Digital Evolution Index The Next Billion Consumers Move Onto the Global Stage Demand Supply Institutions Innovation Presented by MasterCard, DataCash and The Fletcher School at Tufts University 1
SINCE MASS MARKET ADOPTION IN 1993, all things Internet have grown at an astonishing speed. Internet usage has spiked from 14 million global users in 1993 to its current count of 2.9 billion, a compound annual growth rate of 30 percent. It took the Internet 12 years to gather its first billion users, and a third of that time to amass its third billion. Meanwhile, the emerging world is adopting mobile phones at an astonishing pace, opening more avenues to Internet adoption. Broadband subscriptions on mobile phones, now 34 percent of global mobile phone subscriptions, have tripled since 2008. The next billion Internet users, logging on in an era of near universal mobile connectivity, offer promise of greater economic growth and increased business opportunities. The next billion users fully 25 percent of the current total will come from the 60 percent of the global population still not digitally connected. The next billion users will also in large part depend on individual countries readiness for new users, and on those markets having infrastructure and policies successfully in place to meet the challenges and opportunities of the digital future. To measure this trajectory of individual countries, MasterCard Global Insights and the Fletcher School at Tufts University have launched The Global Digital Evolution Index (DEI). The DEI methodology measures the current ability of 50 countries to deliver on consumer demand and business supply, governmental policy and the innovation climate. In addition to the current state, it measured the trajectory of these drivers 2008 through 2013. The Index maps countries journeys, and measures the rate of change in digital evolution across the globe, providing actionable, data-informed insights for businesses, investors and policy makers. It defines the consequences of the interplay between consumer demand, commerce infrastructure, government policy and environment for innovation. For example, it found that demand cannot sustain a digital ecosystem alone, and institutions have mattered greatly during the past five years. Vietnam ranks seventh on the overall DEI. Look specifically at its changes in consumer demand and you ll find the same ranking. However, its government support has been lacking and is not evolving with demand. From 2008 to 2013, Vietnam ranks 43rd in institutional environment. The team at the Fletcher School created the Index by building an analytical framework with data sets from public and private sources to help recognize patterns and make sense of the evolving global digital landscape. The analysis of the years spanning from 2008 to 2013 allows for pattern recognition based on digital readiness progress. From that, longitudinal perspective yields insights into what the digital future of the countries covered could potentially look like, where the next billion digital habitants could likely come from, and how they might shape the digital marketplaces of the future. The research shows that there is very little about the digital past and present of the West that instructs us about the digital present and future of the emerging East and South. Most of the developed nations have high supply and demand scores, but their current innovation scores are relatively low. The eastern countries are developing supply and demand and conversely have high innovation scores. Part of the interest of the DEI s findings is that no grand pattern of linearity can 2
be found in the digital readiness journey, where countries move from being a Watch Out nation (challenged) to a Stall Out (static) nation after a stint as a Stand Out (fast-moving) nation. This picture of unique national digital personalities makes it clear that big events and big players will not drive digital evolution as much as a significant series of small changes. The elements of supply, demand, institutions and innovation must all work together to create a sustainable rate of change. On the basis of those four drivers, Singapore and some of the developing nations lead the current rankings for digital evolution. But when these four drivers are measured in terms of trajectory (fastest moving) digital economies, China, Malaysia and Thailand lead that index. The four drivers define digital market conditions in a country Demand covers consumer income and demographics as well as Internet usage. Here the leaders are North America and Western Europe. Supply focuses on technology and transaction infrastructure, i.e., can the country s infrastructure support digital commerce and the fulfillment of ecommerce transactions? Russia, Brazil and China, for example, have challenges here. Institutions account for government policy and access to trade. Northern and Western European nations lead on the quality of institutions. Innovation rates the environment for creating start-ups and the overall competitive landscape. Malaysia, for example, is very strong in this area. Using the four drivers as high-level guides, the DEI layers a quadrant matrix to visualize the trajectory. The Break Out countries (lower right quadrant) are rapidly advancing their digital readiness. Stand Out countries (upper right) have historically moved at a high level of digital readiness, and are maintaining that rate and growth. The Watch Out countries (lower left) have challenges but significant upsides for business investment. These last include Egypt, Kenya, and Nigeria. Stall Out countries are highly evolved, but because of that evolution their rates of change are minimal or even static. 3
Evolution Lower Scoring Higher Scoring Decrease in score over time Increase in score over time Stall Out markets are losing momentum. While these countries have achieved a high level of development in the past, they run a serious risk of falling behind. Stand Out markets have historically registered high levels of digital readiness, and continue to remain on an upward trajectory. Achieving both a high improvement in scores over time and a high score in the current year is very difficult for countries to sustain. Watch Out markets face both significant opportunities and challenges. They are like bumblebees - their performance, especially in overcoming limitations, defies conventional logic. Highly volatile, ergo watch out. Break Out markets have the potential to develop strong digital economies. These countries have displayed a consistently impressive upward trajectory in improving their state of readiness and are well poised to break into the Stand Out ranks in the years to come.
