successful in embracing technological

development than others? In part, lower incomes mean fewer resources and usually

go along with lower education levels. But even at fairly similar per capita income,

technology achievement differs among emerging markets, indicating the presence of

other factors (Figure 64). There are three big constraints to technological progress:

lack of infrastructure, poor education and structural rigidities that constrain the free

movement of capital – ideas as well as labour.

Figure 64: Technological achievement differs at the same income level


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helping bridge the skills gap in

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19 January 2015 74

Infrastructure constraints

New technology adoption is severely hampered by the absence of infrastructure such

as roads, railways and telephones. Lack of electrification is seen to be the biggest

bottleneck for not only greater penetration of older technologies such as refrigerators

and computers but also the adoption of newer technologies such as mobile phones.

According to the World Bank, 2.5bn people in the world today (out of 7.0bn) have

unreliable or no access to electricity (Global Economic Prospects 2008). Figure 65

shows the close link between technology achievement and the level of electrification.

The IEA estimates that more than two-thirds of the population (or 620mn people) in

Sub-Saharan Africa live without electricity (Africa Energy Outlook 2014). Electricity is

a particularly big problem in rural areas with electrification rates at only 11.9%

(compared to 57.5% in urban areas). Rural electrification rate in countries such as

Uganda, Malawi and the DRC are rated far lower, between 2% and 3% (IEA, 2010).

Education and skill constraints

Earlier in the report, we highlighted the rising importance of skills-biased

technological change. While it is easy to use a refrigerator without much education, it

would be difficult to use the worldwide web without some literacy. The difference

between advanced and emerging markets in terms of education levels is striking.

While the mean years of schooling in countries such as the US, Germany and the UK

are around 12-13, in Ethiopia and Gambia it is as low as 2-3 years. While countries

have made progress on this indicator (Figure 66), education and skills remain

particular concerns for countries in South Asia and Sub-Saharan Africa. This is

particularly relevant as these two regions together are likely to provide more than

80% of the increase in the world’s labour force over the next 15 years.

Figure 65: Electricity is a major determinant of technological achievement


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Macro and business environment

rigidities, infrastructure constraints

and lack of skills are major

constraints to technology diffusion

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19 January 2015 75

Business and macro-regulatory environment constraints

This sub-heading is a catch-all for a very wide range of structural bottlenecks that limit

technology adoption and its EM penetration. Weak governance structures owing to

political instability, limited rule of law, lack of legal redress and high or rising inflation

create uncertainties that dissuade businesses and consumers from pursuing

investment or expansion involving new technologies. In addition to the macroeconomic

constraints, technology spread is contingent on the prevailing business environment.

Poor intellectual property rights and labour-market rigidities make it difficult to re-

organise the work force essential for technology adoption and innovation.

The Networked Readiness Index in emerging markets

The NRI discussed earlier is a comprehensive measure not only of the technological

achievements across countries but also of the structural factors such as the business

and innovation environment, political and regulatory environment, infrastructure, and

digital content and skills that determine technology use. Emerging markets lag

behind industrialised countries on nearly all of these indicators.

But compared to their ranking on GDP per capita (Figure 67), some EM countries are

doing much better on the environment – and structural factors. While they fared

poorly on our updated TAI index, Sub-Saharan African countries such as Kenya,

Ghana and Uganda stand out with more supportive regulatory and political

environments than their GDP per capita suggests. For the major emerging markets,

Russia is ranked highest in our sub-set but is doing poorly compared to its GDP per

capita levels on these scores, which suggest that further technological advances

might be slow to come there. The political and regulatory environment is a challenge

for Brazil, which otherwise is doing relatively well on business and innovation and

usage of technology at an individual and business level. China does well on a range

of indicators but lags behind in terms of the business and innovation environment.

Infrastructure once again is the big problem for the Indian economy, but the Indian

government is doing particularly well in adopting technology

Figure 66: Human skills are improving but still lag in emerging markets

Human skills component of the TAI, 1 is best


2000

2012

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

PK KE UG BD NG IN VN GH EG AE CN BR ID MX PH ZA TH MY SA TR HK SG VE FR CL JP CA AR GB SE DE RU AU KR US

SSA countries rank better on the

NRI than their GDP rank suggests,

while Saudi Arabia and Russia do

worse

Special Report

19 January 2015 76

Figure 67: Performance on NRI ranks relative to GDP per capita rank

Ranks out of 35

Country

Current GDP per capita

NRI Index Political and regulatory

environment

Business and innovation

environment

Infrastructure and digital

content

Individual usage

Business usage

Government usage

SG 1 1 1 1 9 4 7 1

AE 2 12 12 8 13 13 14 2

US 3 3 10 5 2 8 4 7

HK 4 4 5 2 11 5 8 12

SA 5 15 14 12 14 14 16 4

AU 6 11 7 11 5 6 11 10

DE 7 7 4 14 6 9 3 14

SE 8 2 3 9 1 1 1 5

CA 9 10 6 3 4 11 12 13

TW 10 8 15 4 3 12 6 8

FR 11 13 11 18 12 10 10 15

JP 12 9 8 16 10 7 2 11

GB 13 5 2 6 8 2 9 9

KR 14 6 18 10 7 3 5 3

RU 15 17 30 22 16 15 28 25

MY 16 14 13 13 20 16 13 6

CL 17 16 16 7 15 17 21 16

TR 18 18 19 15 17 19 22 24

VE 19 31 35 35 26 25 33 35

MX 20 25 22 23 22 26 26 18

BR 21 22 26 34 18 18 18 22

TH 22 21 27 17 21 24 25 28

ZA 23 23 9 19 19 21 15 31

CN 24 19 20 31 24 22 20 17

EG 25 28 32 32 28 20 32 33

ID 26 20 21 20 23 28 17 21

PH 27 24 28 24 25 27 19 26

NG 28 33 31 28 32 30 27 32

IN 29 26 24 27 33 32 23 19

VN 30 27 29 25 34 23 29 23

PK 31 32 33 26 29 33 31 34

GH 32 30 17 21 35 29 30 29

BD 33 35 34 30 30 34 35 27

KE 34 29 23 29 27 31 24 20

UG 35 34 25 33 31 35 34 30

Note, Colour coding based on difference between rank on NRI indicator and GDP per capita; dark green: relatively much stronger, yellow: in line with GDP per capita rank, dark red: relatively

much weaker; Source: GITR 2014, IMF, Standard Chartered Research

Special Report

19 January 2015 77

Optimal policies

The need for policy action to promote the adoption of technology, described in

Section 2 of this report, is especially essential for the developing world. However,

emerging markets face a more complex set of constraints on technology adoption

than developed countries. The emphasis in developed countries is now on supporting

stronger innovation as they have already reached a certain level of technological

attainment. In developing countries, however, adoption and more widespread

penetration of existing technology is of greater importance.

The policy prescriptions for enabling wider diffusion of old technology include greater

trade openness, especially the import of capital technology. In addition, an emphasis

on greater knowledge and information flow through policies aimed at attracting FDI

and immigration of skilled personnel would help boost EM ability to leverage

technology for growth over the coming years.

The constraints to the adoption of existing technology adoption described above—

political and macroeconomic instability, lack of infrastructure, lack of human skills – all

need tackling, in various ways. Depending upon the institutional set-up, optimal policy

is likely to differ based on the existing capabilities and resources of the economy.

Low education levels, weak law–and-order conditions or business-climate

uncertainty, lack of basic infrastructure such as roads, electricity and telephones as

well as the absence of financial intermediation through banks or deep capital markets

make it difficult for emerging markets to innovate or adopt technological progress.

The process is further complicated by the presence of large informal sectors in both

rural and urban areas, which are slower to adopt new technology, and which

government policy agendas might not be able to reach.

For large and complex economies such as China and India, optimal policy might

differ from region to region depending upon the level of income and technological

advancement in each area. These countries have large parts that are poor and

technologically backward, together with a small concentration of urban areas that are

technologically more advanced with higher income levels.

One framework for thinking about different responses divides countries according to

their technology and institutional capabilities (Autor 2005; Figure 68). Governments in

low-income economies that have weak institutional frameworks and low education

(science and technology education in particular) levels, should focus on enhancing

technology in the health and agricultural sectors primarily to demonstrate the benefits

of technology that would then encourage greater interest of both consumers and

enterprises in technology adoption (Autor, 2005). Those low-income countries that

have some institutional capabilities but low education levels can focus on boosting

technology aimed at developing non-traditional low-value-added goods exports.

Middle-income countries with low education levels but some institutional capability

could focus on developing services sectors, while those with relatively good

institutional and educational capability could focus on boosting innovation through

greater emphasis on R&D clusters and policies aimed at encouraging

entrepreneurship. Those middle-income countries that enjoy high levels of education

and relatively sound institutional capabilities would benefit most from improving

science-based education.

More widespread penetration of

existing technology should be the

main policy focus in EM countries

For large, populous countries such

as China and India, optimal policy

could differ from region to region

Special Report

19 January 2015 78

The debate continues on whether state-sponsored research and development activity

or setting up industrial parks or special economic zones (SEZs) is a good idea. In some

countries, particularly in East Asia (SEZs in China, Korea, Singapore), they have been

successful; in others (SEZs in India, Nigeria), they have failed, with many instances of

government intervention leading to a drop in efficiency and competitiveness of such

state-sponsored enterprises (Global Economic Prospects 2008). One alternative is to

ensure that such state-sponsored enterprises are exposed to market competition, with

subsidies and other incentives provided by the government being based on the market

performance (for example profitability) of these enterprises.

Easier in the ‘development state’

Most technology success stories over the past century, including in East Asia and

Japan, have been the result of strong national-level leadership and policies that

foster stability and transparency, encouraging the private sector to innovate and

adopt new technology. This is sometimes known as the ‘development state’, as

pioneered by Japan, Korea and Singapore. Development states seem to be able to

implement state-led development and innovation particularly well.

Without playing the dominant role of some development states, governments can

drive technology adoption in three major ways. The first is by supporting technical

education and skills that private-sector participants are unwilling to undertake given

the possibility of trained staff leaving the firm. The second is by developing and

implementing well-defined product and process standards that increase consistency

and quality, encouraging firms to adopt technology aimed at becoming more

competitive both locally and in the global markets.

The third way is for governments to play a larger part in adopting technology in their

own operations. A large proportion of infrastructure and technology such as

electricity, roads and telephone lines are provided by public enterprises. Adopting the

latest technology can greatly enhance governments’ ability to provide these public

services and utilities more efficiently and in a more cost-effective manner.

