The Growth Game-Changer

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The GrowthGame-Changer:How the Industrial Internetof Things can drive progressand prosperityMark Purdy and Ladan Davarzani

2 The Growth Game-Changer: How the Industrial Internet of Things can drive progress and prosperityIn the shift from an industrial to a digital economy, many countriesare targeting the Industrial Internet of Things (IIoT) as a means todeliver faster growth. But without establishing the right enablingconditions, they will not fully capture the opportunity. To make thishappen, countries need to understand their “national absorptivecapacity”—their ability to weave innovations into their economicand social fabric—and how that influences their ability to grow.How can countries get started? To point them toward the right path,Accenture analyzed 20 countries to identify their national absorptivecapacity for IIoT-related technologies, products and services. Througheconomic modeling, we determined the likely gross domestic product(GDP) benefit to their economies if today’s investment and policytrends continue on their current path. We discovered a big number:US 10.6 trillion by 2030 for the 20 nations.However, the modeling also revealed that increases in investmentand intervention by policy and business leaders could add anotherUS 3.6 trillion to that total. We outline the key steps they needto take to capture these potential economic benefits.The Internet of Things can be a game-changerfor the world’s economies—acceleratingproductivity, overcoming infrastructuregaps and driving innovation.”Chris Allen Vein, Chief Innovation Officer for Global ICTDevelopment, World Bank

The Growth Game-Changer: How the Industrial Internet of Things can drive progress and prosperity 3ContentsSeizing the trillion-dollar opportunity4The challenge of economic diffusion6Driving economic diffusion8Five ways to win20

4 The Growth Game-Changer: How the Industrial Internet of Things can drive progress and prosperitySeizing the trillion-dollaropportunityCan the Industrial Internet of Things (IIoT) be a force forfaster growth in an increasingly digital global economy?Many governments hope the answeris yes. For example, the UK governmenthas staked out a leading position in this“new industrial revolution,” directingnearly US 125 million to IIoT research.1In China, the government has made theIIoT an “emerging strategic industry” andplans to invest some US 800 million in itby 2015.2 And Germany plans to use IIoTtechnology to increase the productivity ofits manufacturing industry by 30 percentthrough its Industry 4.0 initiative.3 Theseand many other governments view theIIoT as a means to stimulate nationalcompetitiveness and economic growth.And with good reason: By our estimates,the IIoT can add trillions of dollarsto the global economy by 2030 (Figure 1).What is more, 87 percent of the businessleaders Accenture surveyed believethat the IIoT will contribute to long-termjob growth. (Accenture surveyed 1,400C-suite executives from 30 countries;see “CEO Briefing 2015: From Productivityto Outcomes—Using the Internet of Thingsto drive future business strategies”).Why such optimism? The IIoT can boostproductivity, drive the emergence ofnew markets, and encourage innovation.Our survey of global business leaderson the IIoT reveals strong agreement thatit can deliver benefits for their companies.In fact, nearly two-thirds of the businessleaders we surveyed said the IIoT wouldoffer emerging markets the ability toleap-frog developed economies, while63 percent said it would close thecompetitive gaps between companiesin emerging and mature markets.The IIoT could deliver massive economicrewards, but only to countries preparedto capitalize on its growth. To understandwhat is at stake, we worked with FrontierEconomics to model the IIoT’s potentialimpact on the GDPs of 20 developed andemerging economies that generate overthree-quarters of the world’s economicoutput.4 The model takes into accountprojected investment levels, nationalindustry structures and the capacitiesof different countries to absorb IIoTtechnologies. Our analysis shows that, basedon current policy and investment trends,the IIoT could add around US 10.6 trillionto the cumulative GDP of these economiesover the next 15 years. In 2030, under theseconditions, the IIoT could result in GDPbeing 1.0 percent higher than it otherwisewould be (under trend forecast).However, our analysis shows that thepotential for growth could be even greater.By taking additional measures to improvetheir capacity to absorb IIoT technologiesand increase IIoT investment, countriescould generate up to an estimatedUS 3.6 trillion in additional value overand above the indication of currenttrends, for a total of US 14.2 trillion.For the countries we studied, this couldlift real GDP by 1.5 percent in 2030over trend projections.However, these gains won’t becomereality without a great deal of hardwork. Viewed from the perspectiveof national economies, it becomesclear that government leaders andpolicymakers must fully supportthe IIoT to ensure that their countriesreadily translate this technologicalchange into economic growth.

