Objective of This Policy Paper 3

B20 Digital Economy

B20 Turkey, 2015

Draft#2 July 2015 Table of Contents

Objective of this policy paper 3

Executive summary 4

What is Digitalization 5

Challanges and Benefits 5

Digital Double Down- Digital Transformers vs Digital Followers 5

Digital Trust 7

Big Bang Disruption 7

Economics of Big Bang Disruption 8

Digital Density Index 9

Governments’ Role 10

Guiding Digital Transformation

CyberSecurity and IT Security 13

Internet Governance 13

Potential of the IoT 13

Digital Strategy 14

Appendix

Incomplete draft. This version does not represent B20 recommendations. Please do not quote or distribute. OBJECTIVE OF THIS POLICY PAPER .

TASKFORCE CONSTITUTION AND PROCESS . Policy development

Incomplete draft. This version does not represent B20 recommendations. Please do not quote or distribute. EXECUTIVE SUMMARY

Incomplete draft. This version does not represent B20 recommendations. Please do not quote or distribute. What is Digitalization

Increasingly, the world is digital, the economy is digital, the way we do business is digital, our citizens and consumers are digital and demanding more and more digital products and services. Digital technologies have the potential to improve our daily lives from an economic and social perspective, while at the same time creating new challenges threats – both political and commercial.

Challenges and Benefits

Digital poses four key challenges to traditional approaches to regulating economies and markets; responding to emerging technologies; and protecting the rights and security of citizens:

• The borderless - and therefore global - nature of the digital economy;

• The speed of technology and continual change within the digital economy, in comparison with the slow speed of the regulatory process;

• The complexity behind technology and new disruptive business models; and

• The emergence of new cyber threats and how to effectively mitigate them.

Nevertheless, as disruptive and challenging can digitalization be, the impact and the benefits for all the industries are very clear. The widespread adoption of digital technologies can accelerate competitiveness by creating opportunities for productivity, innovation and growth.

According to Accenture research, the productivity gains from a 10 point increase in digital density (a measurement of both the adoption of digital technologies and the enabling environment) could lead to a 1.8% increase in GDP in advanced economies by 2020 and a 3.4% increase in emerging markets.i This research is supported by an Accenture survey of European business leaders, who believed digital technologies would play an important or critical role in boosting EU competitiveness (96 percent), economic growth (93 percent) and job creation (83 percent).ii

Digital Double Down- Digital Transformers vs Digital Followers

To increase the digital density, there has to be a clear understanding of the difference between the digital followers and the digital transformers.iii In just the last few years, “digital” has become more consequential than new rounds of IT efficiency and enablement. The latest research from Accenture reveals a sharp divide between those who continue to view digital technology as a tool for steadily improving existing business activities—digital followers—and those who clearly see something much more profound—the digital transformers. Digital transformers see significant growth potential with digital where the followers don’t.1 52 percent of executives expect digital to “completely” or “significantly” transform their industries, with the remainder expecting moderate or no transformation—this according to the Accenture survey of more than 1,000 executives across 20 countries and 12 industriesiv. The digital transformers understand all too clearly how the nature of entire markets has changed—how Wealthfront Inc., Airbnb Inc., Alibaba.com Hong Kong Limited and others are up-ending whole industry segments—and they

Incomplete draft. This version does not represent B20 recommendations. Please do not quote or distribute. know that similar dynamics are at work in many unexpected ways in their industries too. This is anything but the isolated approach of a few start-up companies. Digital transformers exist in every industry, geography and size; collectively, they constitute a powerful, broad-based trend that demands effective responses from companies everywhere. Their aspirations and investment plans set the pace, and the actions of these organizations should become a core assumption of any future business strategy.

They are acting on their insights at pace and with determination, effectively doubling down on technology aimed at driving growth, deepening digital leadership, and opening up space for future investments in transformative technologies. Collectively, their efforts are enabling them to widen the gap with their peers.v

The digital transformers are not waiting to react to events; they are focusing on growth as the context for digital transformation. Specifically, they are twice as likely as followers to focus their digital investments on growth. Theirs is a balanced approach: they are certainly investing in digital technologies to drive efficiencies, but unlike the followers, that is not their overwhelming focus.

