Related Expertise: Telecommunications Industry , Public Sector, Digital, Technology, and Data
The U.S. likes to consider itself the leader of the digital world—and with good reason. Though other economies may have more advanced digital infrastructures (Sweden and Hong Kong are two examples), the Internet began as a U.S. invention, and most of the companies that have driven digital technology forward, while inventing all manner of new consumer uses, are based in the U.S. In the last decade, the U.S. has come from behind to establish a leadership position in mobile technology, and the U.S. mobile economy, which contributed $548 billion (more than 3 percent) to the country’s overall economy in 2014, is growing faster than 15 percent a year. Thousands of individual or small-company app-development entrepreneurs are based in the U.S. Most people are connected to the Internet at work, at home, and on the go. The U.S. digital economy rolled right through the Great Recession; it will contribute $1 trillion to national GDP in 2016, or 5.4 percent.
Immediate Internet access 24-7-365 has become so ingrained that most of us—including most companies—take it for granted. But as history has repeatedly shown, complacency can be a precarious state, especially when it involves such a critical capability.
The U.S. may lead, but the Internet is a global phenomenon, and it becomes more global every day as millions of new users in emerging markets come online. Twenty years ago, 61 percent of the Internet’s 35 million users were based in the U.S. Today, the U.S. accounts for less than 10 percent of the 3 billion connected people worldwide. There are now 650 million Internet users in China (compared with 280 million in the U.S.) There will be as many as 550 million connected consumers in India by 2018 (more than double the current number).
This is good news for U.S. businesses and the U.S. economy—assuming continued access to a single, cohesive network. With an estimated $1.6 trillion in exports in 2014, the U.S. is a major player in the global economy, and the Internet is a powerful driver of global trade. U.S. companies are increasingly able to use the Internet to sell more goods and services in international markets and to operate more efficiently thanks to global supply chains.
But there are as many impediments to digital trade as there are tariffs and physical barriers to the physical exchange of goods. Data localization laws requiring businesses to store data in the country where the data originates or the business is located are one example. Varying rules for digital intellectual property and different approaches to data privacy and protection are among the others.
The stakes are real, large, and long-term. Consider just three areas, each vital to the growth and vitality of the U.S. economy: manufacturing, small business, and services.
Manufacturing. Ask the CEO of just about any big manufacturing company, and he or she will tell you that a major part of the future lies in being connected. Heavy-equipment manufacturers, for example, manage the performance of their customers’ fleets by monitoring the operating metrics of their machines worldwide. Turbine manufacturers reduce downtime and power outages by monitoring their products globally. Multinational companies operating in hundreds of countries boost productivity by moving data across borders for R&D, production planning, human resources, and other purposes.
This interconnectedness is only set to grow as the so-called Industrial Internet becomes bigger and more economically significant. According to Cisco Systems, there were 500 million connected devices in 2003 and 12.5 billion in 2010; the number is expected to rise to 50 billion in 2020. But one key to achieving a truly global Internet of Things (IoT) is common standards of communication among all of these connected objects so that they can communicate and “understand” one another. Restrictions on cross-border data flows cause fragmentation and complexity that significantly complicate IoT deployment.
Even more important to U.S. manufacturing competiveness is the sea change that is under way in the scramble for competitive advantage. For the past few decades, this has largely revolved around finding new and abundant sources of low-cost labor. But with wages rising rapidly in emerging markets, manufacturers are under intensifying pressure to gain advantage the old-fashioned way: by improving their productivity. Technological development is likely to be the catalyst for the next wave of manufacturing-productivity-gains.
This development, which some refer to as Industry 4.0, is characterized by cyberphysical systems and dynamic data processes that use massive amounts of data to drive smart machines. These tools offer a range of benefits that, taken together, could redefine the economics of global-manufacturing competitiveness in a number of industries. In a recent survey of U.S.-based manufacturing executives at companies with sales of at least $1 billion, 72 percent of respondents said that they will invest in additional automation or advanced-manufacturing technologies in the next five years. Only 10 percent said that they are unlikely to do so. (See “Why Advanced Manufacturing Will Boost Productivity,” BCG article, January 2015.)
Small Business. It is often noted that small and medium-sized enterprises (SMEs) are the job growth engine of the U.S. economy; indeed, they have accounted for 60 percent of net job gains since the end of the recession. SMEs vary widely in their adoption and use of technology. Our research shows that technology leaders far outperform their peers in the marketplace in terms of growth in both jobs and revenues—12 percent job growth a year in the U.S. compared with 1 percent and 14 percent annual revenue increases versus 3 percent.
