Factors holding back the development of the digital Internet are in fact inhibiting wider-economic growth and business success.
In 2014, the Boston Consulting Group (“BCG”) investigates the sources of “e-friction”, i.e. those factors that hamper online exchange and retard digitally driven economic growth. BCG includes four types of friction as part of its e-Friction Index. First, infrastructure-related friction, which is most significant, limits basic access to the Internet. Second, industry-related friction holds back digital business development. This can include for example shortages in capital and skilled labour. Third, individual friction affects the ability of consumers to participate online. Examples of this can include the absence of online payment systems and data security. Finally, information-related friction pertains to, for example, the volume of content available in a local language and a country’s policies relating to Internet and data openness.
BCG reports a number of findings relating to differences in the levels of friction between countries. They find that the digital economy contributes a higher share to the overall economy in those countries with low friction relative to countries with higher friction. In particular, the Internet economy of a country placed in the top quintile of the BCG e-Friction Index is more than twice as large as a percentage of GDP than that of a country in the bottom quintile, on average. As such, it is suggested that high friction countries could benefit from improved economic growth and job creation if such barriers were reduced.
Countries with the lowest e-Friction Indices tend to fare well in minimising all four types of frictions. They boast high investment in digital infrastructure, enjoy a balanced regulatory environment and are supportive of new business development and expansion. In contrast, those countries with poor e-Friction scores tend to face problems relating to basic access to the Internet, broadband speeds and prices, capital and labour shortages, and technologies facilitating consumers’ ability to conduct business online.
BCG also claims that a reduction in e-friction can enhance the performance of SMEs in the digital economy. Those SMEs that conduct more of their business online are almost 50% more likely to reach consumers outside of their located region, and 62% more likely to source products and services from farther regions, as compare to those SMEs who use the Internet less frequently. SMEs face a number of additional sources of friction relative to large businesses, including the protection of consumer data online.
It is noted that most current sources of friction originate at a local level. Policymakers can make great strides in reducing e-frictions through a few key areas, enhancing utilisation of the Internet and the growth of Internet economics. For instance, policies should promote investment, particularly in infrastructure. Policies should also be careful to take into account the rapid speed at which technologies evolve. Importantly, policies should as far as possible aim to address purely localised issues, as many simultaneous uncoordinated policies across countries can create new, unhelpful sources of friction.