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Investment and Industrial Policy: A Perspective on the Future

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.

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Investment and Industrial Policy: A Perspective on the Future

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  1. Investment and IndustrialPolicy: A Perspective on theFuture UNCTAD TRADE AND DEVELOPMENT BOARD, SIXTY-FIFTHSESSION Panel Discussion | October 1,2018 CONFIDENTIAL ANDPROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited

  2. Contents New era of globalflows New opportunities for economicgrowth New world of policychallenges McKinsey & Company2

  3. After 20 years of rapid growth, traditionalflows of goods, services, and finance have declined relative toGDP Finance Service Goods All flowsas % ofGDP Flows of goods, services, and finance, 1980–2017, $ trillion,current FDI, 1980–2017, $ trillion,current FDI as% ofGDPFDI 51 4,1 2,3 1,7 1,4 1,6 2,0 2,7 3,3 2,3 2,0 2,1 2,1 2,1 1,9 1,7 2,6 2,51,8 1.9 1.91.9 1.4 1.4 0,50.9 46 1.5 1.4 1.6 1.6 1.41.3 1.2 1.4 43 -16p.p. 0.8 0.6 0.6 0.70.9 0.1 0.2 1980 90 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 162017 39 3939 37 3737 35 35 35 34 3333 31 3131 30 29 29 30 28 28 2728 28 27 26 26 2525 24 26 22 21 24 23 23 23 22 22 22 18 22 17 20 13 12 1011 910 910 8 6 6 6 5 5 5 4 4 3 3 3 3 3 3 3 1980 1990 SOURCE: UNCTAD; IMF Balance of Payments; World Bank; McKinsey Global Instituteanalysis 2000 2007 2010 2017 McKinsey & Company3

  4. Trade Finance Data However, at the sametime, the world has entered the new era of digitalglobalization Flow dynamics, relative to the year of peak value in1980–20171 Cross-borderdata flows expected to grow 3.5x by2021 1980 85 90 95 2000 05 10 15 2020 1Finance= 2007($12.2trillion), Trade= 2013($23.5trillion),Data=2017(estimated 543terabitspersecondofcross-borderbandwidthused) SOURCE: McKinsey Global Institute’s “Digital Globalization: The New Era of GlobalFlows” McKinsey & Company4

  5. Globalization: Then vs.Now McKinsey & Company5 SOURCE: McKinsey Global Institute’s “Digital Globalization: The New Era of Global Flows”

  6. Cross-border data flows are surging and connecting morecountries Used cross-borderbandwidth Bandwidth Gigabits per second(Gbps) <50 50–100 100–500 500–1,000 1,000–5,000 5,000–20,000 >20,000 45xlarger 2005 100% = 4.7 Terabits per second(Tbps) 2014 100% = 211.3Tbps EU EU NA NA AS AS ME ME AF AF OC OC LA LA NOTE:Linesrepresentinterregionalbandwidth(e.g.,betweenEuropeandAfrica), butexcludeintraregionalcross-borderbandwidth(e.g.,connectingEuropeannationswithoneanother). SOURCE: TeleGeography, Global Internet Geography; McKinsey Global Instituteanalysis McKinsey & Company6

  7. Digital technologies are changing how business isdone across borders and broadeningparticipation McKinsey & Company7 SOURCE: McKinsey Global Institute’s “Digital Globalization: The New Era of Global Flows”

  8. Contents New era of globalflows New opportunities for economicgrowth New world of policychallenges McKinsey & Company8

  9. How globalization increasesGDP McKinsey & Company9 SOURCE: McKinsey Global Institute’s “Digital Globalization: The New Era of Global Flows”

  10. Digitization is transforming business models in ways that enable more cross-borderactivity Flowtype Data Goods Services Finance FDI Cross-border implications ofdigitization McKinsey & Company10 SOURCE: McKinsey Global Instituteanalysis

