Which Countries Are Better Prepared To Compete Globally In The Disruptive Technology Age? IN FOCUS A Rapid, Forward-looking Analysis FINANCE, COMPETITIVENESS of Countries’ Share of the & INNOVATION Global Private Sector FIRM CAPABILITIES Victor Mulas & INNOVATION © 2018 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This volume is a product of the staff of the World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non- commercial purposes. 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Design & Layout: Aichin Lim Jones Photo Credits: IFC and World Bank Photo Librares Table of Contents ABSTRACT III GLOBAL PRIVATE SECTOR TRANSFORMATION: TRADITIONAL MULTINATIONAL CORPORATIONS AND TECHNOLOGY PLATFORMS 1 ANALYSIS OF COUNTRIES’ SHARE OF THE GLOBAL PRIVATE SECTOR IN TODAY’S ECONOMY VERSUS THE NEW ECONOMY 2 FORWARD-LOOKING GAP OF COUNTRIES’ GLOBAL PRIVATE SECTOR 4 CONCLUSION 6 ANNEX: COUNTRY FLAGS 9 WHICH COUNTRIES ARE BETTER PREPARED TO COMPETE GLOBALLY IN THE DISRUPTIVE TECHNOLOGY AGE? | I II | SUPPORTING ENTREPRENEURS AT THE LOCAL LEVEL: THE EFFECT OF ACCELERATORS AND MENTORS ON EARLY-STAGE FIRMS Abstract T his note provides a rapid, forward-looking analysis of countries’ share of the global private sector. By using technology-enabled Unicorns as a leading indicator of the future’s global private sector, which is dominated by a technology platform business model of zero marginal costs and winner-takes-all dynamics, this analysis provides an indication of relative gains and losses of countries in the transition to a technology-driven new economy. The results are tested by comparing the gross domestic product (GDP) growth of countries and their relative position in this transition, which is then measured using a forward- looking approach. This analysis is a first approximation toward a predictive assessment and requires further research. However, the results provided in this note can help policy makers consider and assess new factors to deal with the uncertainties of disruptive technologies in their economies. The author is thankful to Paulo Correa (Practice Manager, Finance Competitive & Innovation) for his guidance, to Arti Grover (Senior Economist, Finance Competitive & Innovation), and to Carlo Rossotto (Lead ICT Policy Specialist, Digital Development) for their com- ments about this policy note. WHICH COUNTRIES ARE BETTER PREPARED TO COMPETE GLOBALLY IN THE DISRUPTIVE TECHNOLOGY AGE? | III IV | SUPPORTING ENTREPRENEURS AT THE LOCAL LEVEL: THE EFFECT OF ACCELERATORS AND MENTORS ON EARLY-STAGE FIRMS Global Private Sector Transformation: Traditional Multinational Corporations and Technology Platforms A s technology transforms the global economy and as technology leads to the fourth industrial revolution, new sectors and markets are being created while traditional ones are disrupted. This global transformation will have implications for firms and workers who will need to adapt their businesses and skills to the paradigms of the new market.1 Ultimately, this process will have structural implications for countries, and their private sector competitiveness will be altered by disruptions and reallocations of firms and resources during this global readjustment process. The global market, where multinational corporations of which are technology-enabled Unicorns (that is, (MNCs) operate, is already witnessing the new technology-enabled companies with private disruptive effects of technology. Traditional MNCs valuation of more than $1 billion) and their Exits and large domestic corporations are being disrupted (that is, new technology-enabled companies that by new technology platforms such as Google, achieve a valuation of more than $1 billion through Facebook, and Amazon, which are competing an initial public offering, merger or acquisition).2 globally by leveraging zero marginal costs and In this context, what is required to successfully winner-takes-all dynamics. As goods and services compete globally is to change from traditional are increasingly digitized, technology global MNC business models to those of global technology platforms are extending their reach to more sectors platforms.3 Hence, countries that generate and retain beyond established technology industries. Those more technology global platforms and firms that are sectors include transportation and hospitality (Uber operating in such an environment will likely gain a and Airbnb, for example). Most of those global larger share in the new global private sector. platforms are newly created technology firms, many 1 See Martin Mühleisen, “The Long