Investment and Industrial Policy:

A Perspective on the Future

UNCTAD TRADE AND DEVELOPMENT BOARD, SIXTY-FIFTH SESSION

Panel Discussion | October 1, 2018

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited
Contents

New era of global flows

New opportunities for economic growth
New world of policy challenges

McKinsey & Company 2

After 20 years of rapid growth, traditional flows Finance
Service
of goods, services, and finance have declined relative to GDP Goods
Flows of goods, services, and finance, 1980–2017, $ trillion, current All flows as
% of GDP
FDI, 1980–2017, $ trillion, current FDI as % of GDP FDI
4,1 51
2,3 1,7 2,7 3,3 2,3 2,0 2,1 2,1 2,1 1,9 2,6 2,5 1,8
1,4 1,6 2,0 1,7
0,5 0.9
1.9 1.9 1.9 46
1.4 1.5 1.6 1.6 1.4 1.4
1.4 1.4 1.3
1.2
0.8 0.6 0.9 43
0.6 0.7 -16 p.p.
0.1 0.2
39 39 39
1980 90 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 2017
37 37 37
35 35 35
34 33 33

30 31 31 31
29 30 29
28 27 28 28
27 28 26
26 24 25 25
26
22
24 23 23 21
23 22 22 22 22 18
17
20
13
12
10 9 10 10 11
8 9
6 6
4 5 5 5 6
3 3 3 3 3 3 3 4

1980 1990 2000 2007 2010 2017

SOURCE: UNCTAD; IMF Balance of Payments; World Bank; McKinsey Global Institute analysis McKinsey & Company 3
 Trade
However, at the same time, Finance
the world has entered the new era of digital globalization Data
Flow dynamics, relative to the year of peak value in 1980–20171

Cross-border data
flows expected to
grow 3.5x by 2021

1980 85 90 95 2000 05 10 15 2020

1 Finance = 2007 ($12.2 trillion), Trade = 2013 ($23.5 trillion), Data = 2017 (estimated 543 terabits per second of cross-border bandwidth used)
SOURCE: McKinsey Global Institute’s “Digital Globalization: The New Era of Global Flows” McKinsey & Company 4
Globalization: Then vs. Now

SOURCE: McKinsey Global Institute’s “Digital Globalization: The New Era of Global Flows” McKinsey & Company 5
Cross-border data flows are surging and connecting more countries
Used cross-border bandwidth

Regions NA EU AS LA ME AF OC
United States and Canada Europe Asia Latin America Middle East Africa Oceania

Bandwidth
Gigabits per second (Gbps)
<50 50–100 100–500 500–1,000 1,000–5,000 5,000–20,000 >20,000

2005 2014 45x larger

100% = 4.7 Terabits per second (Tbps) 100% = 211.3 Tbps

EU EU
NA NA
AS AS
ME ME

AF AF
OC OC

LA LA

NOTE: Lines represent interregional bandwidth (e.g., between Europe and Africa), but exclude intraregional cross-border bandwidth (e.g., connecting European nations with one another).

SOURCE: TeleGeography, Global Internet Geography; McKinsey Global Institute analysis McKinsey & Company 6
Digital technologies are changing how business is done
across borders and broadening participation

SOURCE: McKinsey Global Institute’s “Digital Globalization: The New Era of Global Flows” McKinsey & Company 7
Contents

New era of global flows

New opportunities for economic growth
New world of policy challenges

McKinsey & Company 8

How globalization increases GDP

SOURCE: McKinsey Global Institute’s “Digital Globalization: The New Era of Global Flows” McKinsey & Company 9
Digitization is transforming business models
in ways that enable more cross-border activity

Flow type
Data Goods Services Finance FDI

Cross-border implications of digitization

Remote Remote tracking  

monitoring Remote maintenance  

Supply-chain Remote inventory management  

management Supplier management  

Cross-border access to customers   

Access to
global Cross-border access to labor  
markets
Cross-border access to finance  