The Growth Game-Changer: How the Industrial Internet of Things can drive progress and prosperity 5What is the Industrial Internet of Things?The Industrial Internet of Things isthe industrial application of a networkof physical objects that contain embeddedtechnology to communicate and senseor interact with their internal states orthe external environment. In manufacturing,connected sensor networks already monitorlogistics movements and machines suchas mining equipment and entire utilityplants, helping organizations reducecosts through more efficient operations.In agriculture, similar networks deployedacross farmlands are improving the useof natural resources and contributingto better harvests. Our analysis alsoincludes some consumer applicationssuch as digital health and “connectedlifestyle” products.Figure 1: Cumulative GDP impact of IIoT (US trillion)161412108642IIoT GDP impact (current 12020201920182017201620150IIoT GDP impact with additional measuresSource: Accenture and Frontier EconomicsIn the 20 countries we analyzed, current policy and investment trends in IIoT productsand technologies point to cumulative real GDP contributions of US 10.6 trillion by 2030.With greater investment and the enactment of key measures to absorb IIoT technologies,that figure could rise to US 14.2 trillion.

6 The Growth Game-Changer: How the Industrial Internet of Things can drive progress and prosperityThe challenge ofeconomic diffusionOptimism regarding the IIoT’s potential to drive economicgrowth at the global level is relatively high.However, the prospect of growth becomesless certain at the national level, where somecountries have historically outperformedothers when it comes to capitalizing on theeconomic potential of new technologies.The introduction of electric power inthe industrialized world at the turnof the twentieth century offers a clearexample of this dynamic in action.While many countries stood at aboutthe same technological starting line inthis race, the United States became theworld leader in electrification (Figure 2).Why? Because it more rapidly embeddedthe new technology in the wider economyand altered production and organizationalstructures to take advantage of it.they assembled the product. Electrificationturned this concept on its head, enablingthe product to move down a poweredcentral assembly line while workersremained at their stations. This innovationsaved thousands of hours in labor costsand permitted greater standardizationof work practices. By the 1920s, Americanindustries were constructing new all-electricfactories in line with the recommendationsof industrial engineers and retrainingfactory workers for this new environment.5As the decades progressed, electricityexpanded beyond industrial sites toinfluence the consumer economy. By the1950s, 94 percent of United States familieshad electricity in their homes, fueling strongdemand for electric household appliances.6Powering factories with electricityillustrates this point. Before electrification,factory workers labored around staticworkstations, carrying different parts fromall over the shop to them until, ultimately,The ability of the United States tocapitalize on the economic potential ofelectricity compared with other countriesdemonstrates how the technologicaldiffusion of electricity was not the sameas its economic diffusion. While technologydiffusion describes a relatively limitedprocess of technology adoption, economicdiffusion carries broader implications.It begins with technology diffusion,but also reflects growth, innovation,and financial reward spread across multiplesectors and industries. The entrepreneurialand consumerist culture in the UnitedStates, coupled with a favorable businessclimate, drove the rapid expansion ofelectrification throughout the economy.In the process, it revolutionized the wayindividuals, businesses, and governmentscarried out their daily functions.We see an equally revolutionary potentialwith the IIoT. But without the rightenabling conditions for its economicdiffusion, countries may not reap allits promised rewards.

The Growth Game-Changer: How the Industrial Internet of Things can drive progress and prosperity 7Figure 2: Taking advantage of the technology opportunity - gross output of electricenergy per capita in kWh (thousand)1412Era of consumerelectrification108Era of 1988199019922United StatesUnited KingdomFranceItalySource: The Cross-country Historical Adoption of Technology (CHAT) dataset, Accenture analysisWhile the United States and major European countries started from similar positionswith electrification, the United States made more changes throughout its economy totake advantage of this powerful technology. Over time, this allowed the United Stateseconomy to generate significantly higher outputs of electricity per capita—an importantcontributor to overall economic growth.Electricity changed nearly everything about the waywe live and work—and that scale of transformationis possible with the Internet of Things.”Ian Goldin, Director of Oxford Martin School, University of Oxford