Digital transformers realize that growth strategies demand new approaches for attracting and retaining customers with new and better product and service offerings. So they are playing out the new digital competitive dynamics chiefly on the customer-facing side of their businesses—in sales, products, channels, and customer experiences.

The digital transformers leverage a wide range of digital technologies, they plan for significantly higher levels of total capital and intangible investments in the next few years. They consider the full range of digital technologies to be very important—certainly far more so than do the digital followers.

The digital transformers have already figured out where digital can make the biggest difference. They already plan to invest more than their peers in the areas seen as important for digital success. For instance, they are more concerned about shortages of digital skills and about how they can attract and retain top digital talent. Equally important: They recognize the change management challenges involved in digital transformation, including the significance of whole- hearted, enduring executive support and the need for new operating models. At the same time, they remain concerned about funding levels, especially since earning a return on growth initiatives is more challenging than taking cost out of existing processes and operations.

Digital transformers understand that digital trust is a complex matter vi. It is no longer a question for the chief security officer, the chief information officer or the chief technology officer. Digital trust must become a key management priority in the emerging digital world.

Digital Trust

While some business functions may be more closely involved in building digital trust than others, the entire organization is impacted. All stakeholders now have a much broader responsibility to uphold privacy, deliver benefit in exchange for the use of personal data and remain accountable for the use of data.

Incomplete draft. This version does not represent B20 recommendations. Please do not quote or distribute. From a consumer perspective, we can talk about four keys to digital trust:

1. Security: Protecting information against theft or unauthorized use

2. Privacy/Data control: Controlling who gains legal access to personal information, when they get access, and what they can do with it

3. Benefit/Value: Offering reciprocal benefits that are directly relevant to the data businesses are collecting and storing. This means the information collected is clearly necessary to the service being provided

4. Accountability:Taking responsibility for misuse and incorrect information and ensuring corrective action

It is the responsibility role of consumers, businesses and governments to uphold these four keys to digital trust.

Big Bang Disruption

Gone are the days when companies could more easily follow traditional industry cycles, benefiting from the lag time inherent in customer feedback and competitors’ responses. Technology has destroyed modified latency; decisions are being made immediately and all at once. Customer feedback is torrential and nonstop.vii Competitors can react in lightning time: the actions of so-called “over the top” companies in transportation, retail, media, banking, and payments set competitive terms and response requirements on a regular basis. Digital disruptors are making moves that establish new terms of competition and customer expectations that then require rapid responses from the majority. Therefore and in order to avoid possible unbalances, there is a clear need to review the regulatory landscape in order to provide a fair level playing field for all agents to operate. The whole cycle spins faster, creating far greater potential for what Accenture terms “big bang” disruption, where rapid test-and-learn cycles are just one possible defense.viii

Big Bang disruption is a dramatic new kind of innovation. Instead of entering the market as a product that is either inferior to or more expensive than those of established incumbents, a Big Bang Disruptor is both better and cheaper from the moment of creation. Using new technologies including broadband networks, cloud-based computing and increasingly powerful and ubiquitous mobile devices, Big Bang Disruptors can destabilize mature industries in record time, leaving incumbents and their supply-chain partners dazed and devastated.

Economics of Big Bang Disruption The continued application of exponential technologies has created a series of transformative changes in market economies. They are simultaneously driving down the three four core costs of products and services:

Incomplete draft. This version does not represent B20 recommendations. Please do not quote or distribute.  The Declining Cost of Creation: Steep declines in the cost of key raw materials, including computer hardware and software, along with increasingly efficient supply chains, empowers innovators large and small to compete on all three traditional strategic dimensions at once: products and services can begin life with higher quality, at a lower price and more easily customized that those of traditional competitors.

