The digital economy encompasses economic and social activities that are enabled by platforms such as internet, mobile, and sensor networks, including e-commerce.
The total contribution of the digital economy to countries’ growth consists of a direct effect through the accumulation of digital capital and an indirect effect measured by the diffusion of digital capital in the productive system.
The rapidly expanding digital economy is a strategic sector of the economy and its contribution to national growth is significant. In France, digital technology accounts for 5.5% of value added and its contribution to growth is greater than that of traditional sectors.
Information and communication technologies (ICT) or NICT, new economy, new technologies, electronic economy, and digital economy are terms used to describe the digital economy.
But what is the digital economy? Which sectors does it encompass? What are the theoretical and empirical impacts observed in France?
One thing is certain: the digital economy is now a driver of growth, productivity, and competitiveness for businesses and countries. Its cross-cutting nature impacts all sectors of the economy, and it is also giving rise to new innovative sectors and has made others dependent on it.
I. The digital economy: definition and sectoral composition
Although the literature on the subject is varied and rich, there is no exact definition of the digital economy. Indeed, it is not limited to a particular sector of activity and encompasses very different concepts.
It is the result of the widespread use of new technologies, initially in the field of information and communication, but which have since become universal technologies with implications far beyond information and communication technologies (ICT). It has had an impact on all economic sectors, the growth and productivity of countries, not to mention the business environment, individuals, households, and their behavior.
The use of the internet, for example, has brought people and resources together by breaking down physical distance, enabling them to create, develop, and share their ideas, giving rise to new concepts, new content, and, as a result, a new generation of entrepreneurs and markets.
According to the Australian Bureau of Statistics, the digital economy is: the global network of economic and social activities that are enabled by platforms such as the internet, mobile and sensor networks, including e-commerce. It is also enabled by efforts to achieve efficiency and productivity in production processes, inventory and knowledge management.
Given the difficulty of defining the digital economy and the complexity of quantifying it, INSEE equates it with theICT1 producing sectors. The ICT sector includes companies that produce goods and services supporting the digitization of the economy, i.e., the transformation of information used or provided into digital information (computing, telecommunications, electronics)2.
The cross-cutting nature of the digital economy impacts all sectors of activity, giving rise to new innovative sectors and making other sectors dependent on it. It includes the ICT sector, user sectors, and sectors with high digital content, the latter of which could not exist without these technologies.
Figure 1. Composition of the digital economy
II. Impact of the digital economy
A. Theoretical impacts of the digital economy on growth
Theoretically, a study byCoe-Rexecode3 estimates that the digital economy contributes twice as much to overall economic growth. This is because there is a direct contribution from the increase in digital capital as a factor of production, and an indirect contribution from the fact that this increase in digital capital has a positive effect on the overall productivity gains of the economy.
In terms of direct contribution, the digital economy has a macroeconomic effect linked to the increase in productive investment by businesses, investment in tangible assets: digital equipment and hardware; or intangible assets: software used in the production process. There is therefore a volume effect on growth, as an increase in productive capital leads to an increase in aggregate gross fixed capital formation (GFCF) and, consequently, in GDP. This is a direct volume effect.
Another effect is linked to increased employee productivity. Good training for employees in the use of digital technology in the workplace increases their productivity, particularly through the possibility of automating tasks, which leads to time savings, process improvements, increased exchanges, and organizational optimization. This reorganization leads to improved labor productivity, a major determinant of economic growth.
In terms of indirect contribution, it is the heavy use of digital technologies that leads to an improvement in total factor productivity (TFP). This concept of TFP is difficult to quantify because it cannot be measured by the increase in the use of production factors such as capital and labor. TFP reflects the impact of technical progress on growth. The improvement in TFP is partly attributed to the sectors that produce digital equipment, but also to the sectors that use digital innovations. Indeed, the strong productivity gains (direct volume effect) of the producing sectors have led to a fall in the production and sales prices of digital goods and services, which has an effect on price dynamics and therefore on inflation. The lower the prices, the more incentive user sectors will have to invest in digital products in order to increase their productivity. Total factor productivity also depends on the widespread diffusion of digital innovations throughout the economy. Digital innovation has « network » externalities: the more widely digital innovations are disseminated and adopted, the greater the benefits (learning effect, economies of scale). Their diffusion therefore enables all other economic sectors to gain in innovation and productivity as well.