and Short of the Digital Revolution,” Finance and Development 55, no 2 (June 2018), https:// www.imf.org/external/pubs/ft/fandd/2018/06/impact-of-digital-technology-on-economic-growth/muhleisen.htm. 2 Technology-enabled Unicorns are private companies with valuation of more than $1 billion. The earliest Unicorn that remains a private company was founded in 2010. Exits are tech start-ups that followed an IPO, merger, or acquisition process after 2009. All of those firms have a valuation of more than $1 billion after the exit process. In addition, all of the companies are start-ups whose business model is highly supported by new technologies (such as digital and disruptive technologies) and whose opera- tions often disrupt traditional business models. They may or may not operate in the technology sector. For a full list of companies please see note 5. 3 Indeed, traditional MNCs have seen their global reach curtailed by changes in global trade rules and other factors, whereas tech- nology platforms are expanding and taking over digital global market advantages. See “The Retreat of the Global Company,” Economist, January 28, 2017, https://www.economist.com/briefing/2017/01/28/the-retreat-of-the-global-company. WHICH COUNTRIES ARE BETTER PREPARED TO COMPETE GLOBALLY IN THE DISRUPTIVE TECHNOLOGY AGE? | 1 This note provides an approximation of a forward- Each country’s share of company values ($) is then looking analysis of the ability of countries to compared among traditional MNCs only (today’s generate and retain firms that compete in the global private sector) and among technology- global market. The analysis first assesses two sets enabled Unicorns only (the future global private of countries: (a) the ones with traditional MNCs sector). The difference between the two ratios and (b) those with technology-enabled Unicorns provides a measurement of each country’s gap (including those exited through an initial public (positive or negative) relative to the country’s offering, merger, or acquisition). The first group of predicted capacity to generate growth in the future countries is home to traditional MNCs that have global private sector. As a final step, the analysis been competing internationally in the global market. examines each country’s recent GDP growth to test Here, the term “traditional” describes companies the forward-looking gap measurements. that do not operate under technology platforms or other technology-based business models. To date, Analysis of Countries’ Share of the countries with traditional MNCs have been enjoying a larger share of the global market. The second group Global Private Sector in Today’s of countries consists of host technology-enabled Economy versus the New Economy Unicorns, the firms that are able to compete globally Countries with a large share of today’s global with technology platform business models. The private sector are identified using the country of analysis assumes that a country’s ability to originate origin of the world’s 500 largest public companies. and retain those unicorns is a leading indicator of its It is assumed that those companies are the largest ability to generate the future global private sector. traditional MNCs or are traditional firms large Figure 1. Distribution of the World’s 500 Largest Public Companies (2018) 200 158 Number of Companies 150 100 61 53 50 30 26 22 17 16 12 11 10 9 8 7 6 5 4 3 2 1 0 TC Source: Forbes, “Global 2000: The World’s Largest Public Companies,” 2018. Note: See Annex for country flags reference. TC = Taiwan, China. 2 | WHICH COUNTRIES ARE BETTER PREPARED TO COMPETE GLOBALLY IN THE DISRUPTIVE TECHNOLOGY AGE? enough to compete on an equal footing with MNCs. When comparing this technology-enabled Unicorn Forbes’s list of the world’s largest public companies country list against the list of the large public (2018 ranking), which comprises the world’s 2,000 company countries, one can note that India and largest public companies, is used to identify the Israel are ahead of many OECD countries in their top 500 companies.4 The United States is home share of technology-enabled Unicorns. Also, some to the largest share of large public companies in countries are not listed in the large public company terms of value, followed by China, Japan, and list but appear in the technology-enabled Unicorns other Organisation for Economic Co-operation and list (such as Argentina, the Czech Republic, Israel, Development (OECD) countries (figure 1). the Philippines, Portugal, and Nigeria). To identify countries with a larger share of the future To normalize