 The Declining Cost of Information: As social networks, microblogging, and independent review services proliferate, consumers now have easy access to near perfect market information. Successful product and service experiments can be discovered and adopted instantaneously by customers across every traditional segment. Innovators no longer need to cultivate “early adopters” to establish new markets.

 The Declining Cost of Experimentation: Thanks to global broadband networks and ubiquitous computing devices, innovators and users can now be connected in an environment optimized for collaboration. New products and services often begin life as simple combinations of existing components, tested with little cost or risk directly in the market with real consumers. Compared to traditional proprietary R&D, the “cost of combine” increasingly beats the “cost of design.”

 The Declining Cost of Distance: Geographical distance between exporting and importing countries traditionally has a negative effect on trade. It is commonly found that increasing distance by 10% reduces trade by 15% to 20%ix. Digital technology greatly reduces that effect, as it provides the ability for businesses of all sizes to make their products and services accessible and later delivered to digital consumers all around the world.

Big bang disruptors come and go in relatively short blasts of market penetration and market saturation. The longstanding bell curve of technology adoption first proposed by Everett Rogers now appears placid and predictable by comparison. When Big Bang Disruptors take off, they do so quickly, rising and falling less like a curve and more like a shark’s fin. Where traditional technology marketing moves through five distinct market segments, Big Bang Disruption has only two—trial users and everybody else. Big bang disruption begins with a series of seemingly random experiments, as innovators work with different combinations of component technologies and business models. Most experiments fail, giving incumbents the false sense that disruption is still far off. Yet, when the right combination of technologies is combined with the right business model, take- off is immediate. Customers adopt the disruptor as quickly as its producers can supply it. Market penetration is often nearly instantaneous. For software-based products, innovators may sign up millions of users in a matter of days. Then, as the disruptor quickly approaches saturation, adoption drops at nearly the same pace with which it took off, leading to a period of rapid if uneven decline. One cannot forget that this transformation is feasible due to technology but also to connectivity and an easy access to Internet. The role of high speed network infrastructures is key and should be taken into account. Connectivity is at the heart of the digital economy Without high speed broadband networks and the relevant efforts made by the private sector worldwide to deploy these high speed broadband networks, the digital economy, the big bang disruption and the appearance of new business models, products & services could not be a reality today neither in the future. Therefore, investments in broadband networks should be supported through smart public policy measures.

Incomplete draft. This version does not represent B20 recommendations. Please do not quote or distribute. Digital Density Index In a joint study, Accenture Strategy and Oxford Economics not only confirmed the link between increased use of digital technologies and greater productivity, but also quantified the resulting impact on competitiveness and economic growth. According to the analysis, increased use of digital technology could add as much as US$1.36 trillion to the GDP of the world’s top 10 economies in 2020—which is 2.3 percent more than baseline forecasts. In this ambitious but achievable scenario, a 10 point improvement in Digital Density could raise annual average growth rates between now and 2020 by around 0.25 percentage points in advanced economies and around 0.5 percentage points in emerging markets. Effect of 10 point uplift in country digital density: On average annual On GDP in 2020 GDP growth rates (2015 to 2020)

0.25 percentage 1.8 percent higher In advanced points higher economies than baseline than baseline

0.5 percentage 3.4 percent higher In emerging points higher economies than baseline than baseline

0.32 percentage 2.3 percent higher In the world’s top points higher 10 economies than baseline than the baseline

Countries have different Digital Density scores today and different strengths and weaknesses, requiring different interventions for progress. Governments should understand how digital impacts economic activity in a structured way and thus can develop and manage the required policies and areas of focus. Thus businesses should understand the broad role digital technology can play in their future growth, competitiveness and investments. The Digital Density Index is a comprehensive scorecard of what truly matters to digitally lead economic productivity. A higher score on the Digital Density Index reflects a broader and deeper adoption of digital technologies, as well as the skills, ways of working, and regulatory frameworks needed to realize their economic potential. The study shows that boosting an economy’s score on the Digital Density Index can lead to greater productivity and, other things being equal, faster GDP growth. Reflecting the pervasive nature of digital technology, the index covers more than 50 indicators across four equally weighted areas of economic activity: Making Markets, Running Enterprises, Sourcing Inputs, and Fostering Enabler. These indicators range from the volume of transactions conducted online, the extent to which interactions between firms are automated, and the use of technologies such as the cloud to

Incomplete draft. This version does not represent B20 recommendations. Please do not quote or distribute. streamline processes; to the pervasiveness of technology skills in a business, the use of digital platforms to access capital and talent, and government and business acceptance of new digitally driven business models.

