Back in 2007, ACT worked with the Information Technology and Innovation Foundation (ITIF) to write a groundbreaking paper entitled National Policies as Platforms for Innovation: Reconciling a Flat World with Creative Cities.
The paper pointed out that “innovation is the ‘secret sauce’ for the growth and prosperity of economies,” with “economists generally
Illuminating the important role that national policies play in either stifling or enabling innovation, the paper emphasized that nations cannot recreate their own Silicon Valley without pro-innovation policies. Differences in innovation performance, the paper found, are largely due to different economic and legal policies countries implement at the national level.
Governments wanting to create an environment that promotes innovation and increases competitiveness must get certain policies right. The following three distinctly national policies play a particularly important role:
· Antitrust law: Markets need a sensible national competition policy – particularly one that does not frown upon the integration of innovations – so that a country’s economy can adapt to changing conditions
· Intellectual property rights: Intellectual property (IP) law creates incentives for innovation and provides legal mechanisms for protecting and monetizing intellectual assets
· International trade: Nations that open their markets to the forces of competition will see greater productivity and prosperity
We are pleased to see that a recent IDC study confirms many of the conclusions of our paper.
Like our paper, the IDC study finds that innovation is “essential for competitive, knowledge-based economies to succeed in the 21st century.” It moreover confirms the importance of national policies, particularly intellectual property law and our belief that countries that have innovation-based economies support both IP incentive and enforcement systems to maximize opportunities for local economic growth.
The study goes beyond our paper, however, by looking specifically at one highly innovative industry – the IT industry – and the contribution to economic growth it makes.
IDC finds that the contribution of the IT industry can hardly be overestimated:
· The IT industry will drive economic growth by creating nearly 6 million new jobs and 75,000 new companies in the next four years
· Total IT spending in 2009 will reach $1.4 trillion, or 2.6 percent of global GDP, and continue to grow at 3.3 percent (CAGR) over the next four years. By 2013, IT-sector spending is projected to account for 2.8 percent of global GDP.
· Employment in the IT industry and of IT professionals in IT-using organizations will rise by 5.8 million jobs by the end of 2013, up from 35.6 million this year. This represents a growth rate of 3 percent over the next four years, which is more than three times the growth rate of the overall (non-farm) labor force.
· The IT industry will also drive the creation of more than 75,000 new businesses between now and the end of 2013. More than 40 percent of these new companies will be in the Asia-Pacific region, although Latin America and the Middle East/Africa regions will experience the most rapid growth rates for new company formation of at least 2.5 percent over the next four years. Most of these companies will be small and locally owned.
· Together, employees and companies involved in the IT industry will pay nearly $1.2 trillion in taxes in 2009.
IDC moreover finds that the software industry plays a particularly valuable role within the IT sector. According to IDC, “[s]oftware is the key driver of IT sector growth, and offers even greater opportunities for economic recovery, growth, and development. In 2009 and beyond, the software sector will create jobs, generate revenues for local companies, and continue to drive innovation.”
IDC’s number show that the software industry does, indeed, make a huge contribution:
· The software industry has remained resilient to the economic recession. While the overall economy will contract 2.9 percent in 2009 and overall IT-sector employment has dipped a fraction of a percent, the software industry is expected to add 681,000 new jobs this year.
· Packaged software – operating systems, applications, and development tools – accounts for 21 percent of total IT spending. This spending will grow at 4.8 percent over the next four years, faster than overall IT spending.
· Because software can be more complex to sell, service, and support than hardware, dollar for dollar, software spending generates a higher level of downstream economic activity than spending in other sectors. This is why spending on software creates a disproportionate share of overall job growth; the 21 percent of IT spending on software drives more than half of all IT employment (51 percent).
· By 2013, the software industry will have created 2.9 million new jobs around the world. More than 2 million of these new jobs are expected to be outside of North America. For instance, software-related employment in both the Latin American and Middle East/African regions is expected to grow at more than 7.5 percent (CAGR) over the next four years.
· In addition to employment growth, the software industry will help create more than 75,000 new companies by 2013. The Asia-Pacific region will account for more than one third of all new software-related companies.
· Software-related tax revenue will increase to $771 billion in 2009, a 1.5 percent increase from 2008.
The study also emphasizes that Microsoft’s business model, which relies on nearly 700,000 local partners to help develop, distribute and service its products, plays an especially important role in benefitting the local economy. Out of the 35.6 million highly skilled people that are employed by the IT industry, 6.1 million people work at the 700,000 organizations that Microsoft partners with.
Moreover, more than two-thirds of the companies in the Microsoft ecosystem are small and medium-sized companies – and quite a few of them are ACT members. For them, it is good news that revenues generated by the Microsoft ecosystem remain in local communities: for every dollar of revenue made by Microsoft, local partners make $8.70.
The wider community benefits as well: In 2009, Microsoft’s partners will make $537 billion in revenue for themselves, and invest more than $179 billion in their local economies – in the development of local infrastructure, people, marketing, services and fresh innovations. Moreover, the Microsoft ecosystem will pay more than $489 billion worth if taxes around the world in 2009.
The IDC paper is a veritable treasure trove of interesting data. But there is one thing I would add. ACT is currently working on a paper describing software and hardware convergence, and from our work on that paper, it seems to me that the authors of the IDC study are forgetting something: software innovation can lead to huge increases in hardware sales. For example, in a different study, IDC projects that the release of Windows 7 will increase PC sales by 6.9 percent worldwide in the fourth quarter —even despite the slow economy. Likewise, industry experts predicted new computer sales would increase 10% when Vista was introduced in 2007.
What is more, the software industry – and the IT sector more generally – create performance and productivity gains for enterprises outside of the IT sector and their national and local economies. A recent study of the economy of my home country, Germany, found that “‘software-intensive industries have been the crucial determinant of German productivity growth since 1995. Not only did these industries contribute strongly to productivity growth, but they offset declining investments and productivities in other industries… Post 1995, other industries’ investments in new equipment per worker collapsed, while software-intensive industries’ capital investments rose steadily to generate over half of Germany’s productivity growth by 2000–04.”
Given the importance of the IT sector, and the software sector in particular, policymakers need to make sure they create the right environment for the sector to thrive. Investment in education (to make sure there is a skilled IT workforce), strong intellectual property laws, sensible competition regulations and open trade are central in achieving this goal.