Governments can also reduce corruption and improve transparency through adopting

technology in their own operations such as through e-procurement.

Figure 68: Innovation systems and policy agendas should differ depending upon human and institutional capabilities

Science and Technology capabilities

Weak or fragile institutions Limited Institutional capabilities Strong institutions

Low

Creation of demonstration effect to show that innovation does matter, in particular in health, agriculture, education and crafts Relevant for: Sub-Saharan African countries

Developing a non-traditional exports as entry point for institutional and technology development Relevant for: Vietnam, Traditional urban and rural economies in India and China

Medium

Increase in business R&D through recombination of science and technology capabilities through clusters, etc. Relevant for: China, Chile, Mexico, Brazil, Turkey, South Africa

Increase in R&D investments Relevant for: India (IT clusters), Malaysia

High Creating a diversity of autonomous business-led innovation organisations Relevant for: Argentina, Russia

Increase in business R&D through recombination of science and technology capabilities

Development of proprietary technology through promotion of innovation clusters Relevant for: Korea, Singapore, Taiwan

Source: Autor (2005), Standard Chartered Research

How much direct government

intervention there should be to

promote technology is debateable,

but governments can promote

technology in their own operations

Special Report

19 January 2015 79

Conclusion: Adoption is everything

For emerging markets we have emphasised the importance of adopting both old and

new technologies. Without doubt the new technologies are raising awareness in

emerging markets and making it easier to adopt technology. This is a huge benefit

and should allow development to accelerate, if the structural rigidities discussed do

not block change. There is still no substitute for the broad development-oriented

policies that have allowed successful countries to move from low to middle income

and for some to go on and beat the middle-income trap. There is also no substitute

for education, to tap into new technologies.

One characterisation of economic development is that it is a race between men and

machines. As machines take on more tasks that humans do – manual labour,

precision assembly, answering questions, etc. – humans retain their ability to benefit

from machines by finding new things they can do better than machines. But this

requires education.

In the next section our regional economists review the state of technological

development and policy in selected countries, both developed and emerging.

Individual economies

Special Report

19 January 2015 81

Australia

Summary

Australia is among the top 20 countries globally (based on NRI rankings) for

technological innovation and adoption, and its primary advantage is similar to the

other major technologically advanced countries – top-notch universities with a strong

focus on research and innovation. World-class institutes that attract and nurture

talent from around the world, continued funding and support from the government

and policies that are starting to recognise and promote the importance of Science,

Technology, Engineering and Mathematics (STEM) and innovation have enabled

Australia to stay close to the top of the pile in research. However, most of the

research has been restricted to academia; collaboration with industry has been quite

poor, both for large firms and SMEs. Strengthening the links between strong

academic research and business could lead to fast-tracking innovation to the real

world, likely increasing business activity.

Strengths

Research, particularly in academia, has consistently been a strong positive for

Australia. Australia’s STEM researchers produced almost 430,000 publications in the

10 years to 2012, according to the Australian government’s benchmarking report

published in November 2014. While ranked 10th in the world, behind the US, UK,

China, Japan, Germany and India, it exceeds these countries on a per-capita basis.

Australia published 18.5 articles per 1,000 people, far higher than the US (12.7) and

the UK (16.5). Unsurprisingly, most of these publications were in either biomedical

sciences or biological sciences, accounting for over 40% of the publications. In

addition, Australia ranks 7th for the share of the top 1% of citations in natural science

and engineering – its share increased from 2010-12, the highest increase among the

top 10 countries.

Weaknesses

Despite Australia’s strong academic research, the amount of industrial research is

quite low. Based on the government’s estimate, only around 32% of its researchers

are employed in business, the lowest proportion among comparable developed

countries and almost half the OECD average. This leads to a significant difference in

the impact of research, destination of impact and the time from ‘table to field’.

Australia ranks only 81st as a converter of raw innovation capability to business

output, according to the government’s STEM report in September 2014. The report

also notes that fewer than one in two Australian firms identify themselves as

innovators – just 1.5% of Australian firms developed new innovations in 2011,

compared with 10-40% in other OECD countries.

Australia also ranks poorly on business to research collaboration – only 32 for SMEs

and 33 for large firms as per the government’s STEM report. Only 13.7% of large

Australian firms collaborated with research organisations, slightly higher than

SME’s 9.6%.

Hurdles

The manufacturing sector makes up only 6.3% of Australia’s GDP, down from almost

11% in the 1990s. This lack of competitiveness might lead to reduced industry

funding for research and development (R&D) as most manufacturers now set up

factories abroad.

Australian STEM researchers

produce more publications per

capita than those from the US or

Germany

Chidu Narayanan +852 3983 8568

[email protected]

Macro Research

Standard Chartered Bank (HK) Limited

Special Report

19 January 2015 82

In addition, only 3.1 researchers per thousand employed are in the manufacturing

and services sectors in Australia; this is less than one-third of the 10.5 in the United

States. The lack of innovation, particularly in light of rising wages due to the mining

boom, has severely constrained Australia’s manufacturing industry, partly

contributing to the declining importance of the sector in the economy.

Policy

The government has recognised the importance of research and innovation in STEM

in providing a competitive edge to industry – it estimates that 65% of economic

growth per capita from 1964 to 2005 can be ascribed to improvements made

possible by STEM research. While funding for R&D has always been strong, it has

often been spread across a wide range of programmes. The government recognises

this and aims to clearly articulate national STEM goals and focus on priority areas so

funding has the maximum impact. Australia’s Chief Scientist, who advises the

government on STEM policies, has recently recommended that the government build

strategic relationships with industry and other countries, and adopt best practices

from comparable countries, particularly the US and the UK, which have had success

in innovation in industry.

Figure 69: Australia technology snapshot

Indicators

NRI rank

Venture capital availability (rank)

Quality of math and science education (rank)

Capacity for innovation (rank)

Internet access in schools (rank)

Total investment (% of GDP)

Tertiary education gross enrolment rate, %

Mobile network coverage, % pop.

Mobile phone subscriptions/100 pop.

Individuals using Internet, %

Households with personal computer, %

Households with Internet access, %

Fixed broadband Internet subscriptions/100 pop.

Mobile broadband subscriptions/100 pop.

Research and development expenditure (% of GDP)

Researchers in R&D (per mn people)

Note: Left-hand scale is worst amongst 36 countries; Rank is out of 148 countries; Source: GITR 2014, WDI, IMF WEO, The Conference Board

18th SG BD

19th HK IT

37th SG ZA

23rd DE BD

17th SG EG

28 CN EG

83 KR KE

99 TW VN

106 HK UG

82 SE BD

85 SE UG

81 KR BD

24 FR NG

96 SG TH

2.0 KR PK

5157 SG PK

The Australian government aims to

clearly articulate national STEM

goals and focus on priority areas

for funding

Special Report

19 January 2015 83

Germany

Summary

Germany is a global leader in technology innovation and adoption, ranking number 3 in

the NRI’s capacity for innovation index. The German education system, its strong SME

culture and progressive government policies are its main strengths. Its main weakness is

that it is difficult to access capital due to the traditional financial system and risk-averse

and highly procedural culture. A hurdle for digital innovation is that many government

policies are directed towards manufacturing, which has left digital technology slightly

behind that of other advanced countries. The government’s Industry 4.0 and ‘Digital

Agenda 2014-2017’ are significant steps in supporting the digital economy.

Strengths

The German model of innovation is considered to be exemplary. By keeping ahead in

innovation, Germany became a global leader in manufacturing, despite relatively high

wages and stringent labour regulations. Some studies argue that more labour-market

flexibility leads to less innovation, mainly because workers do not feel long-term

security and loyalty, which hampers innovation. However, there is not enough

evidence to reach this conclusion.

Germany contributed 29.4% of the total scientific R&D services in the EU in 2012, the

highest share of all members. The government spends more than most governments

globally on public R&D, about 2.9% of GDP (Figure 70). Patent registrations in

Germany are the highest in the EU. These are results of the world-class quality of the

German education system and an innovation network on which German SMEs rely.

In contrast to the UK, where high-quality education is concentrated in the tertiary

level, in Germany high-quality education begins earlier. For example, its

apprenticeship system provides large numbers of highly skilled technical workers for

German industry. Furthermore, training does not stop at school. Germany’s

manufacturing work force constantly undergoes training, enabling it to use the latest

methods to improve efficiency and produce cutting-edge output.

An element not found in many other countries is that non-governmental organisations

in Germany play a key role in promoting R&D. For example, the Fraunhofer Society,

an independent non-governmental organisation, provides access to high-quality

applied research that SMEs could not otherwise afford.

Figure 70: Germany leads in R&D expenditure

R&D expenditure, by source of funds, % of GDP

Figure 71: But bureaucracy holds back young firms

Number of procedures required to open a new firm (rank)

Source: Eurostat Source: WEF, Standard Chartered Research

Government

Business

Other

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Germany France Italy UK

107

58 58 58

34

10

0

1

2

3

4

5

6

7

8

9

10

Germany Italy UK US France Sweden

Education, lifelong employee

training, and a culture that fosters

innovation are Germany’s key

strengths

Achilleas Chrysostomou +44 20 7885 6437

[email protected]

Global Research


Special Report

19 January 2015 84

With regard to access to capital, Germany is more traditional than the UK. The public

KfW Bank provides financing on favourable terms to SMEs and promotes capital-

market innovations such as the development of mezzanine finance to fund

commercialisation of R&D. However, this is not as effective as having a network of

private capital, such as venture capitalists that provide technical expertise as well.

Technology adoption in Germany is high. German factories are highly automated and

make extensive use of robotics, especially for complicated tasks. Robot density for

industrial purposes was at 282 per 10,000 employees in 2013, ranking third after

Korea and Japan. But technology adoption still lags other advanced countries,

especially in the public sector. Germany ranks 15th in the ‘percentage of households

with Internet connection’ metric (85% households report having an Internet

connection) and 16th in firm-level technology absorption.

Various government programmes also support technology. The most prominent plan

recently is ‘Industry 4.0’. This project promotes the computerisation of the

manufacturing industry, envisioning a factory where machines, sensors, computers,

etc., are connected, applying the idea behind the ‘Internet of things’.

Germany probably has the most advanced green energy technology in the world,

mostly as a result of green-energy subsidies and high targets for renewable energy

production. The success is reflected in renewable energy manufacturing exports:

according to the German Renewable Energy Agency, about 68% of renewable

energy manufactured goods, solar panels, wind turbines, etc., are exported.