the number of companies and their global private sector, one must use the country of relative size per country, one must use the aggregated origin of technology-enabled Unicorns (including value of the companies that originated in each those exited through an initial public offering, country. This is done both for the list of countries merger, or acquisition). The companies come from where the world’s 500 largest public companies CB Insights’s lists of global unicorns and exits (as originated and for the list of countries where the of August 2018).5 There are 480 global tech firms technology-enabled Unicorns originated. Thus, for with valuation or post-exit value of more than $1 both, the aggregated market value of the firms that billion between 2009 and August 2018 (figure 2). originated in each country is divided by the total The United States is home to the largest share of market value of all sample countries in each of the technology-enabled Unicorns and Exits followed by lists (the world’s 500 largest public companies and China, the United Kingdom, India, and Germany. the technology-enabled Unicorns). Figure 2. Distribution of Technology-Enabled Unicorns and Exits (2009–August 2018) 300 261 of Companies Number 200 114 100 21 14 11 5 4 3 2 1 0 TC Source: CB Insights, “The Global Unicorn Club” and “The Unicorn Exit Tracker,” August 2018. Note: See Annex for country flags reference. TC = Taiwan, China. 4 Forbes, “Global 2000: The World’s Largest Public Companies,” 2018 ranking, https://www.forbes.com/global2000/list/. Alphabet and Amazon were excluded from this list because they operate as technology platforms (leveraging technology business models). Also, excluded were Alibaba and Facebook because they are previous technology-enabled Unicorns that exited through initial public offerings (IPOs); those two firms are instead added to the technology-enabled Unicorn list from CB Insights, which was used to infer the future global private sector. 5 CB Insights, “The Global Unicorn Club,”updated August 2018, https://www.cbinsights.com/research-unicorn-companies, and CB Insights, “The Unicorn Exits Tracker,” updated August 2, 2018, https://www.cbinsights.com/research-unicorn-exits. WHICH COUNTRIES ARE BETTER PREPARED TO COMPETE GLOBALLY IN THE DISRUPTIVE TECHNOLOGY AGE? | 3 Such ratios provide a relative measure to understand also notable that most of the other top 20 countries the position of each country in terms of its share of the in today’s economy are underperforming in the new global private sector in today’s economy and in the new economy, except for India and Singapore. Specific economy relative to its peers (figure 3). The two ratios countries (such as Belgium, Italy, Saudi Arabia, per country can then be compared to see how each and Spain) have not originated a single technology- country’s position changes in today’s economy and in enabled Unicorn yet. that of the new economy—this is a leading indicator for the future share of the global private sector.6 Forward-Looking Gap of Countries’ The United States represents approximately half Global Private Sector of the global private sector in both economies.7 Two ratios (the share of value of the world’s 500 China holds more than a third of the new economy’s largest public companies and that of technology- global private sector, a much larger share than the 12 enabled Unicorns) are combined to identify the percent it holds in today’s global private sector. This gap between each country’s relative position in large differential suggests that the Chinese private today’s global private sector and in the future sector is developing fast in the new economy. It is Figure 3. Share of Value in the World’s 500 Largest Public Companies and in Technology-Enabled Unicorns and Exits among the 20 Countries with Highest Values in Today’s Global Private Sector 50 Countries’ Share of Total Investment in Top Global Leading Companies (%) 40 30 20 10 0 TC Share of total value of world’s Share of total value of technology Indicates country with no 500 largest public companies -enabled Unicorns and Exits technology-enabled Unicorns or Exits Source: World Bank analysis elaborated with data from Forbes, “Global 2000: The World’s Largest Public Companies,” 2018, and CB Insights, “The Global Unicorn Club,” and “The Unicorn Exits Tracker,” both updated 2018. Note: See Annex for country flags reference. TC = Taiwan, China. 6 These ratios were chosen for this rapid analysis because they were the only measures available with existing data at this time. A further exploration of data sources, particularly census data, may result in more detailed analysis and measurements. 