Last year, the Fletcher School of Law and Diplomacy at Tufts University published Digital Planet: Readying for the Rise of the e-Consumer. The report, – based on a research study by the Fletcher School in collaboration with MasterCard*, – explores the economic transformations taking place around the world as countries continue their evolution toward the 21st century digital age.
The report introduces the Digital Evolution Index, which was created to quantify the unique digital journey being pursued by each of 50 advanced and developing countries, to measure the rate of change of their digital evolution, and to provide information-based insights to companies, investors and governments. The Index is based on four key underlying drivers:
- Supply Conditions: How developed are the digital and business infrastructures? Measurements include available bandwidth, access to digital content, security of transactions, business use of IT, consumer financial services, and quality of roads.
- Demand Conditions: Are consumers willing and able to transact in the digital environment? Measurements include consumer income, consumption, demographics, broadband and mobile Internet use, social media usage, and digital financial and payment services.
- Institutional Environment: Are government policies and regulations facilitating the creation of digital ecosystems? Indicators include political stability, rule of law, corruption, investment and trade regulations, ease of doing business and e-government services.
- Innovation and Change: What is the extent of innovations to enable a healthy digital economy? Indicators include investment in digital ecosystems, business focus on customer service, adoption of new technologies, ease of creating startups, and venture capital availability.
For each of the 50 countries, the report calculated a score for the 4 different drivers as well as an overall Index score. Singapore had the highest overall score, followed by Sweden, Hong Kong, the UK, Switzerland and the US. In addition, the study analyzed the rate of growth, – positive or negative, – of each country’s index score by looking at its 5-year change between 2008 and 2013. China had the largest increase in its index score, followed by Malaysia, Thailand, South Africa, Mexico and Colombia. The Netherlands had the largest index score drop, followed by the Czech Republic, Finland, Belgium, France and Hungary.
To better understand each country’s digital evolution, the study created the Digital Trajectory Chart, a 2×2 chart where the vertical axis represents the country’s current index score and the horizontal axis the score’s 5-year rate of change. Based on its current index score and how it changed over the years, each country was then assigned to one of four distinct evolution zones: Watch Out, Break Out, Stall Out and Stand Out.
- Stand Out countries have a high digital evolution score reflecting their high level of digital development while remaining on an upward trajectory toward the future. Sustaining high improvement rates at this level of development requires continuos innovation and market expansion. Singapore, Hong Kong, South Korea, Switzerland and the US are among the top performers in the Stand Out zone.
- Stall Out countries have achieved a high level of digital development but are losing momentum and risk falling behind. Several countries in Northern and Western Europe can be found in this evolution zone, reflecting Europe’s slow recovery from the 2008 financial crisis.
- Break Out countries have low current digital development scores, are improving rapidly and have the potential to grow into strong digital economies. While well poised to becoming Stand Out countries in the future, they must overcome a few key limitations, including improvements in their infrastructure, development-oriented government policies and stronger consumer demand. Malaysia, China, Chile and South Africa are among the prime candidates to move up to the next level.
- Watch Out countries, – e.g., Indonesia, Russia, Nigeria, Egypt, Kenya, – have low digital development scores and low rates of improvement. While having opportunities to improve, they face significant challenges. Some of these countries are overcoming their limitations with clever innovations, while others seem to be making little progress or are falling further behind.
The report includes a number of insights based on the digital evolution data and the distinct patterns of each evolution zone.
The Rest evolve differently from the West. This is the study’s overriding conclusion. Their research shows that each emerging economy is charting its own distinct digital trajectory. “[T]here is very little about the digital past and present of the West that instructs us about the digital present and future of the Rest.” Part of the reason is that the digital evolution each country follows is a non-linear, highly complex interplay of its four underlying drivers, – demand, supply, institutional environment and innovation, – and their various elements.
Neighborhoods matter. While each country is pursuing its unique digital trajectory, its trajectory will likely be similar to that of their geographic neighbors, since they tend to exhibit similar cultural and social norms, as well as similar political and economic environments. In Europe, for example, the Nordic countries follow analogous trajectories, fairly distinct from the trajectories of Central and Southern countries. The trajectories in the countries in East Asia are also similar, as are those of regional clusters in South America and Africa.
Innovative hybrids. The thriving e-commerce models in advanced economies are close associated with strong electronic payments and transaction networks, which enable consumers to pay for their online purchases with credit, debit or prepaid cards. But in a number of emerging economies, e-commerce and financial transactions are growing based on cash-on-delivery, because electronic payment networks are not as well developed, and a large percentage of their populations is unbanked and must therefore deal in cash.
For example, “India, Indonesia and Colombia all have high cash dependence and indeed preference, yet digital marketplaces in these countries have been innovating at a remarkable pace. E-commerce players are simply working with and around the persistence of cash… By contrast, fast-moving China is embracing digital money.”
Attractive demographics. Some of the countries in the Breakout Zone are among the world’s most populous nations, – e.g., China, India, Mexico, Indonesia, Brazil and the Philippines. As a result, their economic potential is very large. However, the study found that the potential in a number of these fast-evolving economies is largely untapped. The bulk of investments in these countries’ digital economy is going to the most populous nations like India, China and Brazil, while the relatively smaller countries, – e.g., Philippines, Chile, Colombia, Thailand and Malaysia, – are receiving much lower investor interest.
Institutional Environment. This is the key reason why the advances economies of the West have such high digital evolution indices. “Countries such as Singapore, Sweden, the United States, the Netherlands, Germany and Japan have all promoted competition and innovation and made many government services available online.” Institutional environment is also a key differentiator in the digital trajectories of different emerging economies. “Policy and regulatory environments that promote rather than restrict the digital economy are a competitive advantage: Chile, Malaysia, and Estonia are reaping the benefits of their forward-looking governments. By contrast, the lack of effective institutions can stymie the growth potential of e-commerce in some of the biggest emerging economies, including China, India, and Brazil.”
Finally, the Fletcher School-MasterCard study offers its overall conclusion for each of the four distinct group of countries.
- Stand Out countries: “Sustaining upward trajectories at this level is difficult. To remain Stand Out markets, these countries need to continue to fast-track innovation and seek markets beyond their borders.”
- Stall Out countries including most Western and Northern European countries, Australia and Japan. “The only way they can jump-start their recovery is to follow what Stand Out countries do best: redouble on innovation and continue to seek markets beyond domestic borders.”
- Break Out countries such as India, China, Brazil, Vietnam and the Philippines: “The greatest challenges to growth and opportunities for improvement in the medium term in these markets lie in improving supply infrastructure and in nurturing sophisticated domestic consumers.”
- Watch Out countries, – home to 2.5 billion people: “These countries expend a lot of energy innovating around institutional and infrastructural constraints. Unclogging these bottlenecks would enable these countries to direct their innovations where they matter most.”
“The Internet has come of age… the emerging world is leapfrogging toward mobile phones at an astonishing pace, opening more avenues to Internet adoption… This has profound implications for the future of global commerce. Where the future e-consumers will come from, who they are, what they are like and how they will shape the digital marketplaces of the future are questions of great importance to businesses and investors globally. The answers depend on how governments, businesses and consumers co-evolve to face the challenges and opportunities of the digital future.”
* I’ve been an adviser to MasterCard since March of this year.