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CHAPTER 1
Accelerating growth
Digital technology creates opportunities to accelerate
growth, but these are often missed because firms
in sectors where technology’s impact is greatest are
frequently protected from innovative competitors.
Firms that face more competition use digital technology
more intensively and effectively—it enables them
to reduce their costs to outperform their competitors.
But firms in developing countries do not necessarily
have the incentive to adopt new technologies to
increase their cost effectiveness because they are
often protected from domestic or foreign competition.
And it is precisely in protected sectors such
as retail and wholesale trade, finance, transport, or
public utilities where digital technology can increase
productivity the most. Harnessing those opportunities
thus requires policies that lower the barriers to
competition and market entry, in addition to investments
in infrastructure and skills. Only then will
firms use new digital technologies more intensively
and effectively—and only then will countries avoid
falling behind.
Firms across the world are becoming more connected.
For instance, the share of firms with at least
five employees using broadband internet in lowermiddle-income
countries rose from 39 percent to 68
percent from 2006–09 to 2010–14. And the growth
rates and valuations of internet firms across the
world are surging. Less visibly, but more importantly,
digital technologies have transformed traditional production
structures, facilitating new, more cost-effective
processes. Indeed, the vast majority of efficiency
gains emerge outside the information and communication
technology (ICT) sector, where firms use the
internet to sell and market their products online or
share real-time information with suppliers to minimize
their inventory and with customers to optimize
their services.
The impact of digital technology on economic
growth is mediated through three mechanisms—
inclusion, efficiency, and innovation. It promotes
the inclusion of firms in the world economy by
enabling more firms to trade new products to new
destinations. For instance, firms selling their goods
online through Alibaba, China’s leading e-commerce
company, are smaller and younger and export more
products to different destinations than firms selling
offline. It raises efficiency by allowing firms to make
better use of their capital and labor. For instance, realtime
data help equipment manufacturers in China
turn over their inventory stocks five times faster than
suppliers not connected to the internet. It enhances
innovation by enabling firms to exploit scale effects
through online platforms and services that compete
with conventional business models in retail, transport,
lodging, and banking, to name a few. These three
mechanisms thus boost growth by expanding trade,
increasing capital and labor utilization, and intensifying
competition (figure 1.1). 1
But the benefits are neither automatic nor assured.
Despite great opportunities, firms’ use of digital
technologies differs substantially across countries
due to variations in skills and infrastructure and in
barriers to competition and market entry. Competition
from China induced firms in member-countries
of the Organisation for Economic Co-operation and
Development (OECD) to adopt new technologies to
escape the competition from low-cost producers,
accounting for 15 percent of their investment from
2000–07. Manufacturing firms in Mexico responded
to higher competition from low-cost Chinese producers
in the domestic and the U.S. (export) market
by using digital technologies more intensively and
productively. Manufacturing firms in Brazil facing
an increase in competition are more likely to invest
in e-commerce systems. Firms in Africa facing an
increase in competition are more likely to use the
internet to market their products or to manage their
inventories. Firms’ use of digital technology also