8 The Growth Game-Changer: How the Industrial Internet of Things can drive progress and prosperityDriving economic diffusionThe lessons of history tell us that achieving economic diffusioncomes down to how well a country can weave innovations intoits economic and social fabric.As a result, understanding the factorsthat underpin this process—whichwe call a country’s “national absorptivecapacity” (NAC)—becomes a centralchallenge for countries seekingto unlock the economic potentialof the IIoT.Based on our research into previous erasof technological revolution and interviewswith experts from the technology, economicsand business disciplines, we have identifiedthe four pillars that underlie a country’sNAC (Figure 3). The impact and strengthof the IIoT’s economic diffusion dependson the relative strength of these four pillars:

The Growth Game-Changer: How the Industrial Internet of Things can drive progress and prosperity 9Figure 3: Realizing the economic potential of the Industrial Internet of ThingsGovernment leaders cannot assume that their nations will automatically enjoy economic growth thanksto the IIoT. To make growth possible, they must shift their attention away from the technology itselfand toward the conditions that convert technology diffusion into economic diffusion. The four-pillarmodel below reveals the elements that help countries derive the greatest benefits from the IIoT.Business commonsTake-off factorsTransfer factorsInnovation dynamo Communicationsinfrastructure Government supportand spending on R&D Formal and informalknowledge transfers Entrepreneurial culture Human capital STEM talent Quality of governanceand institutions Quality of scientificresearch institutions Organizations’ ability toembrace new technologieswithin organization University—industrycollaboration in R&D Access to capital Standards setting Economic openness Urbanization Expanding middle class Consumer willingnessto adopt new technologies Data privacy andsecurity concerns “ Makerism” movement Development oftechnology clusters Organizations’ focuson customer needs

10 The Growth Game-Changer: How the Industrial Internet of Things can drive progress and prosperityBusiness commonsThe business commons describes thebusiness climate and pool of resources onwhich companies can draw to carry outtheir operations.7 Key elements of a healthybusiness commons include an educatedworkforce, a reliable financial system,and a robust network of local suppliersand distributors—all bounded by goodgovernance policies and the rule of law.Today, having strong telecommunicationsand Internet infrastructure plays a keyrole in determining the strength of thebusiness commons, since it connects thesevarious elements. In fact, business leaderswe surveyed see poor information andcommunication technology infrastructure,alongside limited access to capital, as themost significant obstacles to developingthe IIoT in their countries. Countries witha weak business commons may be able tocompensate with strengths in other pillars.But for many, establishing this commonswith investments in the technologicalinfrastructure of the IIoT and businessfriendly policies can be key to the IIoT’seconomic diffusion.Take-off factorsTake-off factors help to transforma technological advance into usableapplications, products and services beyondniche markets and players. With thetechnological foundation established,entrepreneurs, large businesses and thegeneral public start taking advantageof the new technology, in turn drivingincreased innovation and scaling.For instance, once an electrical infrastructurebegan to proliferate, new inventions suchas radio and television emerged, helpingmany of the world’s economies “take off”and increasing the economic diffusion ofelectricity. The presence of leading hi-techfirms, the strength of the science, technology,engineering and mathematics (STEM)workforce and government support inresearch and development (R&D) for the IIoTare key supply-side elements that can fostergrowth in this area. On the consumer side,urbanization and the growing middle classcan drive demand for IIoT goods and services.We can see these elements comingtogether as connected products move intothe consumer sphere and technology firmsrace to develop products and services tomeet increasing demand. The IIoT’s abilityto piggyback on existing telecommunicationsinfrastructure should speed up thisprocess: 85 percent of the IIoT is basedon legacy infrastructure.8The Internet of Things is blurring theboundaries between virtual and physicalobjects, enabling entirely new marketsegments and business models.”Amit Jasuja, Senior Vice President of Development,Java and Identity Management Products, Oracle