Centralized back-office operations  

Business Cross-border digital payments  

operations
and strategy Real-time communications and collaboration  

Data sharing and analytics-driven decision making     

SOURCE: McKinsey Global Institute analysis McKinsey & Company 10

Global flows account for approximately 10 percent of global GDP output;
data flows account for a large (arguably largest) chunk of that contribution
Impact on
Long-term impact on level of GDP1 GDP, 20171
% $ trillion

Goods trade 3,5

Data flows 3,0

Migration2 2,0

FDI 1,6

All flows 10,1

Accounting for secondary effects of data flows – in that they enable trade flows, FDI, and even people flows –
the impact of cross-border data flows on global GDP surpasses the impact of global goods trade

1 Includes inflows and outflows data for 139 countries in MGI Global Flows model.
2 Global migration flows declined slightly from 2003 to 2013, resulting in a positive impact despite a negative coefficient. Migration flows are negligible or slightly negative at the global level,
possibly due to the loss of skilled labor in developing countries or the difficulties of absorbing a large influx of refugees or migrants. However, migration flows have a positive impact on
productivity in advanced economies.

NOTE: Numbers may not sum due to rounding.

SOURCE: McKinsey Global Institute analysis McKinsey & Company 11

The MGI Connectedness Index1 shows that advanced economies
are generally more connected than developing countries
Connectedness score, 2014 Emerging Developed Size of circle represents
(Number in brackets represents the rank on the data connectedness sub-index2) $ value of flows in 2014
70
Correlation coefficient (r) = 0.54
65

60 Netherlands (#1)
Singapore (#6)

55
United States
Germany (#2) (#7)
50

45
United Ireland (#9)
40 Kingdom
(#3)
35 China (#38)

30 France (#4) Belgium (#8)

Saudi Arabia (#53)
25
Canada United Arab Emirates (#46)
20 Russia (#25) (#18)
South Korea
Italy Switzerland (#13)
15 Mexico Spain Sweden (#5)
Ukraine (#16) Austria
Malaysia
10 Thailand Portugal Kuwait
India Australia
Turkey
Japan
Denmark Norway
5 Vietnam Qatar
Brazil
Finland
Greece Czech Republic
0 Indonesia (#10)
0 10 20 30 40 50 60 70 80 140
1 The McKinsey Global Institute Connectedness Index measures the connectedness of 131 countries
Per capita GDP, 2014
across all five flows of goods, services, finance, people, and data and communication;
$ thousand, purchasing power parity, current international dollar
he index reflects the level of inflows and outflows of all types of flows adjusted for country size
2 Listed for the top 15 countries by MGI connectedness score and for top 10 countries based on data connectedness sub-index (where not overlapping)
SOURCE: IMF; McKinsey Global Institute analysis McKinsey & Company 12
Limited participation in global flows by many countries has had a real
economic cost; going forward countries at the periphery of the world’s
digital networks stand to gain even more than those at the center
Output gap
% of GDP

>75
51–75 ▪ While participation in global flows is not the
26–50 panacea for the other factors that may dampen a
country’s economic growth1, our analysis suggests
1–25
some countries may grow their GDP in the
<1 long-term by over 50% by participating fully
in global flows
No data

▪ Over time, participation in data flows will grow

in importance vs. traditional flows

▪ Unlike with traditional flows, countries on the

periphery of the global network of flows
have the most to gain from increasing
cross-border data flows

▪ Countries benefit from receiving cross-border digital

flows as well as producing them; in other words,
countries do not need to transform
themselves into digital content or platform
producers to benefit from data flows

1 For example, uncompetitive business environment, weak rule of law, corruption

SOURCE: McKinsey Global Institute analysis McKinsey & Company 13
Contents

New era of global flows

New opportunities for economic growth
New world of policy challenges

McKinsey & Company 14

Policy-makers need a clear agenda to capture the full potential of global flows

Key enablers for digitalization specifically

1. Think strategically about the role the country can play in global value chains

2. Address policy and administrative barriers that hinder global flows

3. Address the dislocations

4. Invest in human capital

5. Build the necessary physical infrastructure and close the digital divide

6. Create a strong business and institutional environment for the digital economy to thrive

7. Maintain an open Internet while protecting privacy

8. Make cybersecurity a top priority

Can data flows and ‘Digital’ economy be the enablers for some countries
to leapfrog in development, like they have been for tech businesses recently?

