A Digital 'New Deal'

a front view close up of five...
a front view close up of five...

Despite being home to Internet leaders from Amazon to Zynga, the digital economy of the United States is falling behind.

It's still the biggest in the world -- nearly $700 billion in 2011, which is projected to rise to $1 trillion in 2016. But as measured by its contribution to national GDP, America's Internet economy already trails the UK, South Korea, China, and Japan. By 2016 it will be overtaken by India and the EU-27.

Why does this matter, other than perhaps national pride? In a word: jobs.

Research by the Boston Consulting Group shows that small- and medium-sized companies that embrace the Internet in their business operations grew by 10 percent annually in the last three years, adding jobs as they did so. Companies that did not do so shrank over the same period. We encountered the same dichotomy in every country we investigated.

The Internet economy is one of the few bright spots in a dismal global economic landscape. It is creating whole new industries and opportunities. In the developed markets of the G-20, the Internet economy will grow at an annual rate of 8 percent over the next five years. Growth rates will be more than twice as fast in developing markets.

Not only is this growth delivering new jobs across the employment spectrum -- from app developers to smartphone manufacturing, from Internet marketers to "big data" analysts -- but the jobs this growth creates are more valuable than others. Estimates show that in the United Sates the multiplier effect for high-tech positions is three times that for jobs in traditional manufacturing. Because many Internet jobs can be located pretty much anywhere, it is up the businesses and governments in the U.S. to ensure that we get our fair share.

There are models to follow. Several of the most advanced digital economies -- South Korea and Sweden are two -- pursue clear-cut, long-term strategies to guide their Internet economies. Sweden was the first country in Europe to develop a broadband policy with the principle that everyone should have access. The government provided IT training to 75,000 teachers and funded IT training for small businesses and the unemployed. It led a public-private partnership to develop Stockholm's Kista Science City, home to more than 1,000 information and communications technology (ICT) companies, with some 25,000 employees and Europe's largest ICT cluster. South Korea saw the potential of ICT technologies, many then still in their youth, during the southeast Asian economic crisis of the late 1990s. They have turned the country into an economic powerhouse. In London public and private initiatives combined to develop the Silicon Roundabout, home to some of the world's leading Internet games, marketing, and e-commerce companies.

The U.S. can benefit from a similar sort of 21st-century industrial strategy, a plan that builds on America's unsurpassed strengths in technology, productivity, and entrepreneurism, a plan that encourages the types of Internet businesses and jobs we want to locate here, a digital "New Deal" in which both the public and private sectors participate.

Government -- federal, state, and local -- must lead with smart policy in such areas as taxes and talent. The right incentives can help facilitate industry clusters -- the strategy China and others have pursued to great effect. We have our own examples of success: Detroit in the Industrial Age, Silicon Valley in the Information Age. Existing clusters of expertise in Boston, Dallas, Los Angeles, and New York, among other cities, can be encouraged to expand. Tax policy can also favor insourcing rather than outsourcing.

Education and immigration policy can help ensure that America continues to have the best talent pool in the world. The U.S. already has the finest engineering and technology universities. Our secondary schools can start teaching computer programming alongside other "foreign" languages. Our community colleges and vocational training institutions can deliver the skills that attract employers. We train thousands of people from other countries. For those with needed skills, the U.S. should consider offering a six-month green card after graduation that becomes permanent when they get a job.

The private sector must do its part, too, first and foremost by looking close to home before sending jobs and functions overseas, just like America's manufacturers are doing. Conventional wisdom says the U.S. can't compete with China, or with numerous other supposedly lower-cost nations. As we have argued elsewhere, the conventional wisdom is wrong. The U.S. is increasingly competitive with China and will only become more so in the years to come. But that competiveness is for naught unless companies make the effort to analyze the economics before they invest in a new "cheaper" plant overseas.

The economic ecosystems that have built up around the Internet are large, dynamic, and growing fast. U.S.-based Internet giants such as Apple, Amazon, Facebook, and Google sit at the heart of many. A concerted public-private effort can ensure that the most attractive businesses base themselves in America, creating more than our fair share of Internet-based economic activity -- and jobs.

Jean-Manuel Izaret (San Francisco) and Paul Zwillenberg (London) are Partners and Managing Directors, The Boston Consulting Group.