Area Definition

This is the recognition that existing markets Making are becoming increasingly digital, and new markets markets are being created through digital means. This is the extent to which the factors of production are sourced and used with digital Sourcing technology. The second part of sourcing inputs inputs is to capture the degree to which digital technologies change the lifecycle of sourcing these factors for the business. Running enterprises relates to the extent to which firms are embracing digital technologies Running and activities to carry out business functions enterprises such as supply chain, strategy, talent, procurement and research and development.

Fostering The impact of digital is in part enabled by the enablers institutional and socio-economic environment.

While the Digital Density Index’s indicators can help pinpoint specific areas for improvement, the broad areas of economic activity that the model describes can also help government and business leaders think differently about how digital technology transforms business and economies to capitalize on new growth opportunities.

Governments’ Role

Governments need to act to convert digital potential into growth, across all sectors of the economy, by creating the right conditions for businesses to invest: Harmonization and and modernization of EU rules should be considered, particularly on data protection; globally ensure interoperability of standards, and mutual recognition of regulation; the free flow of data and the creation of an open platform; enable businesses to leverage the full potential of digital technologies at scale; and incentivize investment in digital infrastructure and services. Helping businesses invest in the skills of existing and future workforces and allowing them access to the global workforce by improving labor mobility should be a priority. To capture the innovation they bring to the economy, supporting the growth of digital entrepreneurs and start-ups through the development of digital clusters, which facilitate access to technology, finance and markets needs to be considered.

In reaction to fast-paced digitalization, governments are responding by introducing or revising legislation to protect their citizens’ data and to some extent to protect local business interests

Incomplete draft. This version does not represent B20 recommendations. Please do not quote or distribute. against global players. This includes the introduction of problematic data localization requirements or restrictions on public procurement. There is also the emergence or expansion of government cybersecurity requirements on businesses, either in the form of legislation and standards, or public procurement requirements.

In today’s globalized and data-driven world, traditional regulatory approaches are being challenged as technology outpaces the regulatory response.

Governments should adopt a strategic approach to regulation that protects personal data, recognizes global business models, and leaves room for innovation so businesses and consumers can take advantage of new digital technologies. Regulation should be simple, minimize administrative burden, be consistent with international standards and provide for sanctions that are proportionate to risk.

There should be no unnecessary restrictions on the free and secure flow of data, which drive up costs and limit consumer choice. There should also be no discriminatory restrictions on public procurement.

Guiding Digital Transformation  Making markets: Understand and support new business models and markets

Create new growth opportunities by supporting the digitalization of markets and the creation of whole new markets and converged industries. Growth-oriented businesses can boost Digital Density by focusing on using digital technologies to better meet the needs and wants of customers (“the outcome economy”). To help new businesses and markets flourish, governments must be a partners to businesses, encouraging the adoption of new models and disruptive technologies. An example of business and government working together is the German “Smart Service World” program. Its aim is to determine how the business models of suppliers, manufacturers, and operators will be revolutionized by new types of products and services. This public—private partnership supports Germany’s goal to become the number-one country in Europe in terms of digital growth

 Running enterprise: Transform how you operate

An original selling point of digital technologies was their ability to take time, cost, and distance out of an activity or process. That still holds true today. Companies and governments should increase their use of digital technologies to transform key business processes to create greater leaps in efficiency and productivity. Global mining company Rio Tinto, for example, has increased free cash flow in its copper mining operations by leveraging data streams from processing equipment to constantly optimize the production performance of the plant. In the U.S., the Internal Revenue Service used predictive analytics to save $20 billion in tax fraud refunds in 2012, while the General Services Administration’s Cloud First policy requires agencies to use cloud computing where possible to maximize capacity utilization, improve IT flexibility and responsiveness, and minimize cost.