Germany is also the home of world-class car manufacturers. US car-technology

advances of the past few years – such as Google’s self-driving car and Tesla’s

electric cars – have prompted German manufacturers to speed up their research

significantly. Recently, Audi tested a self-driving car at speeds as fast as 300kph.

2015 will bring several hybrid and electric cars from German manufacturers.

Weaknesses

Risk-aversion, conservatism and hierarchical tradition are characteristics of German

culture that make it harder for companies to start and flourish. For example, Germany

ranks 75th with regards to the number of days required to start a business and 107th

in the number of procedures that have to be followed before starting a business

(Figure 71).

Recent disputes between the German government and American tech companies such

as Amazon and Google have prompted some to question whether Germany’s

government is trying to limit the domination of American companies. Some believe the

government is making life hard for American companies because of the failure of

German companies to achieve similar status. It is more likely that the traditionally more

conservative German regulators are very concerned about issues such as privacy,

where US regulators may be more willing to sacrifice privacy for security reasons.

Germany does not score as well on government tech adoption as on industry tech

adoption, ranking 27th in the NRI for government usage. By investing in government

technology, Germany could reduce the red tape which slows down new businesses

and innovation and at the same time reduce the long-term cost of its government

sector. The use of ICT in schools is also limited in Germany, ranking 42nd in the

Internet access in schools measure.

Rigid culture and bureaucracy

makes it hard for young companies

to flourish

Government programmes are aimed

at maintaining Germany’s

leadership in manufacturing

German auto manufacturers are

catching up fast and even

surpassing US innovations

Special Report

19 January 2015 85

Hurdles

Heavy regulation and bureaucracy are seen as the main hurdles for innovation in

Germany. Due to its more conservative culture, Germany is more concerned than

most advanced countries about protecting consumers. However, overly restrictive

regulation hampers the entry of new firms and constrains competition, ultimately

holding back innovation. Also, government support is seen as skewed towards

manufacturing, neglecting the IT sector, as reflected in the lack of German

companies in the recent boom in web services and phone applications.

Policies

The government is not complacent about Germany’s technology industry and is on

the right path regarding innovation policy. With policies such as Industry 4.0 and the

Digital Agenda 2014-2017, the government aims to maintain its lead in innovation.

Steps that would support technology innovation are the promotion of entrepreneurial

culture; for example, by arranging young entrepreneur exchanges with other

countries and encouraging the immigration of entrepreneurs and highly skilled

workers from abroad. Other helpful policies would be those that reduce red tape,

encourage private investment in young companies, and put more emphasis on digital

technologies than manufacturing. That said, diversity in innovation systems might be

a good thing; trying to adapt Silicon-Valley style entrepreneurism might not be the

right direction for every region. German institutions are seen as protectors of ethical

standards, including privacy; everyone might benefit if these ideas were maintained.

Figure 72: Germany technology snapshot

Indicators

NRI rank

















12th SG BD

33rd HK IT

21st SG ZA

3rd DE BD

42nd SG EG

17 CN EG

57 KR KE

99 TW VN

112 HK UG

84 SE BD

87 SE UG

85 KR BD

34 FR NG

41 SG TH

2.9 KR PK

4139 SG PK

Government policies are aimed to

maintain Germany’s lead in

manufacturing; more emphasis on

digital technologies is probably

needed

Bureaucracy is holding early stage

companies back

Special Report

19 January 2015 86

India

Summary

Technology has played a pivotal role in putting India on the global map over the last

decade. The rise of information communication technology (ICT) positioned India as

one of the fastest-growing knowledge-based economies, despite its lagging

manufacturing sector, infrastructure challenges and uneven technology adoption.

Recently the landscape has changed drastically. A broad-based growth slowdown,

domestic-policy challenges, structural bottlenecks and other countries’ more rapid

development of technology have pushed India’s rank in technology readiness from

69 in 2008-09 to 121 in 2014-15. The government realises the importance of

technology and aims to develop it by reducing inefficiencies and increasing

transparency. The vision of a digital India is clear, but persistent and co-ordinated

efforts will be required to hasten domestic technology adoption.

Strengths in technology and its adoption

India’s dominant position in IT and IT-enabled services is well established. The AT

Kearney Global Services Location Index has ranked India as the preferred country

for offshore IT services for a decade (Figure 73). Despite a decline in India’s share in

global sourcing services over the last two to three years, it still provided more than

50% of such services in 2013 (Figure 74).

The industry (broadly comprised of four sub-components – IT services, business

process outsourcing (BPO), engineering services and R&D, and software products)

grew exponentially to USD 118bn in 2013-14 from c.USD 5bn in the 2000s according

to NASSCOM (Figure 76). Skilled labour, entrepreneurship, cost advantages and a

supportive policy environment have allowed India to move up the value chain to

provide a wide array of services across sectors.

With more than 100mn English-speaking people – second in number only to the US –

India has a clear competitive advantage in the services space. Despite some cost-

advantage erosion recently, India still offers the most attractive cost propositions to

the world (Figure 75). With the domestic population now increasingly digitally

connected and the introduction of government measures aimed at further hastening

it, technology diffusion is likely to increase domestically.

Figure 73: India has been ranked first by AT Kearney

Global Services Location Index (Scores)

Figure 74: India dominates global services outsourcing

%

Source: A.T.Kearney, Standard Chartered Research Source: PWC India – A destination for sourcing of services, Standard Chartered Research

Financial attractiveness

People and skills

availability

Business environment

0

1

2

3

4

5

6

7

2005 2007 2014

RoW share

India's share

0

20

40

60

80

100

2005 2009 2010 2011 2012 2013

India provided more than 50% of

global IT sourcing services in 2013

Anubhuti Sahay +91 22 6115 8840

[email protected]

Macro Research

Standard Chartered Bank, India

Despite India’s emergence as a

global software brand, its

technology readiness has

deteriorated in the past few years

Special Report

19 January 2015 87

Weakness in technology and technology adoption

Despite India’s dominant position in IT and IT Enterprise Solutions (ITES) services,

its digital divide is pervasive. First, domestic absorptive capacity for IT and ITES

services remains low, as more than 70% of such services are generated for export.

Second, with low internet penetration levels, access and usage between

urban/rural areas, less developed/more developed states, and large/small

industries remains highly uneven. According to India’s 2011 census, in developed

states such as Maharashtra/Haryana, more than 5% of households had computers

with internet facilities, while the number is less than 1.5% for less developed states

such as Bihar. Only 0.7% of rural households have computers with internet

facilities versus 8.3% of urban households. Similarly, while larger companies have

adopted IT to various degrees, this has not filtered through to SMEs.

Third, technology penetration remains very low in the domestic manufacturing

sector. Despite being the one of the largest markets for Smartphones/computers,

India’s production capacity remains low. According to the government’s Twelfth

Five Year Plan report, while India is the second-largest mobile subscriber market, it

imports c.77% of total equipment demand. According to MAIT (the industry body

representing the hardware industry) India's IT hardware industry was worth USD

12.5bn in 2013-14. This is almost one-tenth of the USD 118bn value of the IT &

Figure 75: India still has a cost advantage

Operating cost per FTE for BPO services; transactional F&A

2012, USD ’000/per annum

Figure 76: Domestic absorptive capacity of IT& ITES

services is low

USD bn

Source: PWC India – A destination for sourcing of services , Standard Chartered Research Source: NASSCOM, Standard Chartered Research

Figure 77: India’s rank has slipped on technology

readiness

Figure 78: Import intensity remains high

USD bn, FY14

Source: Various Global competitiveness reports, Standard Chartered Research Source: DGFT, Standard Chartered Research

88-90

58-60

40-42

37-39

32-34

29-31

29-31

28-30

19-21

15-16

0 20 40 60 80 100

US Tier 11

Sao Paulo

Prague

Budapest

Montennery

Kuala Lumpur

Shanghai

Bucharest

Manila Metro

Bangalore

Exports

Domestic

0

20

40

60

80

100

120

2008 2012 2013

0

20

40

60

80

100

120

140

2008-09 2011-12 2012-13 2013-14 2014-15

Exports

Imports

0 10 20 30 40 50

Machinery

Electronic goods

Project goods

Mfg of metals

Defence

India’s digital divide

Technology penetration in the

manufacturing sector remains low

Special Report

19 January 2015 88

ITES services industry. Value-added to IT hardware meant for domestic

consumption remains low, as major global companies still use India as an

assembly point. Imports of electronic goods were c.USD 30bn in FY14 (ended

March 2014), while machinery imports’ share of total imports remained high at 12%

on the lack of locally available technology. Lack of technological and manufacturing

capability in India leads to an annual defence imports bill of USD 10-15bn.

Hurdles in technology and technology adoption

Other factors constraining technology adoption are the lack of basic infrastructure

such as regular power supply, digital infrastructure and wide skill gaps. According

to Nasscom & Mckinsey (2009), employability of graduates in business services

remains low at 10-15%, while it is 26% for engineers in technology services.

Inadequate infrastructure in nine cities that generate 95% of IT& ITES services in

India, means these cities are already overburdened, which can further limit the

adoption of technology. While India’s R&D spend is inching towards c.1% of GDP,

it remains extremely low versus other counties and most is focused on defence,

agriculture and health.

The recent slowdown in global GDP growth has inhibited technology adoption by

smaller firms in India, where limited awareness has led to the perception of cost as a

major barrier. Policy uncertainty is another issue: the recent closure of a mobile

handset manufacturing unit by a major global player in India because of tax-related

issues has added to this. From consumers’ perspective, while very competitive

mobile phone tariff rates and the availability of low-cost mobile handsets improve the

prospects for technology adoption, poor broadband Internet connectivity limits it.

Figure 79: India technology snapshot

Indicators

NRI rank

















83rd SG BD

27th HK IT

32nd SG ZA

41st DE BD

77th SG EG

31 CN EG

23 KR KE

83 TW VN

70 HK UG

13 SE BD

11 SE UG

10 KR BD

1 FR NG

5 SG TH

0.8 KR PK

SG PK

Hurdles include a lack of basic

infrastructure and low employability

of graduates in business services

Special Report

19 January 2015 89

Policies to move towards a digital economy

The new government has renewed its focus on technology adoption. In July 2014,

the government launched the ‘Digital India’ drive centred on three key areas: digital

infrastructure for every citizen, governance and services on demand via e-platforms,

and digital empowerment of citizens. Specific aims include providing broadband for

all rural areas by December 2016, universal access to mobile connectivity by 2018,

training people in smaller towns and villages for IT jobs over the next five years and

targeting net zero electronic imports by 2020. These targets are ambitious and will

require persistent and well co-ordinated efforts to be realised. Some measures have

been announced in recent months but more will be required.