The DEI illustrates some significant global trends and some surprises, while also identifying some fascinating examples of digital market growth patterns in many countries. Among the 50 countries measured, China, Malaysia and Thailand are the fastest moving digital economies. Asian countries accounted for six of the top 10 spots. The study also found a duality between overall readiness and a lack of growth among Western European countries. In terms of overall rankings (a composite score of the current state of Demand, Supply, Institutions and Innovation), Singapore, Sweden and Hong Kong ranked one, two and three. As global unrest continues to roil the Middle East and former Soviet republics, it is no surprise that the DEI found that political and economic turmoil may be damaging to digital readiness. The two drivers that can be most affected by instability are institutions and innovation. When it comes to digital readiness, the Index showed conclusively that institutions matter. For example, instability in the Middle East and the sanctions on Russia might impact those markets momentum adversely in 2014. The pace of reform in India and Indonesia following elections will play a role in determining their trajectories, leading them either further into Break Out territory or relegating them to watch out status yet again. Latin American countries show promise spurred by innovation, but institutional and supply issues surface with social and civil unrest. They are also affected by economic uncertainty that affects supply and demand. Hybrid solutions are enabling the creation of vibrant new digital marketplaces in countries that often don t make it to multinationals short lists when seeking new markets. Tablet-toting salespersons where access is patchy and delivery personnel using customer contact at the doorstep doubling up as salespersons offer an opportunity to cross-sell or up-sell. Companies could be missing opportunities if they ignore such trends and the markets where they can be found in motion. As the next billion consumers enter the digital realm, whether they cross the digital Rubicon will be a function of the vigor and vibrancy of the digital ecosystems around them. 5
Five countries in particular show how the DEI defines the individual stories and conditions that drive digital evolution. Estonia: Here the government is proactive in digital education. In fact, public schools teach first graders coding skills. There is free WiFi in most areas of country, with more than 900 hotspots. E-voting, e-payments for public transport and online banking are enabled through a single ID card. Mexico: 75 percent of all households have access to mobile phones and retail ecommerce sales represent 31.5 percent of all business-to-consumer sales. Most developed countries average around 10 to 12 percent. Nigeria: Only 8.1 percent of the population has access to personal computers, but mobile penetration is 94 percent. Innovation is active with a 674 percent increase in capital investments from 2008 to 2013. Netherlands: Internet penetration is 92 percent and ecommerce is strong. 46 million online orders were placed in 2013, a 10 percent increase from 2012. It maintained a top two ranking under the Supply driver in the Index from 2008 to 2013. Malaysia: There has been a 310 percent growth in the smartphone market with government subsidies for young, low-income consumers. Digital growth could yield large dividends due to proximity to ASEAN markets such as Indonesia, the Philippines and Singapore. Malaysia is one of the fastest moving countries on the index: Its score under the Innovation pillar increased by 42 percent from 2008 to 2013. 2013 Rank Demand Supply Institutions Innovation Estonia 24/50 19 26 11 32 Mexico 37/50 42 40 39 22 Nigeria 50/50 49 50 45 48 Netherlands 10/50 4 1 10 30 Malaysia 23/50 38 25 15 9 6