7 The position of the United States is underrepresented with the ratios because Alphabet and Amazon are not included in either list. Although those two companies are among the largest public companies in the world in terms of market valuation, they operate as technology platforms. For this reason, they are excluded from the list of the world’s 500 largest companies, which intends to capture traditional MNCs and large corporations. Alphabet and Amazon are also excluded from the technology-enabled Unicorns list because their market valuation is not on par with the rest of technology-enabled Unicorns firms. In addition, using their valu- ations at the time of their IPO (less than $1 billion) would not be accurate, and these companies would be underrepresented. 4 | WHICH COUNTRIES ARE BETTER PREPARED TO COMPETE GLOBALLY IN THE DISRUPTIVE TECHNOLOGY AGE? Figure 4. Forward-Looking Gaps of Countries’ Global Private Sector 23% 5 Gap of Value Captured in Today’s Economy vs. New Economy (%) 3 0% > (-1%) (-1%) > (-3%) >(-3%) 1 TC -1 > 0% -3 -5 Source: World Bank analysis elaborated with data from Forbes, “Global 2000: The World’s Largest Public Companies,” 2018, and CB Insights, “The Global Unicorn Club,” and “The Unicorn Exits Tracker,” both updated 2018. Note: See Annex for country flags reference. TC = Taiwan, China. global private sector (on the assumption that illustrate that countries can originate a large share technology-enabled Unicorns will lead tomorrow’s of global private sector leaders in the new economy, global private sector). This measure provides a in addition to having an existing large share of forward-looking gap of countries’ share of the today’s global private sector. The positive gaps for global private sector. Given a direct transition China, India, and Israel show that those economies from today’s global private sector to the future’s are leapfrogging toward the new economy as they global private sector, the forward-looking gap develop. Many developing countries—including shows which countries have a larger share to win Argentina, Colombia, Estonia, Indonesia, Nigeria, or lose from today’s position (figure 4). the Philippines, and South Africa—are following the examples of China and India and are also Countries shown in green, led by China and the leapfrogging to the new economy. United States,8 have a positive gap (that is, their share of global private sector value is greater in To test the application of these gaps, one must the new economy). The rest of the countries have a examine the GDP growth of the sample countries. progressively negative gap (0 to −1 percent shown Thus, GDP growth since 2008, which represents the in yellow, −1 to −3 percent shown in orange, and latest economic cycle, is examined.9 The average of greater than −3 percent shown in red), with France growth in all the countries with a positive gap in the and Japan having the most to lose in a straight- new economy (countries shown in green in figure forward transition to the new economy. 4) is compared with the average of growth for all other countries in the sample (those with a negative Most of the OECD countries have a negative gap in varying degrees). The analysis indicates gap. This finding is not surprising, because those that since 2008 countries with a positive gap have countries have a larger global private sector in been enjoying higher GDP growth than have those today’s economy. However, the United States, with negative gaps, with the growth differential Sweden, and Singapore are notable exceptions that See note 7. 8 GDP figures come from International Monetary Fund, World Economic Outlook, April 2018, “GDP, current prices,” http://www.imf. 9 org/external/datamapper/NGDPD@WEO/OEMDC/ADVEC/WEOWORLD. WHICH COUNTRIES ARE BETTER PREPARED TO COMPETE GLOBALLY IN THE DISRUPTIVE TECHNOLOGY AGE? | 5 increasing significantly throughout the period (figure Different rates of GDP growth can result from 5). The difference in growth between countries multiple causes. Countries in earlier stages of with a positive gap and the rest still holds even development tend to grow at higher rates. Further when China and the United States (which, when research is required to understand this relationship combined, originate two-thirds of the future global in more detail.10 private sector value) are excluded from the sample. The difference in GDP growth also is tested by Conclusion category of forward-looking gap (that is, positive This note provides an