More relaxed FDI policies in e-commerce and defence manufacturing, the

government’s emphasis on the development/adoption of solar technology instead

of thermal power, and digitally connected government departments are a few of the

recent measures taken to allow faster technology adoption.

The ambitious Digital India drive

requires persistent and co-

ordinated efforts

Special Report

19 January 2015 90

South Korea

Summary

Korea’s technology sector is poised at a critical juncture, in our view. Following the

past four decades as Asia’s manufacturing powerhouse, South Korean now strives to

maintain its leadership position in technology, especially in information and

communication technology (ICT). Having leapfrogged predecessors such as Japan,

Korea’s technological development has secured the leading position in the high-end

mainstream market since mid-2000. However, while major technology firms have

secured frontrunner positions in the industry, they now find themselves squeezed by

fierce competition, mainly from China and India. As the Korean government

recognises the technology sector as the main engine of economic growth, we think

there will be increased investment and higher funding for R&D in coming years, as

well as technology sector-accommodative policies.

Strengths

South Korea’s technology sector has thrived owing to the development of various

manufacturing industries. The electronics, automobile, chemical, steel and

shipbuilding sectors have been especially successful since the 1970s in utilising

high-technology production. Korea started as a labour-intensive industry base for

developed countries during the 1970s-80s. Then a few domestic conglomerates

rapidly caught up with global industry leaders through a capital-intensive industry

strategy. Samsung Electronics, in particular, has maintained the largest global

market share in mobile distribution (34% in 2013). Its leading edge stems from the

ICT industry – mainly network platforms and mobiles.

The ICT industry emerged as the core growth driver in the sector. A Financial Times

article cited Korea as the ‘most advanced broadband internet market’ and the Wall

Street Journal wrote, ‘Koreans are the world’s most active and sophisticated Internet

users…’. With the production volume of USD 105.9bn, or 5.7% of global production,

Korea ranked fourth in ICT production after China, the US and Japan in 2013; in

2012 it was ranked first as a display producer and third in semiconductor

development and production.

Figure 80: Human capital in R&D more than doubled in

the past decade

Number of researchers (LHS), number of researchers for

every 1,000 economically active members of population

Figure 81: Korea is the leading producer in global IT

markets

Number of smart phone (LHS) and tablet PC users in

Korea, ’000

Source: Invest Korea, Standard Chartered Research Source: Invest Korea , Standard Chartered Research

4.9

6.2 6.7

8.3

9.7 10.7

11.3

12.4

0

2

4

6

8

10

12

14

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2000 2002 2004 2006 2008 2010 2011 2012

Number of researchers

7,330

18,830

27,060

33,240

38,200

42,130

180

1,800

3,830

5,830

7,440

9,820

0

2000

4000

6000

8000

10000

12000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2010 2011 2012 2013 2014 2015F

Smart phones

Tablet PCs

Chong Hoon Park +82 2 3702 5011

[email protected]

Macro Research

Standard Chartered Bank Korea Limited

Kathleen B. Oh +82 2 3702 5072

[email protected]

Macro Research

Standard Chartered Bank Korea Limited

Leading position in ICT industry

secured by top conglomerates

Special Report

19 January 2015 91

The fundamental strength of Korea’s technology development is its high-value

human capital, which supports technology education. Some 72.5% of high school

students enter university and Korea has the highest college graduation rate among

OECD peers at 65% (Japan 60%, Canada 57%). Engineering college graduates

reached 3,555 out of 100,000 students in 2013. According to a report by the World

Intellectual Property Organisation (WIPO), the number of Patent Co-operation Treaty

(PCT) applications filed by Korea in 2012 was 11,848, or 6.1% of the global total. The

domestic think tank, the Electronics and Telecommunications Research Institute

(ETRI), won first place for US patent evaluation in 2014. Korea is in fifth place

globally in terms of patent co-operation treaty applications and it reported the

second-highest R&D expenditure-to-GDP ratio in the world in 2012.

Weakness

Korea leapfrogged advanced countries in technology in the 2000s. The key to

Korean technology companies’ success has been commercialisation and technology

adoption or utilisation from tech-advanced countries. Put another way, Korea has

been highly successful at tweaking others’ innovative ideas and developing them. For

example, Samsung’s success came after Apple’s Smartphone revolution with the

iPhone series; gains in the consumer electronics sector were derived from Japanese

companies such as Sony or Panasonic. Now that Korean companies have surpassed

previous top industry names, it needs to maintain its market leadership position.

We think Korea stands at a crossroads where either emerging countries such as

China or India could overtake Korea, or Korea could maintain its top position by

making a breakthrough. Korea caught up with Japan by matching its high quality with

cheaper products; now China and India are rapidly catching up with cheaper prices

and improving quality. Korea’s technology firms are under pressure. Samsung

Electronics’ operating profit declined more than 60% y/y in Q3-2014 due to the

mobile division’s slowdown. China’s rising mobile producers, such as Xiaomi, have

designs on Samsung’s territory, and even the Korean market.

Figure 82: Korean mobile manufacturers face fierce

competition

Major smart phone makers’ market share changes, %

Figure 83: Software production lags behind compared to

hardware production

ICT production between hardware and software, %

Source: Strategy analytics, Standard Chartered Research Source: IT Statistics of Korea, Standard Chartered Research

31.1 Samsung electronics,

25.2

Apple

Huawei

Xiaomi 0

5

10

15

20

25

30

35

Q2-2012 Q2-2014

73% 73% 78% 76% 73%

14% 14% 10% 12%

15%

2008 2009 2010 2011 2012

Hardware/parts Software

Stepping up to become an

innovative leader from being a

‘leapfrogger’ is a challenge

Special Report

19 January 2015 92

Hurdles

Korea’s technology sector faces both internal and external hurdles. Internally, the

chaebol (family-run conglomerates) business model hinders the development of

venture capitalists and innovative smaller firms. In the past, Korea’s successful

technology development has depended on the chaebol corporate structure. Since the

1960s, the government has supported a few strong corporates such as Samsung or

LG, which contributed to high industrial production and economic growth for decades.

However, their vertical corporate structure is the main hurdle to generating ‘out-of-box’

thinking, along with Korea’s conservative culture, which is evident in the small size of

the software industry compared to hardware production. In 2012, software production

contributed only 15% of total production while hardware parts and machinery

accounted for 73%. We think software business, such as digital content development,

requires higher levels of creativity and this area falls behind in the technology race due

to a rigid corporate culture and standardised working practices at large corporates.

External hurdles include fierce global competition. First, China’s economies of scale

dominate the market, with product standardisation. Given Korea’s high dependency

on Chinese machinery parts (rising to 28.4% in 2014 from 25.6% in 2012) Korean

firms are expected to develop only within the standardised product lines of Chinese

goods. Second, Japan’s weakening yen (JPY) enhances the relative price

competitiveness of Japanese companies against Korean companies. The outlook for

prolonged JPY weakness saw Japanese corporates expand global exports by c.10%

y/y in 2014 and they are now focusing on strengthening business fundamentals

through aggressive R&D investment and M&A strategies.

Figure 84: South Korea technology snapshot

Indicators

NRI rank

















10th SG BD

115th HK IT

20th SG ZA

22nd DE BD

13th SG EG

29 CN EG

101 KR KE

100 TW VN

109 HK UG

84 SE BD

82 SE UG

97 KR BD

37 FR NG

105 SG TH

4.0 KR PK

5928 SG PK

Korean technology sector faces

internal structure and external

competition

Special Report

19 January 2015 93

Policies

Given the intention to transform the current chaebol-centric economic model, we

think structural reform in the technology sector will be one of the Korean

government’s top priorities for 2015. The Park administration’s commitment to

promoting a ‘creative economy’ guides further technology development in Korea. The

government plans to create an environment in which smaller firms start businesses

with new ideas and government-supported capital investment. The total budget for

such a creative economy in 2015 is proposed at KRW 8.3tn (c.USD 8.0bn), more

than 50% of the total R&D budget (5% of the total budget proposed). At the core of

this creative economy agenda is a technology ecosystem in which small firms’ new

ideas can be developed through large firms’ production lines and capability.

One way to close the gap between the two large conglomerates and SMEs is the

application of ICT technology ideas from small firms to larger firms in various sectors

to increase productivity. Not only the manufacturing industry, but also agriculture

could utilise high-tech production. Also, the government aims to create a Long Term

Evolution (LTE)-based rail system, driverless automobiles, and plans heavy

investment in the ‘Internet of things’. The government’s R&D allocation to science

and technology is expected to expand to 40% of the total budget by 2017 from 36%

now. Also, we expect the government to play the role of primary client in using and

adopting new technology developed by smaller firms to create a captive market for a

new generation’s local-technology market.

‘Creative economy’ campaign aims

to boost the domestic economy via

revitalising the technology sector

Special Report

19 January 2015 94

Taiwan

Summary

Technology has been a driving force behind Taiwan’s economic development and

success. The island has shown keen interest in embracing new technology as a

means of upgrading industry/economy and improving the standard of living. It is

therefore little surprise that Taiwan is ranked top among Asia’s economies in

leveraging knowledge-based industries to drive economic growth, according to a

report released by the Asian Development Bank (ADB) in September 2014,

outperforming Hong Kong, Japan, Singapore and South Korea. Officials from the

National Development Council (NDC) also cited the ADB’s report as a strong vote

of confidence in the government’s drive towards building an ‘intelligent’ economy

as the key to industrial transformation and sustainable economic development.

Strengths and the role of the government

Taiwan’s strength in technology innovation and adoption is best illustrated by its rapid

emergence and dominance in the global IT manufacturing supply chain. Taiwan’s

transformation to a world-class IT manufacturing powerhouse is not accidental; the

government has played an active role.

The emergence of Taiwan’s IT industries began in the 1980s. Dr iven by upward

pressure on wages, rising land costs and a stronger Taiwan dollar (TWD), many

labour-intensive industries moved overseas in search of cheaper production bases,

including to mainland China. Concerned that the rapid hollowing out of

manufacturing industry would have a severe socioeconomic impact, Taiwan’s

government began to promote the use of technology to enhance industrial

competiveness and sustain economic growth. As a result, since the 1980s-90s

Taiwan has undergone several industrial upgrades that helped establish the

foundation of its IT industry today.