The Growth Game-Changer: How the Industrial Internet of Things can drive progress and prosperity 11Transfer factorsTransfer factors enable a technology tobecome far more deeply ingrained in aneconomy—inducing wider changes in thebehavior of businesses, consumers andsociety. At this point, change is less aboutthe technology itself and more about theorganizational and social transformationsthat it enables to take place. For example,the economic diffusion of the Internet overthe past two decades is clearly illustratedby the technology’s evolution from offeringrelatively limited applications in e-mailingand file sharing to becoming the foundationfor how business is done and how manyconsumers conduct their daily lives.Key transfer factors include the exchangeof knowledge as well as shifts in social andcompany norms that make harnessing thenew technologies possible. These factorscan differ across regions. For instance,research reveals that European firmshave seen far fewer benefits from theproliferation of ICT than their  United Statescounterparts. European companies couldnot adapt their organizational structuresand management styles to take advantageof the change as quickly.9 We believe thatadapting successfully to the IIoT can testthe competitiveness of a nation’s businesssectors to an even greater extent.Innovation dynamoThe innovation dynamo is whena technology produces self-sustaininginnovation and development. Whenthis happens, innovators combinetechnological advances in other areaswith the core technology’s newfoundubiquity, producing a “multiplier effect”by building once unimaginablecomplementary goods.For example, electronics led to moderncomputing, which, when combined withtelecommunications, led to today’s Internetand the IIoT. The quality of a country’sresearch ecosystem, the presenceof technology clusters, and a strongculture of entrepreneurialism are justsome of the factors contributing tothe growth of the innovation dynamo.“Makerism”—essentially a tech-basedextension of do-it-yourself culturefocused on breakthroughs like 3Dprinting—will be a key feature ofa mature IIoT economy. Today,“makers” are contributing to the globaleconomy by creating homegrown IIoTapplications, and by bringing theirinnovations to market.Leading in the Internet of Things won’tbe just about technology—it will alsobe about the enabling institutions.”Carlota Perez, Centennial Professor of InternationalDevelopment, London School of Economics

12 The Growth Game-Changer: How the Industrial Internet of Things can drive progress and prosperityAssessing country performance on the NAC IndexLeaders can assess a nation’s economicdiffusion potential from the NAC Index,which shows the potential for economicdiffusion of the IIoT in a given country.Nations in higher positions on the indexare more likely to reap the rewards ofIIoT diffusion. In association with FrontierEconomics, we created the NAC Indexdrawing on the Oslo Manual, whichfeatures guidelines established by theOrganization for Economic Co-operationand Development (OECD) for collecting andmeasuring data on technology innovation.10We then adapted this information tofocus specifically on the IIoT. Combiningour own historical research and a series ofinterviews with experts, we examined 55indicators from sources such as the WorldBank, the World Economic Forum and theInternational Telecommunication Union.We then integrated these quantitativeproxies into our four-pillar model.NAC SCORE64.0 63.9 63.2 62.4 61.859.0 58.855.0 54.4 54.3 54.152.2 50.947.1 45.733.0 32.4 31.3 UTH KOREAAUSTRALIAJAPANGERMANYUNITED RLAND21.3UNITED STATES1009080706050403020100Source: Accenture and Frontier EconomicsThe NAC IndexA country with a NAC score of 100 wouldbe the top performer on each of the 55indicators compared to the other studycountries. Overall, our results show thatno one country has achieved this levelof NAC. In other words, everyone haswork to do. The United States, Switzerlandand three Nordic countries are the furthestahead in terms of their NACs, but theyalso exhibit room for improvement withineach of the four pillars.Our results suggest that if each of the 20countries invested the same amount ofcapital in the IIoT, countries higher on theNAC Index will gain more economic benefitfrom the investment, ceteris paribus.

The Growth Game-Changer: How the Industrial Internet of Things can drive progress and prosperity 13

14 The Growth Game-Changer: How the Industrial Internet of Things can drive progress and prosperityNAC SCORE75.8 75.770.1 67.765.1 63.557.5 56.6 56.2 54.852.2 52.0 50.843.7 41.738.034.430.0 28.0INDIARUSSIAITALYBRAZILSPAINCHINASOUTH KOREAJAPANFRANCEUNIT

The Growth Game-Changer: How the Industrial Internet of Things can drive progress and prosperity 5 0 2 4 6 8 10 12 14 16 IIoT GDP impact (current conditions) IIoT GDP impact with additional measures

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