SOURCE: McKinsey Global Institute analysis McKinsey & Company 15

BACKUP

McKinsey & Company 16

The outlook also appears more challenged than a year ago

Decline in the value of announced FDI projects Deteriorating outlook of overall economic conditions

SOURCE: UNCTAD; Economic Conditions Snapshot, McKinsey Global Survey, September 2018; team analysis McKinsey & Company 17
Data flows and traditional flows paint different pictures of the world
The US is the largest producer of digital content
for Internet users across the globe

United States1 Europe Asia Pacific Other

Location of top 100 websites requested by users

% by user region, as of April 2015
China, the United States, or Germany is
the major trading partner for most countries US and Canada 88 10 2
Largest trading partner in goods, 2014
Latin America 66 16 18

Africa 56 32 12

Asia Pacific 51 17 32

Europe 36 61 3

15

12 100% = 42
Hosting location of top
1 million websites, 20132 1 million
% websites

1 Includes United States and Canada for location of top 100 websites requested by users 31
2 Based on Pingdom analysis of Alexa top 1 million websites
NOTE: Data omitted for some small nations as indicated in gray

SOURCE: : UNCTAD; TeleGeography, Global Internet Geography; Pingdom; McKinsey Global Institute analysis McKinsey & Company 18
Flows remain concentrated among a few leading countries,
however data flows show more broadening of scope than others
% of world total Top 15 countries Next 20 countries All others

Global goods flow distribution Global services flow distribution

2005 2014 2005 2014

13 14 13 14

21 $10.6 $19.0 22 $2.5 $4.9

trillion 23 trillion trillion 23 trillion
66 63 65 62

Global FDI flow distribution Global data flow distribution

2005 2014 2005 2014

4 5 2 7
11
17 16 16
$1.39 $1.63 4.8 211
trillion trillion Tbps1 Tbps1

79 79 77
86

1 Tbps = terabits per second

NOTE: Numbers may not sum due to rounding

SOURCE: : UNCTAD; IMF; TeleGeography, Global Internet Geography; McKinsey Global Institute analysis McKinsey & Company 19
The biggest online platforms have user bases
on par with the populations of the world’s biggest countries
Active users of online platforms vs. country population, million
Online platforms1 Countries2

Facebook 1,590
China 1,372
India 1,314
YouTube 1,000
WhatsApp 1,000
WeChat 650
Alibaba 407
Instagram 400
United States 321
Twitter 320
Skype 300
Amazon 300
Indonesia 256
Brazil 205

1 4Q15 or latest available

2 2015 population

SOURCE: Facebook; Twitter; Alibaba; Fortune; Statista; Population Reference Bureau; McKinsey Global Institute analysis McKinsey & Company 20
Individuals are participating in globalization,
and 914 million have cross-border social media connections

Social networking users with International Cross-border

at least one foreign connection travelers e-commerce shoppers
914 million 429 million 361 million

People living outside Cross-border Cross-border Students

home country online workers online students studying abroad
244 million 44 million 13 million 5 million

NOTE: Numbers adjusted to account for overlap between platforms and for individuals making multiple international trips in the same year.