B. The impacts of the digital economy observed in France
In France, the digital economy is a strategic sector with substantial weight and represents a factor of growth. In 2013, theadded value5 of digital technology as a percentage of French GDP amounted to 5.5%, or €113 billion, and its contribution to GDP is estimated to be higher than that of certain traditional sectors such as agriculture (2%) and financial services (4.8%). The digital economy and its constituent sectors contributed an average of 13% to French GDP growth between 2010 and 2013.
The importance of this sector is driven by household consumption of digital equipment such as smartphones and tablets, as well as by private investment and public spending on digital infrastructure.
According to theMcKinsey report, in terms of direct employment, the digital sector employs 3.3% of the working population in France and creates almost an equivalent number of indirect or induced jobs (jobs generated by digital activities in sectors that use digital goods and services).
In terms of traditional commerce, digital technology directly or indirectly influences €80 billion in commercial transactions.
For businesses, there is a growing weight of B2B exchanges, i.e., inter-company trade, thanks to the increased use of digital channels. Similarly, for consumers, the widespread use of the internet has a very strong influence on exchanges between individuals (online sales and purchases). B2B transactions in France represent around €400 billion, and more than 50% of transactions between individuals are carried out via the internet.
In addition, consumers can enjoy increased purchasing power thanks to the direct financial gains made possible by lower online prices and the deflationary pressure that online commerce exerts on traditional commerce. Furthermore, savings can be made with the development of exchanges of goods and services between individuals (C2C commerce). The gains associated with internet use in France are estimated at €20 per month per internet user. Indirect gains are linked to services such as access to free online services (social networks, email, information), access to a huge variety of products, time savings, etc. These gains represent an estimated financial gain in France of around €15 billion per year.
Other gains linked to the use of digital technology for consumers are not quantified (online job searches, access to education and culture, etc.). Part of these gains in purchasing power are reinjected into the economy and translate into revenues of around €7.7 billion benefiting French companies.
Other qualitative gains from digital technology are due to the adoption and emergence of organizational innovations aimed at increasing business performance by improving processes or optimizing organization. For example, these organizational innovations reduce administrative and transaction costs, increase well-being at work and, as a result, boost productivity.
Conclusion
The rise of the digital economy is associated with a new industrial revolution affecting social, economic, political, and cultural spheres.
In addition to the observed and empirical impacts of the digital economy on countries’ growth, it also has a disruptive effect on all sectors of activity and the economy in general: consumer behavior has changed, the functioning and organization of businesses has been transformed, particularly through improvements in value chains, production processes, and managerial organization, and their business models are constantly being called into question.
Digital transformation brings many advantages for certain companies that are ready to embrace change. In particular, the dematerialization of distances eliminates barriers to entry in certain markets and translates into massive access to new opportunities for companies.
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1 INSEE ICT definition: According to an international convention established by the OECD, the following sectors are classified as information and communication technology (ICT) sectors: – ICT-producing sectors (manufacture of computers and computer equipment, TVs, radios, telephones, etc.);
– ICT distribution sectors (wholesale trade in computer equipment, etc.);
– ICT services sectors (telecommunications, IT services, audiovisual services, etc.).
2« The impact of the digital economy, » Philippe Lemoine, Benoît Lavigne, and Michal Zajac, Sociétal magazine No. 71 (1st quarter 2011).
3 « The Digital Economy and Growth: Weight, Impact, and Challenges of a Strategic Sector, » Antoine Arlandis, Stéphane Ciriani, Gilles Koleda, Working Paper No. 24 – COE-Rexecode (May 2011).
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5 Value added calculated using the demand approach (consumption + investment + public spending + trade balance). « Accelerating the digital transformation of businesses: a source of growth and competitiveness for France, » McKinsey France (September 2014)
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