The technology leaders are almost all online—88 percent have broadband connections, and two-thirds use mobile devices. Leaders told us that technology-enabled collaboration has become key to how they compete against larger companies. As one custom-handbag manufacturer put it, “Technology lets me reach my customers in real time. Technology lets us be unique, personal, and friends with our consumers without ever meeting in person.”
Technology leaders are bigger exporters too—they are far more likely than other SMEs to have customers outside their home countries. More than a third of leaders have international customers, compared with only 7 percent of laggards. Data from eBay shows that 94 percent of small commercial sellers engage in export and that, on average, each exports to 19 countries. BCG estimates that increasing the number of SME technology leaders could create more than 2 million jobs and add more than $350 billion to the U.S. economy. (See Lessons on Technology and Growth from Small-Business Leaders, BCG report, October 2013.)
Services. Services, and especially digitally deliverable services, are big sources of exports that help reduce the nation’s trade deficit. In 2014, the U.S. had a trade deficit in goods of $741 billion. Services are a different story: the trade surplus increased by 4 percent in 2014 to $233 billion. Not enough to compensate for the widening deficit in goods, but good news all the same.
The news gets better: analysis by the U.S. Department of Commerce shows that the U.S. exported $400 billion in digitally deliverable services in 2014, an increase of 12 percent since 2011. This represented 56 percent of all U.S. service exports and about 17 percent of total exports. The U.S. imported $241 billion in digitally deliverable services, an increase of 7 percent since 2011, representing half of U.S. service imports and about 8 percent of total imports. The U.S. had a trade surplus in digitally deliverable services of $159 billion, up 19 percent on 2011—and representing almost 70 percent of nation’s service trade surplus.
The U.S. has a competitive advantage in service exports, particularly in high-wage, high-skill services. Services that SMEs are more likely to export include those that are knowledge intensive, such as professional, scientific, and technical services. Research conducted by the Organisation for Economic Co-operation and Development shows that service-exporting SMEs not only pay higher wages than SMEs in the manufacturing sector but also have higher survival rates.
U.S. service exports accounted for 4.2 million jobs in 2013, and there is significant scope for expansion. While 25 percent of U.S. manufacturing companies are exporters, only 5 percent of service businesses are engaged in international trade. The Internet provides them with an ideal platform for more exports and further growth.
In each of these areas, U.S. companies take advantage of a single global Internet that connects companies, customers, suppliers, partners, and others wherever they happen to be. But suppose for a moment the connection was broken. Suppose that instead of one global network, there were several, each with its own rules and protocols, each requiring permission to join or make use of it. Consider how quickly just the fragmentation of the network would slow things down, add costs, slow productivity gains, and reduce growth in GDP and jobs.
Lowering barriers to Internet usage within a country—we call these barriers e-friction—fuels national economic growth as well as exports and trade. (See Which Wheels to Grease? Reducing Friction in the Internet Economy, BCG Focus, May 2015.) Reducing barriers to cross-border data flows—and avoiding the erection of new ones—is critical to the continued operation of the Internet as a platform for commerce, employment, and growth.
These are big issues and concerns in continuing multilateral negotiations, including major trade deals such as the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership. They are also factors in the transition of oversight of the Internet Assigned Numbers Authority (IANA), whose naming protocols help maintain the orderly operation of the Internet, from the U.S. Department of Commerce to a multinational, multistakeholder organization, the exact nature and makeup of which are currently being debated.
The Commerce Department has overseen IANA under a no-fee contract with its administrator, the Internet Corporation for Assigned Names and Numbers (ICANN), since 1999. However, Internet policies themselves are developed by global citizens in a broad community that includes businesspeople, academics, technology experts, and representatives of civil society. In fact, the Internet’s success has long been based on this model of open, participatory, and nimble policy development. The successful privatization and globalization of the IANA functions will mitigate the risk of cyberborders being erected and maintain the Internet as a global platform for communication, commerce, and innovation.
As the negotiations over trade and Internet administration play out, U.S. companies of all sizes and in all industries have a big interest in maintaining their ability to take full advantage of expanding interconnectedness. The right policies can further U.S. competitiveness. They can also incentivize investment in next-generation technologies and promote adoption of new technologies and applications among businesses and consumers. Policies that create uncertainty or confusion among businesses and consumers can have the opposite effect.
To make sure U.S. companies and consumers continue to have access to the Internet’s transformational capabilities, both government and private-sector leaders need to stay engaged in the Internet’s long-term evolution—or risk ceding influence to others that are pursuing their own agendas. U.S. companies in particular, which have much to gain and potentially even more to lose, need to take their seat at the table.