Based on an extensive analysis of the Digital Value Add of Dutch organizations The METISfiles has valued the Gross Digital Domestic Product at €129 billion, 22% of Dutch GDP. Read more below!
Digital Value Add
In our previous discussions (here, here and here) surrounding the Dutch Digital economy we concluded that the current sizing is falling short as in most calculations the ICT generated value-add is not included. A decent sizing of the Dutch Digital economy should include all of the value add for which ICT is responsible. Here is where we get into a somewhat grey area. How do we know which processes are handled through ICT and how do we value that?
From the classic economic theory it is the combination of natural resources, labor, capital and entrepreneurship that is responsible for the value add of organizations. At least, until a few years ago. While economists still argue how to value the use of ICT in the production process, it is clear that its role cannot be underestimated. ICT is used to find and exploit natural resources, ICT is used to increase labor productivity, an increasing part of capital is being spent on ICT infrastructure and emerging new business models show the impact ICT has on entrepreneurship. Yet what is the value of ICT for an organization and the Dutch economy as a whole?
To come up with a sizing of the Dutch Digital Economy The METISfiles has taken a pragmatic approach. Our assumption is that the ICT intensity of an organization has a direct relationship with its value add. More specifically, we think that ICT intensity positively relates to the digital value add (DVA) of an organization. Digital value add is that part of the value add of a company that is generated through the use of ICT. ICT intensity is defined as the total full time equivalents (FTE’s ) in an organization that use ICT for executing their primary business tasks more than 50% of their working hours as a percentage of all FTE’s in an organization. We purposely left out people handling shopping counters or users of embedded software systems e.g. truck drivers and operators, although the case can be made that their tasks are very much ICT dependent.
First we distinguished the 19 vertical markets using CBS’s SBI primary classification (Agriculture, Mining, Industry, Energy, Water, Construction, Trade, Transport and Storage, Hospitality, Information and Communication, Financial Services, Real Estate Services, Special Business Services, Other business Services, Government, Education, Health, Cultural – Sports – Leisure activities, Other Services). We also distinguished between primary (Procurement, Logistics, Sales/Marketing, Production) and secondary business processes (Facilities, Finance, HR, IT, Other Support and R&D).
The next step was to establish on a per sector and business process basis the number of employees that use ICT during more than 50% of their professional working hours. ICT professionals are counted as using ICT 100% of their working hours while for HR employees for example we estimated the percentage of HR employees that use ICT more than 50% of their time for primary business tasks. By adding up all resulting ICT intensive job FTE’s per sector we arrived at the ICT intensity per sector. ICT intensity per job and sector have been generated through checking existing sector research, making indirect calculations using demographic and economic data as well a using common sense and conservative estimates. All data pertains to 2013.
The final step was to multiply a sector’s ICT intensity by the total value-add of that sector giving the Digital Value Add for that sector. The sum of all sectors’ digital value add represents the total Value of the Dutch Digital Economy, or the Gross Domestic Digital Product (GDDP).
Dutch Digital Economy
From this exercise we conclude that the 2013 Dutch GDDP amounted to a total of € 129 billion which equals 22% of the total value add of the Dutch economy. With a stagnating Dutch economy and an increase in ICT investment in 2014 we can safely assume that the Dutch GDDP in 2014 is now closer to 24% totaling € 135 billion. In other words: the real value of the Dutch digital economy in terms of value add is a quarter of our GDP.
These numbers on the Dutch Digital Economy are much higher than other estimates that are based on the output value of various sectors, business models and transaction volumes of digital goods and services. The problem with these methods is that they are all more or less based on transaction volume. The resulting size includes a double counting problem since transaction volumes include purchases from other sectors. On top of that these transaction volumes are represented as a percentage of the GDP which is excluding purchases from other sectors, comparing apples and pears. Also, these methods tend to underestimate the true value of the digital economy as they do not take into account the role ICT plays in the business value chains of most economic sectors. To understand how digital value add works out on a per sector basis we will compare two sectors: financial services and domestic trade.
Comparing Financial Services and Trade
When calculating DVA it becomes clear that although some sectors are considered large in output based calculations they are less important in the value-add approach. This can be exemplified by looking at the DVA of Financial Services and Trade. All numbers refer to 2013.
*) Source: Thuiswinkel Markt Monitor
**) Source: ICT Markt marktmonitor
From the table it can be concluded that – output wise – the trade sector is almost 1.75 times larger than the financial services sector and in terms of value add is more than 1.5 times bigger than financial services. However when looking at the role of ICT in the sector translated into DVA, it becomes clear that business processes in the financial sector are almost completely (82%) driven by ICT. In contrast, the trade sector DVA is only 9%. While digital logistics systems in the trade sector may require a lot of ICT involvement it is still the physical process combined with the huge share of purchase cost in relation to the sector’s turnover that ultimately causes a low DVA. In sharp contrast the DVA of financial institutions is 82% but at the same time the DVA is not represented in traditional sizing of the digital economy.
So when faced with the relative and absolute size of e-commerce and e-business in the Netherlands we should keep in mind that they are gross misrepresentations of the value that ICT holds for various sectors and individual companies. For a better understanding of the Dutch digital economy we should be looking at the digital value add of the business processes within our economic sectors providing both a more realistic qualitative and quantitative view of the status and dynamics of the Dutch digital economy.
The METISfiles is planning a series of reports that will chart the Dutch Digital Economy on a sector by sector basis. If you are interested in these forthcoming reports please contact Simone de Bruin for additional info.