approximation of a forward- gap is shown in green, negative gap ranging from 0 looking gap analysis of countries’ position in the to −1 percent is shown in yellow, −1 to −3 percent global private sector as it transitions to technology- is shown in orange, and greater than −3 percent is led global competition, where a technology platform shown in red). Moreover, the average growth from business model prevails. By using technology- all countries in each category is examined. The enabled Unicorns as a leading indicator of what the growth differential persists between categories, future global private sector will be, this analysis with countries in green having larger GDP growth provides a predictive measurement of the capacity and countries in red having the lowest growth of countries to generate this future global private (figure 6). sector relative to their peers. Figure 5. GDP Performance (2008 = 0): Average of Countries with Forward- Looking Positive Gap vs. Negative Gap 70 Growth Percentage Points (Base 2018) 60 50 40 30 20 10 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year Average GDP growth (base 2008) of countries with New Economy positive gap Average GDP growth (base 2008) of countries with New Economy negative gap Source: IMF (International Monetary Fund), World Economic Outlook, April 2018, “GDP, current prices.” A more detailed study may use census data and other sources of data to further explore and provide more granularity on the abil- 10 ity of countries to generate firms that compete globally in the two business models (today’s economy versus the new economy) studied in this note. 6 | WHICH COUNTRIES ARE BETTER PREPARED TO COMPETE GLOBALLY IN THE DISRUPTIVE TECHNOLOGY AGE? Figure 6. Average GDP Performance (2008 = 0): Forward-Looking Gap Categories 70 Growth Percentage Points (Base 2018) >0% 60 50 40 0% < ( − 1%) 30 20 (− 1%) < ( − 3%) 10 < ( − 3%) 0 -10 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year Average GDP growth (base 2008) of countries with New Economy positive gap Average GDP growth (base 2008) of countries with New Economy negative gap [0 > (− 1%)] Average GDP growth (base 2008) of countries with New Economy positive gap [(- 1%) > (− 3%)] Average GDP growth (base 2008) of countries with New Economy negative gap [> (− 3%)] Source: IMF (International Monetary Fund), World Economic Outlook, April 2018, “GDP, current prices.” A straight transition from today’s global private technology-enabled Unicorns is not a linear or sector to the future’s global private sector inferred automatic process. It requires a series of coordinated by this analysis is unlikely, because multiple other policy and market reforms in different domains that factors, which are difficult to predict, may influence may take time to generate results. the transition process. Nonetheless, the trends identified by the forward-looking gap analysis Some small- and medium-sized countries such can help policy makers deal with the uncertainties as Colombia, Israel, and Sweden have designed of disruptive technologies in their economies. and implemented targeted strategies and policies Countries can proactively design and implement to develop tech-led economies that result in new policies to respond to the trends. technology-powered businesses (such as technology start-ups). Having a large share of the global private Technology-enabled Unicorns emerged in 2009 sector in today’s economy is not a disadvantage per in the United States; however, they did not start se (as the cases of China, Singapore, Sweden, and showing up in most other countries and expand as the United States show). In fact, it can be turned a global phenomenon until the end of 2013 and into an advantage if that country’s private sector the beginning of 2014. Catalyzing the conditions transitions toward the technology platform business needed for an economy to originate and retain model and leverages its current global position. WHICH COUNTRIES ARE BETTER PREPARED TO COMPETE GLOBALLY IN THE DISRUPTIVE TECHNOLOGY AGE? | 7 8 | CHAPTER TITLE Annex: Country Flags Argentina Mexico Australia Netherlands Austria Nigeria Belgium Norway Brazil Philippines Canada Portugal China Qatar Colombia Russian Federation Czech Republic Saudi Arabia Denmark Singapore Estonia South Africa Finland Spain France Sweden Germany Switzerland India Thailand Indonesia Ireland United Arab Emirates Israel United Kingdom Italy United States Japan Korea, Republic of Luxembourg Malaysia Malta WHICH COUNTRIES ARE BETTER PREPARED TO COMPETE GLOBALLY IN THE DISRUPTIVE TECHNOLOGY AGE? | 9