In a bid to accelerate the development of IT industries and encourage local

companies to adopt the latest technology, the government (during the 1980s-90s)

established several science parks to attract foreign investment in high-tech, high-

value-add industries. By 2013, the total output value of Taiwan’s IT industry stood at

TWD 4.3tn (USD 140bn), representing one-third of overall manufacturing output, up

considerably from the mere 10% recorded in the early 1980s. In 2013 it was also

more than twice the size of chemical manufacturing output (i.e., c.TWD 2.0tn, or USD

67bn), the second-largest industry segment in Taiwan. The number of people

employed in the IT sector was 899,000 in 2012. This was more than twice the

482,000 employed in the chemical industry at that time, according to data provided

by the Ministry of Economic Affair (MOEA).

The government has provided financial assistance, including low-interest-rate loans

for R&D, the purchase of automated equipment, energy-conserving machinery, etc.

The ‘Statute of Upgrading Industries’ was implemented in 1991, providing tax

incentives to encourage local manufacturers to undertake industrial R&D and

innovation programmes to strengthen competitiveness. Additionally, the Ministry for

Labour (MoL) also offered incentive programmes to assist firms and businesses to

train and retain talent.

Taiwan‘s strength in knowledge-

based industries is a result of

supportive government policies

Tony Phoo +886 2 6603 2640

[email protected]

Macro Research

Standard Chartered Bank (Taiwan) Limited

Special Report

19 January 2015 95

Taiwan’s government has set ambitious goals for the high-tech sector up to 2020. It has

identified several industries in which overall output value is expected to rise

substantially from 2012 to 2020. These include semiconductors, flat panel displays,

digital content, communications, bio-technology, information services, design services

and intelligent electric vehicles. The government expects these will help facilitate the

next phase of industrial transformation, increase employment and improve income

distribution. It has also introduced several measures to promote the development of

these industries, mainly aimed at setting up platforms, eliminating (regulatory)

obstacles and fostering the right environment to attract talent and investment.

During 2011-12 the government introduced the ‘Outline for Industrial Development’

programme, which was the blueprint for upgrading Taiwan’s industrial structure into

a high-tech, specialty, services-oriented manufacturing economy (Figure 85).

Earlier, in 2005, the Development Fund of the Executive Yuan set aside a special

fund to provide low-interest-rate loans, and financing for major investment projects.

The government also promulgated the ‘Statute for Industrial Innovation’ in May

2010, providing tax credits to qualifying business enterprises for R&D expenses.

Weaknesses and hurdles to technology adoption

Taiwan’s overall performance in terms of networked readiness has lagged behind

that of Singapore, Hong Kong and South Korea, according to The Global Information

Technology Report (GITR). Taiwan is particularly weak in terms of the regulatory

environment (law making, settling disputes, etc.), affordability (tariffs) and usage

(virtual networks, etc). This shows there is further room for improvement in terms of

technology adoption to help enhance domestic economic and social welfare.

The challenge for the government will be on how to reassure the general public given

rising concerns over cyber-security, protection of consumer rights, enforcement of

rules of law, etc. This suggests that both market players and regulators will have to

ensure security features are adequate in handling new-age financial crimes, fraud

prevention, information/data leakage, etc. It also indicates the need for less complex

rules to ensure legal rights and claims involving disputes arising from on-line, e-

commerce transactions, especially cross-border activity.

Policies to move towards an ‘intelligent’ economy

In a bid to push Taiwan towards a knowledge-based ‘intelligent’ economy, the

government launched the ‘e-Government’ programme in 1998. By seeking to

broaden and deepen on-line access to government services, it hoped to raise

awareness of the potential benefits the integrated public-service network could bring

in terms of improving standards of living and promoting sustained economic

development. There have been some positive results. For example, on-line personal

income tax filing rose to 79.9% of the total number of filings, from 14.46% in 2004,

while on-line business tax applications topped 99.6% in 2013. This has vastly

reduced the manpower and paperwork required during tax filing season, as well as

enabling the general public to file income tax returns at their own convenience.

The government expects a significant rise in e-commerce activity, owing mainly to

widespread acceptance and use of on-line, wireless services and rapidly increasing

digital content and applications ranging from shopping, entertainment, health care

and financial services. As a result, Taiwan has earmarked the use of digital

content, wireless broadband applications, cloud computing, e-commerce and

intelligent automation as the next wave of technology to help promote and upgrade

Cyber-security and the protection of

consumer rights are the main

challenges for the government

Special Report

19 January 2015 96

the domestic services sector with hi-tech, high value-added content. The aim is to

establish a platform for an ‘intelligent’ economy to promote Taiwan’s services

sector’s overall development and international competitiveness.

According to local media reports, Taiwan’s e-commerce transactions (i.e., business

to business (B2B), business to consumer (B2C) and consumer to consumer (C2C))

are expected to overtake traditional retail stores, driven by the growing

convenience of wireless connection, changing consumer behaviour, and rising

competition (local and overseas). Already, the local e-commerce market is

expected to reach TWD 1.0tn (USD 33bn) in 2015, up by more than 10% y/y and

accounting for over 25% of estimated total domestic retail sales (USD 133bn). To

enable the local-banking sector to fully explore the new market potential, Taiwan’s

government has embarked on a ‘Bank 3.0’ reform programme that aims to provide

the infrastructure to further streamline banking operations and improve overall

efficiency and productivity by leveraging the latest mobile gear and bio-technology.

Figure 85: Key high-tech industries identified under ‘Outline for Industrial Development’ programme

Category Status 2012 Goals for 2020

Semiconductor Production value in 2012: TWD 1,540bn

12-inch fabrication plants: 17 fabs in operation

Production value in 2020: TWD 1,650bn

12-inch fabrication plants: 17 fabs in operation

Flat panel displays Production value in 2012: TWD 1,430bn

G5 to G6 production facilities: 14

G7.5 production facilities: 3



G5 to G6 production facilities: 14



Digital content Production value in 2012: TWD 633.8bn

Amount of investment, including direct and indirect

investment: TWD 28.1bn

Combined value in international collaboration

projects: TWD 5.5bn

Medium-/long-term talent cultivation: 266 people; on-

the-job training: 850 people



investment: TWD 240bn

Fostering five international large digital content

companies to invest in Taiwan

Talent cultivation: Over 1,000 people annually

Communications Production value in 2012: TWD 433.2bn

(communications equipment and components)

WiMAX production value in 2012: TWD 4.4bn

Production value in 2020: TWD 610.1bn

(communications equipment and components)

100Mbps speed broadband internet connected to 80% of

households

Biotechnology Production value in 2012: TWD 263.3bn

Amount of investment: TWD 39.5bn

Production value in 2020: TWD 500bn15 new drugs

approved for the market

One flagship company whose annual revenue is more

than TWD 30bn

Information services Production value in 2012: TWD 281bn


investment: TWD 5.7bn

One Taiwan IT company has achieved the top charge

card market share in the Thai

circulatory industry and financial industry

Production value in 2020: TWD 500bn

Assisting five domestic companies to establish channels

in five countries

At least two Taiwanese information services firms ranked

among the top-three in specific

segments in the Asia-Pacific region

Design services Production value in 2012: TWD 66.8bn

1,675 winners in four major international design

competitions

Production value: TWD 98bn

2,200 winners in four major international design

competitions

Intelligent electric

vehicles

Production value in 2012: TWD 3.84bn

Investment amounts: TWD 16.2bn

Production value: TWD 65bn

Accumulated sales: 28,000 for domestic market;15,000

for exports

Source: MOEA Industrial Development Bureau

Taiwan’s e-commerce businesses

are expected to overtake traditional

retail stores

Special Report

19 January 2015 97

Driven by the rapidly expanding e-commerce market, Taiwan launched its third and

largest mobile commerce and payment platform in December 2014, enabling

subscribers to make payments at more than 30,000 local stores and more than

2.6mn participating shops overseas. So far, 18 financial institutions are known to

have signed up for the latest online electronic wallet system during its opening, while

14 more are expected to join in 2015.

Figure 86: Taiwan technology snapshot

Indicators

NRI rank

















14th SG BD

9th HK IT

11th SG ZA

19th DE BD

7th SG EG

19 CN EG

83 KR KE

100 TW VN

126 HK UG

76 SE BD

75 SE UG

72 KR BD

24 FR NG

50 SG TH

KR PK

SG PK

Special Report

19 January 2015 98

Thailand

Summary

To capitalise on opportunities arising from regional economic integration, Thailand

aims to further promote technology development and adoption in both the private and

public sectors. The country’s technology readiness remains relatively low, as gauged

by the IMD World Competitiveness Centre Scoreboard, (Figure 87). Lack of

sufficiently skilled workers in electronics design and accessibility to digital technology

are key hurdles to technology adoption. As a result, the government recently unveiled

policies to move towards a digital economy. These include the development of hard

infrastructure, such as a national broadband network, and soft infrastructure involving

related regulations. The policies aim to promote technology development and enable

Thailand to position itself as a future regional trading hub.

Strong biotechnology industry

Thailand’s biotechnology industry has played a key role in driving the economy

towards being more tech-savvy, and will remain important in the future. The industry

is divided into four key segments – agricultural, food, health and medicine, and

environmental. Medicine is the industry’s flagship: notably, the World Health

Organization (WHO) has approved Thailand to manufacture the H1N1 flu vaccine.

The biotechnology industry’s success is mainly owing to the government’s ongoing

support through R&D funding, numerous institutes and policy incentives to promote

foreign investment in this industry. The National Center for Genetic Engineering and

Biotechnology (BIOTEC) was established in 1983, and is now a pillar of the country’s

biotechnology industry.

To promote foreign investment in this industry, the Board of Investment (BoI)

provides special incentives, including both tax and non-tax. Tax-based incentives

include exemption or reduction of import duties on equipment and raw materials, and

corporate income tax exemptions and reductions. Non-tax incentives include

permission to bring in foreign workers, own land and take or remit foreign currency

abroad, according to the BoI.

Figure 87: Thailand’s technology readiness IMD ranking

2009-14

Figure 88: Thailand’s R&D investment, 2001-13

% of GDP

Source: IMD Source: Ministry of Transportation, Standard Chartered Research

36

48 52

50 47

41

0

10

20

30

40

50

60

2009 2010 2011 2012 2013 2014

0.15

0.20

0.25

0.30

0.35

0.40

2001 2003 2005 2007 2009 2011 2013

Thailand is approved by the WHO

as a manufacturer of the H1N1 flu

vaccine

Usara Wilaipich +662 724 8878

[email protected]

Macro Research

Standard Chartered Bank (Thai) Public Company Limited

Special Report

19 January 2015 99

Overall technology readiness remains low

Apart from the biotechnology industry, Thailand’s overall technology readiness

remains relatively low. According to the IMD’s competitiveness measure, out of 59

countries, Thailand’s technology readiness was 41st in 2014, falling from 36th in

2009. Thailand’s ratio of R&D investment to GDP was relatively low at only 0.37% of

GDP in 2013. This suggests that progress in technology development and adoption

is greatly needed, in both the private and public sectors. Technology advancement is

a pre-requisite for promoting the development of a knowledge-based economy, and

enhancing competitiveness.