Incomplete draft. This version does not represent B20 recommendations. Please do not quote or distribute.  Sourcing inputs: Think forward to the Industrial Internet of Things

To keep growing and innovating, economies and businesses must use land, talent, capital, ideas, and other resources ever more effectively. The Industrial Internet of Things will further accelerate the digitalization of supply chains as objects interact with objects and humans to optimize processes or create new product and service hybrids. For example, Michelin solutions’ EFFIFUEL solution™ uses high-tech and high-touch to reduce fuel consumption in truck fleets. Sensors inside vehicles collect data on fuel consumption, temperature, speed and location. Michelin solutions’ fuel experts analyze this data and recommend ways fleet managers and truck drivers can use less diesel fuel when driving. The savings can be as much as 2 liters of fuel for every 100 kilometers driven.

 Fostering enablers: Look beyond digital infrastructure

High-speed broadband is important essential for the future digital economy. High speed broadband infrastructures should be supported and fostered through smart public policies enabling investments in this area, as these infrastructures ensure the appearance of new services and products, enabling economic & social growth, there were they are deployed. However, digital requires a much broader range of also additional enabling factors beyond technology infrastructure. Governments and businesses must work together in at least four additional areas to create an environment in which digital can flourish. The first is making it easier for entrepreneurs to launch and grow digital businesses, which Italy did in 2014 by eliminating registration fees for startups and establishing a legal framework for crowdfunding. As one of the B20 Taskforces “SME and Entrepreneurship” act as vital forces for innovation, economic growth and job creation across the world. Therefore it is crucial to enable for entrepreneurs to launch and grow digital businesses, where digital technologies remove traditional barriers to expansion and enable SMEs to enter new and bigger markets using agility and flexibility to compete. It is also needed to reduce the SME financing gap by finding good- practice policy actions, reduce the risk inherent in SME financing, and expand alternative avenues for financing as B20 indicates. Existing challenges and obstacles of SMEs and entrepreneurs should be overcome to succeed in today’s economic environment. Finally, beyond technology infrastructure is postal infrastructure, which now acts as a key success factor to SMEs engaging in digital trade. Efficient and affordable delivery services are indeed critical for the growth of technology-enabled small businesses, and they should therefore be adapted to the small global trader in terms of pricing, parcel sizes, return, tracking technologies, standardization, etc. The second is streamlining and simplifying market rules to reflect the degree of commerce, online and offline, that now depends on digital. It is necessary to take actions on the prevalence of tariff and non-tariff measures, opaque customs procedures, digital barriers and storage mandates to enable the trade. The European Union, for example, wants to put in place a “Digital Single Market” of 500 million people, based on harmonized data protection rules, ecommerce, telecommunications, copyright and consumer protection.

Incomplete draft. This version does not represent B20 recommendations. Please do not quote or distribute. The third involves initiatives to develop digital skills, such as Estonia’s nationwide program called ProgeTiiger (Programming Tiger) to teach children aged seven 7 to 19 how to write software code. As one of the B20 goals to address the loss of jobs associated with rapid technological development and the re-skilling needed for rapidly shifting job markets, the need for developing digital skills for the future is inevitable. In addition to that, the world is expected to have a higher mismatch of skills demanded and supplied, due to disruptive technological changes. The increased productivity through the use of new technologies implies a change of approach towards skills needed for jobs. is a threat against mid skill jobs. The fourth is consumer and citizen trust that businesses and governments will use their personal data responsibly. Digital trust relies on secure infrastructure and appropriate data protection rules worldwide, as well as initiatives by businesses to become increasingly transparent with their customers as to how and why their data is used.