Conclusion The DEI is a dynamic, comparative framework that yields insights on a rapidly digitizing world. Businesses will always seek out opportunities to fill the gaps between supply and demand and this is where they have the highest leverage and payoffs in the short run. It is their ability to innovate and navigate institutional constraints areas where their leverage is lower and the payoffs distant that will determine their success in the long run. The report identifies the following opportunities embedded in the patterns revealed by the DEI: Break Out and Watch Out markets such as South Africa, Indonesia, Vietnam and Mexico have registered the highest gains in demand during 2008-2013, yet face significant limitations in supply conditions. China s tilt toward greater consumption and India s improving supply infrastructure will, in the near term, create significant investment opportunities, given adequate institutional support. The increasingly integrating ASEAN economies, with their similar trajectories and more than 600 million consumers, are as compelling as India and China as candidates for digital commerce investments. ASEAN s integration and tariff harmonization is poised to generate opportunities for the creation of regional marketplaces and integrated delivery networks. Taking advantage of increased regional integration by selling across national borders to the 500-plus million consumers in the wider EU could help jump-start these Stalling Out economies. 7
Full Rankings 2013 Countries ranked on 2013 composite total scores across four drivers of Demand, Supply, Institutions and Innovation. Country Rank Index Score Supply Demand Institutional Innovation Singapore 1 56.21 64.40 49.08 37.23 74.11 Sweden 2 55.23 60.51 54.16 35.61 70.66 Hong Kong 3 53.52 66.15 45.81 32.27 69.88 United Kingdom 4 53.41 62.83 57.12 31.99 61.70 Switzerland 5 53.32 66.58 50.61 32.03 64.05 United States 6 51.79 58.17 49.79 30.39 68.80 Finland 7 51.49 67.28 52.36 32.75 53.59 Canada 8 51.17 56.15 48.54 33.14 66.86 South Korea 9 50.63 59.68 52.41 26.02 64.39 Netherlands 10 49.86 70.16 53.56 31.22 44.51 Denmark 11 49.03 57.05 49.35 30.76 58.98 Australia 12 48.14 51.51 50.01 29.71 61.34 Germany 13 47.18 60.51 43.61 27.38 57.22 Norway 14 47.04 52.51 53.72 33.31 48.61 New Zealand 15 46.26 46.72 46.41 32.77 59.13 Ireland 16 45.81 43.76 43.96 27.57 67.97 Japan 17 45.71 57.15 38.85 27.79 59.05 Austria 18 44.13 54.19 44.59 26.34 51.39 France 19 44.07 53.81 45.93 27.32 49.24 Belgium 20 43.49 57.38 42.49 26.00 48.11 United Arab Emirates 21 43.29 56.76 37.89 24.44 54.08 Israel 22 39.69 36.42 40.15 24.57 57.60 Malaysia 23 39.43 40.06 26.45 29.11 62.10 Estonia 24 39.36 39.60 42.87 30.87 44.10 Spain 25 37.29 50.66 36.80 20.99 40.71 8
Full Rankings 2013 (continued) Country Rank Index Score Supply Demand Institutional Innovation Portugal 26 33.41 44.13 33.11 23.71 32.67 Chile 27 33.25 34.83 27.85 26.59 43.75 Slovenia 28 33.17 32.94 36.84 19.74 43.14 China 29 32.20 26.08 29.14 16.16 57.43 Turkey 30 31.95 32.60 27.65 19.43 48.11 Czech Republic 31 31.87 44.85 37.29 17.83 27.53 Saudi Arabia 32 31.87 33.94 29.75 23.07 40.71 South Africa 33 30.06 33.16 20.87 18.88 47.34 Brazil 34 29.86 21.73 26.31 18.44 52.95 Thailand 35 28.42 25.79 21.92 15.27 50.69 Slovak Republic 36 28.27 27.31 34.85 15.91 35.00 Mexico 37 27.23 22.53 18.87 15.91 51.61 Italy 38 27.12 26.38 31.19 11.65 39.27 Poland 39 26.73 23.09 30.50 15.46 37.86 Russia 40 24.65 17.56 26.89 9.82 44.36 Greece 41 24.08 23.76 29.84 10.82 31.91 India 42 23.17 17.73 5.89 16.99 52.08 Colombia 43 22.97 14.15 15.16 19.32 43.25 Hungary 44 21.92 24.97 26.93 16.63 19.17 Vietnam 45 20.29 14.63 11.19 11.78 43.58 Indonesia 46 19.85 19.50 11.63 15.21 33.07 Philippines 47 19.38 13.37 12.69 13.27 38.18 Egypt 48 17.28 15.34 15.34 8.95 29.51 Kenya 49 16.98 11.88 8.98 14.11 32.97 Nigeria 50 13.77 7.26 6.78 12.80 28.25 9