Hurdles to technology adoption

Lack of sufficiently skilled workers and accessibility to digital technology are key

hurdles to technology adoption not only in Thailand, but also in other developing

countries. In Thailand’s case, there is much room for improvement, especially in the

electronics design industry and information & communications technology (ICT).

Electronics design is an important area that could propel Thailand up the global value

chain, given its importance in creating new technology and innovation in the

automotive, electronics, electrics and ICT industries, among others. As a result, the

National Science and Technology Development Agency (NSTDA) and related

institutes have established the ‘Thailand Electronics Design Industry Human

Resource Development Project’. The primary aim is to produce skilled workers by

educating and training university students. Integrated circuit design for the

automotive software industry is a pilot project.

Thailand’s telecommunication services meet international standards. Fixed

telephone lines, mobile telephones, dial-up internet, and broadband services are all

available. However, Thailand may need to strengthen its ICT infrastructure, which

is crucial for further technology adoption. Under a national broadband plan,

Thailand planned to expand broadband infrastructure coverage to 80% of the

country by the end of 2014 (data still pending on whether this target was met), and

to 90% coverage by end-2020. The mobile network is expected to be upgraded

from 3G to 4G in 2015.

Policies to move towards a digital economy

To capitalise on opportunities arising from regional economic integration, Thailand

plans to position itself as a regional trading hub. To this end, it plans to move

towards a digital economy, which will play an increasing role in moving from a

physical-based to a digital-based business model. The move reflects consumers’

more complicated demands and changes in social interaction through social media

and online networking.

On 12 September 2014 Prime Minister Prayut Chan-ocha delivered his policy

statement, with plans to lay the foundations for the digital economy and ICT

development. Policies include the development of hard infrastructure such as a

national broadband network, a digital gateway and an integrated data centre; and

soft infrastructure involving related regulations, e-commerce and paperless public

services. An auction for the 4G network is scheduled to take place in 2015.

Thailand’s technology readiness

was ranked 41st in 2014, falling

from 36th in 2009

Digital technology will play an

increasing role in the transition to a

digital-based business model

There is still much room for

improvement, especially in

electronics design and ICT

Special Report

19 January 2015 100

To support the government’s plan to move towards a digital economy, the BoI

provides an additional one to two years of tax exemption incentives for both

investment and expenditure on research, development, design, advanced technology

training, funding for educational and research institutions and contributions to science

and technology development funds.

In November 2014, the BoI also approved its ‘Seven-Year Investment Strategy’

offered to SMEs, aimed at promoting investment in high-technology and creative

industries, in order to support the development of a digital economy. The investment

incentives include an additional two-year corporate income-tax exemption, effective

1 January 2015.

Figure 89: Thailand technology snapshot

Indicators

NRI rank

















67th SG BD

41st HK IT

80th SG ZA

87th DE BD

65th SG EG

29 CN EG

51 KR KE

100 TW VN

127 HK UG

27 SE BD

27 SE UG

18 KR BD

8 FR NG

0 SG TH

KR PK

SG PK

Special Report

19 January 2015 101

United Kingdom

Summary

According to the NRI index, the UK is among the top countries globally for

technological innovation and adoption. Its main strengths are its world-class

universities that attract and nurture talent from around the world, the ease of

access to pools of capital, and government policies that support innovation. Its

main weaknesses are the lack of a strong SME network that shares research

capabilities, and risk aversion on the part of entrepreneurs compared to the US.

Technology adoption is more widespread for individual usage than business usage,

which reflects hurdles such as financing and entrepreneurs who are not sufficiently

equipped to run a modern business. A key hurdle is the lack of sufficient

employees with strong STEM skills. The government could jump this hurdle by

adopting progressive migration policies.

Strengths

The UK is among the top countries in terms of technological readiness, ranking 9th

in the overall NRI. UK universities’ research quality consistently ranks among the

top globally. This, together with the widespread use of the English language,

makes UK universities attractive to top talent from around the world. Many foreign

students stay in the UK to work in tech- or R&D-related industries (Figure 90).

Many business ideas emerge from academic research, deepening the link between

academia and business. One example is Imperial Innovations, a company owned

by Imperial College, which commercialises research carried out in the university.

In terms of technology adoption, the UK scores very well according to NRI.

However, we see a divergence between individual usage (ranking 8th) and

business and government usage (ranking 17th in both). The UK ranks 1st in the

use of business-to-consumer technology (e-commerce), a sign that consumers

have embraced such technologies. The use of technology to improve public-sector

efficiency has huge potential, especially in public health care. To promote this goal,

the government launched a National Health Service Technology fund in 2013 with

GBP 500mn worth of capital to support the shift from manual to electronic systems.

Figure 90: UK leads the EU in high-tech employment

Employment high-tech sector in 2010 and 2013, % of total

Figure 91: But lags behind in R&D expenditure

Total R&D expenditure, % to GDP

Source: Eurostat Source: WDI

2010 2013

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

UK Germany EU France

0

1

2

3

4

Korea Japan Germany US France UK

The UK ranks 1st in the use of

business-to-consumer technology

(e-commerce)

Achilleas Chrysostomou +44 20 7885 6437

[email protected]

Global Research


The higher education system is one

of the UK’s key strengths

Special Report

19 January 2015 102

A major advantage of the UK as a place to start a hi-tech business is the ease of

access to capital. Several of the world’s largest venture-capital funds are based in

the UK or have an office there, which usually covers the whole of Europe. Other

sources of capital, such as pension funds, private-equity firms, and recently several

angel investors (affluent individuals who provide capital to start-up companies in

exchange for equity ownership) also have a strong presence in the UK. Access to

capital allows start-ups to obtain the funds needed to support initial growth.

Moreover, venture-capital firms and angel investors bring the necessary expertise

and networks to support these start-ups.

The government plays an active role in promoting technological innovation and

adoption. Organisations such as Innovate UK and TechCity UK provide real financial

and technical support to SMEs and start-up companies. The government is also

trying to adapt education to market needs: from 2014, primary school students as

young as five will learn how to write a computer programme.

Financial sector

The financial technology (FinTech) sector is experiencing a boom in the UK. The

UK’s technologically sophisticated customer base, London’s position as a leading

global centre for institutional financial services, combined with the advantages of

starting up a business in the UK make it a globally attractive place for a FinTech

start-up. British banks have been laggards in adopting new technology in recent

years. The financial crisis has left the banks with no choice but to reduce costs by

utilising technology, therefore raising demand for innovative financial technology

services. We have recently seen decisions by high street banks to close branches

and invest more in online and mobile banking instead.

Estimates put the number of people working in FinTech in the UK at c.44,000, more

than Silicon Valley and New York combined. Their spectrum is very broad, from

mobile payments to data security and peer-to-peer lending platforms. Many aspects

of banking, including data management, compliance, credit risk and stress testing,

offer plenty of opportunities for UK FinTech companies in the near future.

Weaknesses

The main weakness of the UK in technological innovation is the weak R&D activity by

SMEs in the technology and engineering sector. In contrast to German’s Mittelstand,

most UK innovation is undertaken by multinationals. The reason is the lack of

resources by SMEs to fund R&D and the absence of a network that creates

economies of scale in R&D and distributes research for commercial purposes, such

as the Fraunhofer Institute in Germany. However, this is changing; and given the shift

in mentality of entrepreneurs and investors, as well as government support, we

should see a greater number of SMEs working closely with universities and

improving their innovation rates.

Another problem common across Europe, including the UK, is aversion to failure. In

the US, when a start-up fails, it is not regarded so much as failure but as a learning

process. In contrast, in Europe would-be entrepreneurs prefer more secure career

paths to riskier entrepreneurial ones. This is changing gradually, though, as the

community between Europe and the US becomes more integrated, with Europeans

spending time in the US and Americans moving to Europe.

Closer co-operation between SMEs,

academia and non-profit

organisations may improve SME

innovation rates

Ease of access to pools of capital is

also a key advantage of starting a

tech business in the UK

The government promotes tech

entrepreneurialism through several

programmes

The financial-technology sector is

going through a boom, benefiting

from London’s prominence as a

global financial centre

Special Report

19 January 2015 103

Hurdles

The two main hurdles to the UK’s technological innovation are the lack of sufficient

STEM skills and the low level of public R&D funding. The STEM-skill deficit is broad,

ranging from basic IT skills to highly specialised technical jobs. Recent research

published by the BBC has found that 21% of the UK’s population lacks the basic

digital skills to realise internet benefits. Also, that 30% of SMEs do not have a

website. The government has launched a Digital Inclusion Strategy to support parts

of the population to improve their digital skills. This strategy also targets civil

servants’ capabilities, in order to improve government services.

Public expenditure on R&D remains a hurdle for the UK’s innovation capabilities

(Figure 91). Unlike universities in the US, British universities have insignificant

endowments, which leaves no choice but to rely on government funding for research.

The UK government’s current expenditure on R&D is about 1.2% of the total, while in

Germany and the US it is above 2%. The government is moving in the right direction,

with initiatives to increase R&D spending.

Policies

The government ideally should focus on policies that lower the UK’s hurdles to

technology innovation and adoption: STEM-skill deficiency, the comparative

weakness of the SME sector to innovate, and low public R&D funding. Supporting the

study of STEM subjects from primary school to the post-graduate level is a step in

the right direction, but it is too slow to address the skills gap. Progressive immigration

policies should be adopted to allow for more highly skilled migrants to move to the

UK. SME culture can be addressed by encouraging UK entrepreneurs to travel to the

US; this is already being done via the Entrepreneur First programme.