Cybersecurity and IT Security

When it comes to Cybersecurity and IT Security Rules, all organizations need to build information security systems that are resilient and able to respond to rapidly evolving security threats.International and industry-driven information security standards, with third-party audit and certification assessment, are an important mechanism to manage security risks. As an example, Accenture has chosen to follow international standard ISO27001 to manage security risks.

Cybersecurity requirements should be voluntary and based on international standards, as adherence to mandated standards or technology does not necessarily reduce security risk and would limit a business’ flexibility to respond effectively to rapidly evolving threats. There should be a support for the sharing of threat information across the public and private sectors, however, public disclosure of security breaches should be proportionate to the risk involved and avoid any unnecessary harm to the reputation and confidential information of affected businesses.

Ensuring an open, stable, secure and thriving Internet is vital for the development of the global economy. The internet underpins innovation and enterprise, open markets and competition, and free and fair trade, rendering it the global trade route of the 21st Century.

Internet Governance

There is a danger of fragmentation of the Internet as different groups—political and non-political —pursue separate paths to resolve the recognized challenges to Internet Governance. The internet should be governed through a bottom-up, distributed, multi-stakeholder approach that involves open collaboration between industry and government, as well as academic and civil society. The multi-stakeholder approach reflects the very nature of the Internet itself. The NETMundial Initiative, convened by the World Economic Forum, provides an additional platform to engage all stakeholder groups various stakeholders in a dialogue on this important issue covering topics not deal elsewhere and as such not duplicating other processes.

Potential of the Internet of Things (IoT)

Incomplete draft. This version does not represent B20 recommendations. Please do not quote or distribute. The promise and potential of the internet remains enormous, with mobile technologies extending it to four billion people who do not have it today:

o The IoT will connect billions of devices and create new services and capabilities;

o The IoT market has been estimated to hit $8.9 trillion in 2020x;

o According to General Electric, 46 percent of the global economy ($32.3 trillion in global output) will be impacted by the industrial IoT. xi

Digital Strategy

There may soon come a point where the terms “digital” and “strategy” are all but synonymous, as digital becomes the way in which competition is redefined and go-to market models are reshaped. The digital transformers are already moving rapidly in this direction. Their broader focus on growth investments, digital technology and executive leadership reflects their expectations for change. Together, the actions of these forward facing organizations and the accelerated pace of digital market competition make digital transformation a core assumption of any future business strategy. Ultimately, every company’s strategy will need to incorporate some form of digital transformation, even if transformation is not its explicit strategic goal. Digital change is coming fast, and it will not be stopped. It will come from the outside in—in the form of customer choices, new products, services and experiences. It will be entirely agnostic in its impact, affecting every company and every industry.xii

Incomplete draft. This version does not represent B20 recommendations. Please do not quote or distribute. i Accenture Digital Productivity and Growth Study (to be published) ii Accenture Digital Productivity and Growth Study (to be published) iii https://www.accenture.com/tr-en/insight-doubling-down-drive-digital-transformation iv http://www.accenture.com/ceobriefing v M. McDonald, and R. McManus,“Growth Strategies for a Digital World,” March 2014. http://www.accenture.com/digitalstrategy vi https://www.accenture.com/cn-en/insight-accenture-four-keys-digital-trust.aspx vii R. Wollan, D. Palmer and N. Jain, “Digital Customer: It’s time to play to win and stop playing not to lose.” www.accenture.com/gcpr13 viii L. Downes and P. Nunes, “Big Bang Disruption.” http://www.accenture.com/bigbangdisruption ix A. Lendle, M. Olarreaga, S. Schropp, P-L. Vezina, “There goes gravity: how eBay reduces trade costs”, CEPR Discussion Paper 9094, 2012 x Worldwide Internet of Things (IoT) 2013–2020 Forecast: Billions of Things, Trillions of Dollars, IDC, October 2013 xi Industrial Internet: Pushing the Boundaries of Minds and Machines, General Electric, November 2012 xii M. McDonald and R. McManus, “Growth Strategies for a Digital World.” March 2014. http://www.accenture.com/us-en/Pages/insight-growth-strategies-digital-world.aspx