SOURCE: Facebook; AliResearch; US Department of Commerce; OECD; World Bank; McKinsey Global Institute analysis McKinsey & Company 21
MGI Connectedness Index (1/2)
Country connectedness index and overall flows data, 2014
Rank of participation by flow as measured by flow intensity and share of world total
Connectedness index rank 1–10 11–25 26–50 >50 Flow intensity 100+ 70–99 <70
1 2
Connectedness Index rank Flow value Flow intensity
Rank Country Score Goods Services Finance People Data $ billion % of GDP
1 Singapore 64.2 1 2 2 12 6 1,392 452
2 Netherlands 54.3 3 3 6 21 1 1,834 211
3 United States 52.7 7 7 3 1 7 6,832 39
4 Germany 51.9 2 4 8 3 2 3,798 99
5 Ireland 45.9 32 1 1 28 9 559 227
6 United Kingdom 40.8 13 5 5 6 3 2,336 79
7 China 34.2 4 16 4 82 38 6,480 63
8 France 30.1 11 8 9 7 4 2,262 80
9 Belgium 28.0 5 6 33 33 8 1,313 246
10 Saudi Arabia 22.6 20 28 27 2 53 790 106
11 United Arab Emirates 22.2 6 23 17 4 46 789 196
12 Switzerland 18.0 12 11 10 17 13 848 115
13 Canada 17.3 16 22 11 11 18 1,403 79
14 Russia 16.1 21 25 18 5 25 1,059 57
15 Spain 14.4 25 13 19 14 16 1,105 79
16 Korea 14.0 8 12 28 50 44 1,510 107
17 Italy 13.4 17 18 24 16 19 1,587 74
18 Sweden 13.0 29 14 22 31 5 572 100
19 Austria 11.7 26 17 31 20 12 470 108
20 Malaysia 11.6 9 19 25 26 43 610 187
21 Mexico 10.7 14 63 34 18 41 1,022 80
22 Thailand 10.7 10 15 36 44 64 605 162
23 Kuwait 10.6 37 46 13 13 75 306 153
24 Japan 10.5 15 20 12 81 20 2,498 54
25 Kazakhstan 10.0 48 73 41 8 57 176 83
26 Ukraine 9.8 38 39 87 10 34 133 101

1 Flows value represents total goods, services, and financial inflows and outflows.
2 Flow intensity represents the total value of goods, services, and financial flows as a share of the country’s GDP.
SOURCE: McKinsey Global Institute analysis McKinsey & Company 22
MGI Connectedness Index (2/2)
Country connectedness index and overall flows data, 2014
Rank of participation by flow as measured by flow intensity and share of world total

Connectedness index rank 1–10 11–25 26–50 >50 Flow intensity 100+ 70–99 <70
1 2
Connectedness Index rank Flow value Flow intensity
Rank Country Score Goods Services Finance People Data $ billion % of GDP
27 Australia 9.7 30 34 21 15 33 825 57
28 Denmark 8.9 35 9 32 41 11 369 108
29 Jordan 8.8 73 50 75 9 83 50 138
30 India 8.5 24 10 35 58 70 1,316 64
32 Czech Republic 7.5 18 33 57 59 15 397 193
34 Poland 7.0 23 31 47 34 22 585 107
35 Hungary 6.8 22 30 26 62 17 287 209
36 Norway 6.0 36 24 20 46 24 458 92
37 Vietnam 5.7 19 54 45 103 61 350 188
39 Finland 5.5 46 27 23 70 10 390 144
40 Portugal 5.5 47 36 30 23 31 255 111
41 Turkey 5.1 28 40 53 38 29 521 65
43 Israel 4.9 51 32 49 24 56 248 82
44 Brazil 4.5 41 38 14 125 30 869 37
45 Chile 4.1 45 58 16 102 27 239 92
47 Greece 4.1 60 29 54 35 42 160 67
48 New Zealand 3.9 67 48 61 25 51 130 63
51 Indonesia 3.4 31 49 38 106 76 504 57
53 South Africa 3.3 34 57 52 64 80 277 79
54 Philippines 3.2 54 41 44 52 67 230 81
64 Morocco 2.6 58 43 74 56 65 104 97
73 Egypt 2.2 68 42 69 73 71 158 55
83 Nigeria 1.9 55 76 48 128 98 268 47
86 Peru 1.8 62 88 51 104 49 122 60
118 Kenya 1.3 100 84 127 119 91 35 58

1 Flows value represents total goods, services, and financial inflows and outflows.
2 Flow intensity represents the total value of goods, services, and financial flows as a share of the country’s GDP.
SOURCE: McKinsey Global Institute analysis McKinsey & Company 23