Figure 92: United Kingdom technology snapshot

Indicators

NRI rank

















9th SG BD

20th HK IT

50th SG ZA

8th DE BD

10th SG EG

14 CN EG

61 KR KE

100 TW VN

135 HK UG

87 SE BD

87 SE UG

89 KR BD

34 FR NG

72 SG TH

1.7 KR PK

4024 SG PK

There is a shortage of workers

trained in STEM subjects at all

levels

Progressive immigration policies

and development of an SME

innovation support network are the

two key policies needed to keep the

UK at the top of technology

rankings

Special Report

19 January 2015 104

United States

Summary

The US remains at the forefront of technology and innovation globally, exemplified by

California’s Silicon Valley (and now increasingly, San Francisco’s downtown), which

continue to lead computer, software and digital innovation. According to some

academics (e.g., Caselli and Coleman 2000) the US marks the “world technology

frontier”, with other countries trying to catch up. Nevertheless, there are mixed feelings

domestically about the degree of innovation and its spillover into growth and incomes.

Doubts are also increasing over whether the US can maintain its leadership.

In contrast with newspaper stories of successful tech start-ups, mostly originating

from the high-tech centres of California (and to a lesser degree New York), and a

flurry of new products – particularly in the information and communication sector –

statistics offer a mixed picture of how new technology affects US growth. Recent

years have seen a slowdown in productivity growth, particularly since the ‘dot-com’

bubble burst. US growth overall has been relatively tepid, averaging only 2.3% since

mid-2009; new business creation has also been on a downtrend. Academics are

debating whether there are better times ahead and the current weak performance

should be ignored, or whether this weakness is a sign of a more protracted

moderation in the coming years.

Strengths

The degree of innovation in the US is attributed to a combination of elements: (1) the

quality of higher education and university research; (2) the availability and low cost of

capital; (3) a cultural environment prone to entrepreneurship and risk-taking; (4)

strong institutions and a solid legal framework.

The US financial sector (‘Wall Street’) provides a strong competitive advantage as it

allocates capital to high-growth and innovative sectors, via seed investment, private

equity or initial public offerings; this also explains why innovative foreign firms

continue to line up to tap the US financial markets.

Figure 93: US research is undisputedly ahead

Number of Nobel laureates by country of birth (1901-2014)

Figure 94: US total factor productivity has more than

halved in 2007-13 from 1995-2000

Percentage point contributions to growth in output per hour in

the private sector, 1987- 2013

Source: Nobelprize.org, Standard Chartered Research Source: BLS, Standard Chartered Research

0

50

100

150

200

250

300

US UK Germany France Sweden Russia Poland Japan

0.9 0.7 0.7

1.2 1.0

0.7

0.3 0.4 0.5

0.2 0.2

0.3

0.9

0.5 0.5

1.4 1.4

0.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1987-2013 1987-1990 1990-1995 1995-2000 2000-2007 2007-2013

Contribution of capital intensity

Contribution of labor composition

Multifactor productivity

Thomas Costerg +1 212 667 0468

[email protected]

Macro Research

Standard Chartered Bank NY Branch

US innovation strength is due to an

exceptional university system, the

abundance of capital and the US’

cultural and institutional framework

Special Report

19 January 2015 105

The Silicon Valley-San Francisco area is also important for new technologies. There,

ideas meet capital. This cluster fosters innovation and new businesses. Innovation

and new ideas are “in the air”, as Economist Alfred Marshall famously remarked

when referring to such positive ‘externalities’, including the unintended transmission

of knowledge among individuals and organisations within the area. Economists have

noted that the established strong network effects of such clusters mean that creating

another tech cluster somewhere else from scratch would be difficult; this may explain

the continued appeal of California globally.

But areas of industrial concentration can also have disadvantages: aggregate costs

can outweigh benefits. Such costs can include over-crowding and congestion,

infrastructure inefficiency and high land costs. In recent years, California has posted

particularly rapid house-price growth, leading to debate over whether expensive

housing may be discouraging entrepreneurs from moving there or making it less

attractive to potential workers.

California is also far from some important emerging tech markets, such as China,

where demand for tech services has been growing strongly, and has immense

potential. Longer-term, the rise of China’s market could affect California’s strategic

dominance, particularly in web-based services and technology.

Weaknesses

The main hurdle to further innovation lies in the adoption and use of technology –

particularly information technology – due to uneven education standards. Although

US university-level education is world class, the quality of high-school education

remains uneven. This is particularly true of the so-called STEM subjects, where US

pupils continue to lag many global peers. According to the OECD’s authoritative

PISA survey (PISA stands for Programme for International Student Assessment), the

US scored 481 in maths, lower than the OECD average of 494, and a broadly

stagnant score compared with previous surveys.

Funding for primary and secondary education occurs mostly at the state and local

level in the US and remains relatively heterogeneous. Some commentators have

stressed that, due to its reliance on local tax funding, the US school system

Figure 95: Contributions to the growth of US potential GDP, 1950 to 2024

Percentage change in potential GDP (and projections according to CBO)

Source: Congressional Budget Office

Labour hours

Capital

Total factor productivity

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1950-1973 1974-1990 1991-2001 2002-2013 2014-2024 (Projected)

Reforming US education could help

to increase adoption of technology

Special Report

19 January 2015 106

perpetuates inequalities between wealthy and less wealthy areas; others have

pointed out rigidities within the teaching profession, such as its unionisation and

resistance to new pedagogical techniques. The uneven performance of US schools

remains a matter of debate.

Another issue is the displacement of jobs by technology; for instance, the effect of

communication technology on ‘routine’ jobs due to automation. This has led to

downward wage pressure in some sectors and rising inequality. Also, lower

purchasing power and skill attrition can undermine the adoption of new technology.

According to media reports, 100mn Americans live where fast internet broadband is

available, but prefer not to subscribe either because of the cost or lack of interest

(and lack of adoption prevents a faster fall in costs).

Hurdles

Although the US remains a global manufacturing powerhouse, its manufacturing

share has eroded in recent years, which could discourage wider adoption of

innovation, especially at the business level. Services can be a source of productivity

growth due to new organisation, delivery or communication methods (think of the

supermarket versus the street market; or internet over in-store purchases). Still,

much innovation, including process improvements, new products or new materials,

happens within factories, and the location of production facilities close to design or

engineering labs has been documented as a source of additional innovation. This is

particularly the case in electronics, where even if products are designed in the US,

they are often manufactured elsewhere (mostly in Asia).

More broadly, the US manufacturing base remains fragile and relatively narrow, with

a limited presence in some sectors, such as electronics assembly, household

appliances, textile products or furniture, which have increasingly been moved

offshore in the past three decades. Although US manufacturing has experienced a

cyclical pick-up since the financial crisis (led by automobiles), the sector still faces

structural challenges. The ‘US manufacturing renaissance’ often portrayed in the

press is still being debated: for now signs of such a phenomenon are scant and

mostly anecdotal. The US trade deficit with Asia continues to increase, for instance,

led by manufactured goods.

But, as we argue in this report, new technology such as 3D printing could help to

make production more local. Furthermore, the top-down manufacturing situation

hides wide geographical discrepancies within the US. The lid on labour costs in

manufacturing in the southern US states, combined with the ‘open-for-business’

attitude of many local policy makers, has led to growing attractiveness particularly for

automobile, aircraft and chemical manufacturing.

Policies

The US government adopts a light touch in terms of spurring innovation, preferring to

let the private sector lead the way. Most R&D is undertaken by the private sector, for

instance. However, the US government provides support for innovation via two main

channels: (1) spending on research at government institutes and the spillover from

defence spending; (2) the promotion of a sound legal and institutional framework

friendly to innovation (particularly regarding patents). Meanwhile, tax policy includes

tax credits for R&D; certain legal requirements also favour domestic firms over

foreign firms in some government contracts.

Looser immigration rules could help

attract talent to the US, at a time

when engineers and IT experts are

in high demand

The declining share of

manufacturing in the US may be a

hurdle to the wider adoption of

technology and incremental

innovation

Special Report

19 January 2015 107

One area of debate is whether the US should loosen its strict immigration rules to help

attract talent. While the US faces a severe skills mismatch in STEM, there are

numerous impediments to educated or specialised workers’ immigration. According to

the Congressional Budget Office, 13% of the US population is foreign-born; yet they

account for 27% of all full-time workers specialising in science and engineering. In

2013, only 160,000 immigrant visas related to employment were granted (almost half of

which were to those already living in the US when the visa was issued). President

Obama has sought to relax immigration rules lately, although these measures target

undocumented workers (already in the US) and mostly do not address the question of

skilled immigration. Looser immigration rules, especially for skilled labour, would help

alleviate an acute shortage of engineers and IT experts, particularly in California.

Figure 96: United States technology snapshot

Indicators

NRI rank

















7th SG BD

3rd HK IT

49th SG ZA

5th DE BD

18th SG EG

19 CN EG

95 KR KE

100 TW VN

95 HK UG

81 SE BD

79 SE UG

75 KR BD

28 FR NG

88 SG TH

2.8 KR PK

3979 SG PK

Special Report

19 January 2015 108

Country Code

Country Country Code

Angola AO

Argentina AR

Australia AU

Austria AT

Bangladesh BD

Belgium BE

Brazil BR

Canada CA

Chile CL

China CN

Colombia CO

Cyprus CY

Czech Republic CZ

Egypt EG

Finland FI

France FR

Germany DE

Ghana GH

Greece GR

Hong Kong HK

India IN

Indonesia ID

Italy IT

Japan JP

Kenya KE

Korea, Republic of (South Korea) KR

Malaysia MY

Mexico MX

Netherlands NL

New Zealand NZ

Nigeria NG

Pakistan PK

Peru PE

Philippines PH

Poland PL

Portugal PT

Russian Federation RU

Saudi Arabia SA

Singapore SG

Slovakia SK

South Africa ZA

Spain ES

Sri Lanka LK

Sweden SE

Switzerland CH

Taiwan, Province of China TW

Thailand TH

Turkey TR

Uganda UG

United Arab Emirates AE

United Kingdom GB

United States of America US

Venezuela VE

Vietnam VN

Special Report

19 January 2015 109

Appendix

The Technology Achievement Index

The TAI-2002 was an attempt to capture the ability of an economy to create and use

technology, rather than an index measuring the technological prowess of an

economy (Desai, 2002). The underlying rationale for the index was that while not

every country can drive advances in technology, its economic progress and growth

will depend on how well prepared it is to access and use (or even create) technology.

It also focused on outcomes and achievements (number of patents granted) rather

than effort or inputs (number of patents applied for) as the causal relation between

inputs and outputs is not well known.

