Who in Europe is Successful in Exporting in Digital Sectors?

Earlier this month the European Commission presented its new strategy of the Single Digital Market. Several of DG Connect’s most important goals are to give everyone a fast connection to an open internet and to support European innovators, entrepreneurship and start-ups. The creation of a true Single Digital Market should impact the export performance of firms active in the digital economy. This columns ask which countries in Europe have been so far successful in exporting these digital sectors (i.e. services) and which are not. The result is surprisingly mixed.

The figure below shows the relationship between the exports of digital services on the vertical axis and an index measuring the so-called network readiness of countries on the horizontal axis. This latter index on is taken from the World Economic Forum which measures the extent to which an economy is prepared to apply the benefits of information and communications technologies (ICTs) in order to promote economic growth and well-being. Included in this measure is whether countries have the latest technologies available, whether firms absorb technology, or whether multinationals bring in new technologies into the domestic economy, etc.

Data-intensive services exports and network readiness index (2012)

Source: author’s calculations using WEF, BEA and WB TIS

On the vertical scale, digital services are defined as the producers and users of data services. The producers of data services are those active in sectors such as data processing services, software publishing services, telecommunications, or internet publishing and broadcasting services. These are sectors that bring forward data in their production process, which is then used in many other sectors inside the wider (downstream) economy. Using much disaggregated data, it is possible to measure in great detail how much each and every industry uses these data services from data producers.

Unsurprisingly, the biggest users are at the same time the producers. Users of data services are therefore in turn telecoms, software publishers, internet publishers, data processing and hosting services firms, but also sound recording industries and the motion and video industry. Taken together, these services are data-intensive as they work a lot with data. Using a different data set and connecting data-intensive services with trade, the vertical axis shows how much each country in the world actually exports these data-intensive services as defined above. This export measure is put in logs.

The figure shows that there is a pretty clear relationship between the readiness of a country in terms of ICT networks and the level of exports a country has regarding data-intensive services. In other words, a stronger ICT network in countries is positively associated with exports of services which intensively use data and the ICT network. Countries with low network readiness show low levels of data-intensive services, but countries with high network readiness exhibit a higher level of services which precisely depend on a strong ICT network in order to transmit data. In the figure above, the European countries are given in blue and are marked with their 3-digit country code. It shows that overall most European countries are doing well.

However, there are countries which are doing better than others, even between countries sharing a similar level of network readiness. For instance, although some countries such as Italy, Spain, but also Poland and Romania have an average score on ICT networks, they nonetheless are very successful in exporting data-intensive services compared to Lithuania, Estonia and Slovenia which actually share a similar level of ICT network. Similarly, countries such as Great-Britain, France and Belgium are outperforming Scandinavian countries whilst actually having the same potential to export when looking at their ICT networks. In fact, surprisingly Finland and Denmark export as much data-intensive services as Romania and Poland despite having a much higher network readiness index.

What can we therefore say about the success of Europe’s new strategy of the Single Digital Market? Well, in terms of trading it, much scope still exists for the Nordics and the Baltics to improve their performance in exporting in the digital economy of Europe. Perhaps the Commission’s new digital strategy should focus first on these countries and try to figure out why these are the underperformers.