Reducing e-Friction Delivers Economic Benefits and Speeds Growth

BARCELONA, SPAIN--(Marketwired - Mar 3, 2015) -  Addressing the five main causes of "e-friction" can help countries realize greater economic and social benefits from the digital economy and spur growth, according to an analysis by The Boston Consulting Group (BCG).

Which Wheels to Grease? Reducing e-Friction in the Internet Economy updates BCG's 2014 study of e-friction in 65 economies that encompass more than 80 percent of the world's population and more than 90 percent of the world's economic activity. That report introduced the BCG e-Friction Index, which identified 55 individual e-friction indicators in four categories: infrastructure, industry, individuals, and information (See Exhibit 1 below.)

Low e-friction correlates closely with high Internet penetration and strong digital economies. Top-ranking e-friction countries have Internet penetration rates of more than 80 percent, while many low-ranking nations have penetration rates of 50 percent or less. 

The five major causes of e-friction identified in the 2015 update are wealth, population density, the urban-rural population mix, literacy, and English-language skills. Wealth is an important factor, but it does not explain e-friction on its own. The common causes of friction suggest high-potential solutions.

"Digital trade enriches nations," said Paul Zwillenberg, a BCG partner and coauthor of both the 2014 report and the update. "But not all nations engage equally in the exchange of goods, services, ideas, and information, as e-friction gets in the way. Some of the causes of e-friction can be influenced by policy initiatives; others require more creative approaches."

Analyzing economies by their e-friction scores and their per capita GDP results in eight clusters, split into three groups by income levels (See Exhibit 2 below.) Those looking to reduce e-friction should start by prioritizing the relative significance of each cause, then developing a strategy for each. Those in the same cluster face common challenges and are likely in some, but by no means all, instances to pursue similar solutions. 

Developing rural nations face multiple issues of basic infrastructure. A number of emerging markets are experimenting with several funding and operating models. The optimal technology depends on local conditions, with a combination of mobile and fixed wireless generally the most cost effective for rural areas and satellite typically the best bet for truly remote areas. 

Middle-income nations may benefit substantially from efforts to demonstrate to their populations the value of the Internet and bring more people online. There are good models to follow in four key areas: furthering local content development, building digital literacy, simplifying access and use, and bringing down cost. 

Even countries with relatively low e-friction face thorny digital issues, such as privacy and data security, which clumsily handled or left unresolved can throw sand in the gears. Some have more sources of friction to address, such as those related to outdated regulation, excessive bureaucracy, and impediments to investment; they need to focus their interventions with care. 

"The digital economy is expected to grow at an annual rate of 10 percent globally over the next several years and at 15 to 25 percent in developing markets," said Fadi Chehade, president and CEO of the Internet Corporation for Assigned Names and Numbers (ICANN), which commissioned the 2014 report and the update. "National competitiveness will increasingly depend on how well countries address e-friction. The digital economy is one place almost any nation can look to for increasing business revenues and jobs."

To arrange an interview with one of the authors, please contact Eric Gregoire at
+1 617 850 3783 or gregoire.eric@bcg.com.

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