The TAI-2002 index focused on four dimensions of technological capacity, with two

indicators measures for each dimension. We have followed the same measures and

these include:

1) Creation of technology

a. Royalties and license fee payments (USD/pop)

b. Patents granted by USPTO/mn people, avg for five-year period

2) Diffusion of old technology:

a. Telephones (telephone lines and mobile cellular subscriptions), per 100

people

b. Electric power consumption (kWh per capita)

3) Diffusion of new technology

a. Internet users (per 100 people)

b. High-technology exports (% of manufactured exports)

4) Human skills

a. Mean years of schooling (age 15 and older)

b. Gross tertiary enrolment ratio (%)

Our index differs from the original TAI index in a few ways. We include a measure of

Internet users rather than Internet hosts. Another major difference between our index

and the original 2002 TAI is in the human skills development factor. The TAI 2002

uses the gross tertiary enrolment in science. However, many countries in our list do

not report data for this variable so we have used the gross tertiary enrolment ratio

instead. The indicators for the diffusion of old technology are expressed as

logarithms in keeping with the original TAI 2002 index.

The index calculation is fairly simple:

Indicator index=(actual value-observed minimum value)/(observed maximum value-

observed minimum value)

One of the drawbacks of the TAI-2002 index was that it did not lend itself to

comparison over time. This was because the maximum value for any variable is not

fixed and can change over time. We, however, are not only interested in where

emerging markets stand in the pecking order of technological development, but also

in how much they have been able to improve over time. As a result, we have

modified the way the index is calculated to make it comparable over time,

recalculating it for the years 2000 and 2012. To do this, we have taken the observed

maximum value for both 2000 and 2012 as the maximum value of each variable in

2012 (under the general assumption that there has been progress on each of these

factors over the last decade).

TAI measures capacity to create

and use technology and not the

technological prowess of a country

Our updated index differs from the

TAI 2002 in a couple of ways

Special Report

19 January 2015 110

This index still has its limitations and should be used only as an indicative guide of

what is happening across a broad range of countries. For some countries we have

had to make assumptions about developments on a variable if data was not

available. These have included assuming that the data is close to that for the nearest

year for which data is available or assuming that the data is similar to that of another

comparable country for which data is available. We believe these assumptions are

reasonable, but they could distort the picture.

At the same time, this index assumes that a higher number is better in most cases.

This can be fallacious as it does not take into account possible efficiency gains. For

example, lower use of electricity per capita might reflect more efficient use of

Figure 97: Technology Achievement Index 2012

Index and actual values

Country

Royalties Patents Electricity Telephone Internet use High-tech exports

Mean schooling Tertiary

enrolment

Index Actual Index Actual Index Actual Index Actual Index Actual Index Actual Index Actual Index Actual

SG 1.00 2343.1 0.31 97.0 0.88 8404.2 0.93 192.0 0.77 73.0 0.93 45.3 0.75 10.2 1.00 41.4

KR 0.06 144.6 0.49 151.2 0.91 10161.9 0.91 172.6 0.89 84.8 0.53 26.2 0.90 11.8 0.85 35.2

US 0.04 82.2 1.00 308.8 0.96 13246.3 0.88 137.8 0.89 84.2 0.36 17.8 1.00 12.9 0.38 15.8

JP 0.06 132.0 0.92 284.9 0.86 7847.8 0.91 165.6 0.91 86.3 0.35 17.4 0.87 11.5 0.44 18.1

DE 0.07 172.3 0.40 123.9 0.84 7081.0 0.92 177.9 0.89 84.0 0.32 15.8 1.00 12.9 0.78 32.3

GB 0.07 153.6 0.21 64.8 0.80 5472.1 0.92 176.6 0.95 89.8 0.44 21.7 0.94 12.3 0.54 22.2

SE 0.08 197.0 0.45 138.1 0.97 14030.2 0.91 165.0 1.00 94.8 0.27 13.4 0.89 11.7 0.23 9.3

AU 0.06 141.2 0.22 68.9 0.92 10712.2 0.89 151.2 0.88 83.0 0.26 12.7 0.99 12.8 0.46 19.0

MY 0.02 41.3 0.02 5.6 0.75 4246.5 0.90 159.9 0.71 67.0 0.89 43.7 0.68 9.5 0.56 23.0

CA 0.10 228.7 0.39 119.6 1.00 16473.2 0.87 128.1 0.91 85.8 0.25 12.4 0.94 12.3 0.00 -

HK 0.10 230.8 0.32 98.6 0.81 5948.9 1.00 301.7 0.78 74.2 0.33 16.2 0.73 10.0 0.00 0.0

AE 0.00 0.0 0.01 1.6 0.90 9388.6 0.93 194.2 0.93 88.0 0.00 0.0 0.64 9.1 0.57 23.4

CL 0.01 27.1 0.00 1.1 0.72 3568.1 0.89 152.5 0.70 66.5 0.09 4.6 0.71 9.8 0.57 23.5

MX 0.00 0.0 0.00 0.8 0.62 2091.7 0.83 102.7 0.46 43.5 0.33 16.3 0.58 8.5 0.77 32.0

SA 0.00 0.0 0.00 0.9 0.87 8161.2 0.93 192.9 0.64 60.5 0.00 0.0 0.60 8.7 0.51 21.1

RU 0.01 29.0 0.00 1.3 0.83 6486.0 0.92 181.3 0.65 61.4 0.17 8.4 0.89 11.7 0.00 -

AR 0.01 33.0 0.00 1.1 0.68 2967.4 0.92 182.3 0.63 59.9 0.15 7.7 0.71 9.8 0.22 9.1

PH 0.00 4.6 0.00 0.3 0.40 647.0 0.84 107.7 0.39 37.0 1.00 48.9 0.62 8.9 0.00 -

CN 0.00 8.3 0.00 1.2 0.70 3298.0 0.84 108.0 0.48 45.8 0.54 26.3 0.49 7.5 0.00 -

ZA 0.01 33.6 0.01 2.5 0.76 4603.9 0.90 156.6 0.52 48.9 0.11 5.5 0.72 9.9 0.00 -

TR 0.00 5.2 0.00 0.4 0.67 2709.3 0.85 111.1 0.49 46.3 0.03 1.8 0.50 7.6 0.42 17.5

BR 0.01 13.0 0.00 0.7 0.65 2438.0 0.90 157.6 0.54 51.6 0.21 10.5 0.46 7.2 0.00 -

VE 0.01 12.4 0.00 0.5 0.70 3312.7 0.87 127.2 0.58 54.9 0.00 0.0 0.59 8.6 0.00 -

TH 0.01 33.2 0.00 0.5 0.64 2316.0 0.89 147.0 0.30 28.9 0.42 20.5 0.47 7.3 0.00 -

ID 0.00 6.7 0.00 0.1 0.41 679.7 0.88 137.6 0.17 15.8 0.15 7.3 0.49 7.5 0.39 16.1

EG 0.00 3.4 0.00 0.1 0.58 1742.9 0.87 129.8 0.52 49.6 0.01 0.6 0.39 6.4 0.00 -

VN 0.00 0.0 0.00 0.0 0.49 1073.3 0.88 141.0 0.46 43.9 0.02 1.0 0.30 5.5 0.00 -

GH 0.00 0.0 0.00 0.0 0.28 343.7 0.84 109.2 0.13 12.3 0.15 7.3 0.44 7.0 0.00 -

KE 0.00 0.5 0.00 0.1 0.14 155.0 0.78 71.1 0.41 39.0 0.00 0.0 0.38 6.3 0.00 -

IN 0.00 1.6 0.00 0.5 0.41 684.1 0.78 73.1 0.16 15.1 0.13 6.6 0.20 4.4 0.00 -

NG 0.00 1.4 0.00 0.0 0.13 148.9 0.78 73.5 0.40 38.0 0.03 1.9 0.27 5.2 0.00 -

PK 0.00 0.5 0.00 0.0 0.33 449.3 0.78 73.6 0.11 10.9 0.03 1.7 0.23 4.7 0.00 -

BD 0.00 0.1 0.00 0.0 0.23 258.6 0.77 67.8 0.07 6.5 0.00 0.0 0.26 5.1 0.08 3.3


Special Report

19 January 2015 111

electricity and not just unavailability of electricity. But it was difficult to incorporate any

meaningful measure of efficiency gains in the index. Despite these limitations, the

index is a useful way of summarising the improvement in different countries over the

last decade and the areas that need further improvement.

We include the actual data for 2012 and the index values used for calculating the

overall score of the index (Figure 97), along with a heatmap of how the country ranks

on each of the four measures of technology achievement compared to its GDP per

capita rank (Figure 98). Sub-Saharan African countries, in particular Uganda and

Kenya, stand out as creating technology and diffusing new technology at a level

much higher than would be expected given their GDP per capita rank. In Asia, China

and the Philippines are performing better than their GDP ranks would suggest, while

Korea, Japan and the UK show that technological advances can be made even at a

more developed income levels. Countries in the Middle East have to do more to

ensure that technological progress is in line with relatively high income levels.

Figure 98: Performance on 2012 TAI ranks relative to GDP per capita rank

Ranks out of 34

Country

Current GDP per capita

TAI Index Creation of technology

Diffusion of old

technology

Diffusion of new

technology

Human Skills

SG 1 1 1 8 1 13

AE 2 18 20 4 15 25

US 3 2 2 3 9 1

HK 4 11 8 7 13 14

SA 5 15 23 9 21 16

AU 6 6 9 6 12 3

DE 7 7 7 11 10 5

SE 8 5 5 1 7 6

CA 9 8 6 2 11 8

FR 10 10 11 12 6 11

JP 11 4 3 10 8 9

GB 12 9 10 14 4 7

KR 13 3 4 5 3 2

RU 14 13 14 13 16 4

MY 15 12 12 16 2 17

CL 16 14 16 17 17 10

TR 17 21 21 22 26 15

VE 18 17 19 18 24 12

MX 19 23 25 24 18 21

BR 20 24 17 19 19 23

TH 21 20 15 21 20 18

ZA 22 22 13 15 22 19

CN 23 19 18 20 14 24

EG 24 25 27 23 25 26

ID 25 26 22 26 30 22

PH 26 16 24 27 5 20

NG 27 31 29 34 28 30

IN 28 30 26 28 31 29

VN 29 27 32 25 27 28

PK 30 33 30 30 33 34

GH 31 29 32 29 32 27

BD 32 34 34 32 34 31

KE 33 32 28 33 29 33

UG 34 28 31 31 23 32

Source: GITR 2014, IMF, Standard Chartered Research

Note, Colour coding based on difference between rank on TAI indicator and GDP per capita

Dark green: relatively much stronger, yellow: in line with GDP per capita rank, dark red: relatively much weaker

SSA countries rank better on the

TAI than their GDP rank suggests

as do China and the Philippines

Special Report

19 January 2015 112

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