  11. Global flows account for approximately 10 percent of global GDP output; data flows account for a large (arguably largest) chunk of thatcontribution Impacton GDP,20171 $trillion Long-term impact on level ofGDP1 % 3,5 Goodstrade 3,0 Dataflows 2,0 Migration2 1,6 FDI 10,1 Allflows 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 goodstrade Includes inflows and outflows data for 139 countries in MGI Global Flowsmodel. 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 advancedeconomies. NOTE: Numbers may not sum due to rounding. SOURCE: McKinsey GlobalInstituteanalysis McKinsey & Company11

  12. The MGI Connectedness Index1 shows that advanced economies are generally more connected than developingcountries Connectedness score,2014 (Number in brackets represents the rank on the data connectednesssub-index2) Size of circlerepresents $ value of flows in2014 Emerging Developed 70 Correlation coefficient (r) =0.54 65 Netherlands(#1) 60 Singapore(#6) 55 UnitedStates (#7) Germany(#2) 50 45 United Kingdom (#3) Ireland(#9) 40 35 China(#38) Belgium(#8) Saudi Arabia(#53) France(#4) 30 25 United Arab Emirates(#46) Canada (#18) Italy Russia(#25) SouthKorea Spain (#16) 20 Switzerland(#13) Sweden(#5) Austria Australia Mexico 15 Ukraine Malaysia Turkey Portugal Kuwait 10 Thailand India Japan Norway Denmark 5 Vietnam Qatar Brazil Finland (#10) 40 CzechRepublic Greece 0 Indonesia 10 20 30 60 70 80 140 Per capita GDP,2014 $ thousand, purchasing power parity, current internationaldollar 0 50 1 The McKinsey Global Institute Connectedness Index measures the connectedness of 131 countries across all five flows of goods, services, finance, people, and data andcommunication; he index reflectsthe level of inflows and outflows of all types of flows adjusted for country size 2Listedforthetop15countriesbyMGIconnectednessscoreandfortop10countriesbasedondataconnectednesssub-index(wherenotoverlapping) SOURCE: IMF; McKinsey Global Institute analysis McKinsey & Company12

  13. 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 thecenter Outputgap % ofGDP >75 51–75 26–50 1–25 <1 Nodata • While participation in global flows is not the panacea for the other factors that may dampen a country’s economic growth1, our analysis suggests some countries may grow their GDP in the long-term by over 50% by participating fully in globalflows • Over time, participation in data flows will grow in importance vs. traditionalflows • Unlike with traditional flows, countries on the periphery of the global network of flows have the most to gain from increasing cross-border dataflows • Countries benefit from receiving cross-borderdigital 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 dataflows 1 For example, uncompetitive business environment, weak rule of law,corruption SOURCE: McKinsey Global Instituteanalysis McKinsey & Company13

  14. Contents New era of globalflows New opportunities for economicgrowth New world of policychallenges McKinsey & Company14

  15. Policy-makers need a clear agenda to capture the full potential of globalflows Key enablers for digitalizationspecifically Think strategically about the role the country can play in global valuechains Address policy and administrative barriers that hinder globalflows Address thedislocations Invest in humancapital Build the necessary physical infrastructure and close the digitaldivide Create a strong business and institutional environment for the digital economy tothrive Maintain an open Internet while protectingprivacy Make cybersecurity a toppriority Can data flows and ‘Digital’ economy be the enablers for some countries to leapfrog in development, like they have been for tech businessesrecently? McKinsey & Company15 SOURCE: McKinsey Global Instituteanalysis

  16. BACKUP McKinsey & Company16

  17. The outlook also appears more challenged than a yearago Decline in the value of announced FDIprojects Deteriorating outlook of overall economicconditions McKinsey & Company17 SOURCE: UNCTAD; Economic Conditions Snapshot, McKinsey Global Survey, September 2018; teamanalysis

  18. Data flows and traditional flows paint different pictures of theworld The US is the largest producer of digital content for Internet users across theglobe UnitedStates1 Europe AsiaPacific Other Location of top 100 websites requested byusers % by user region, as of April2015 USandCanada 88 102 China, the United States, or Germanyis the major trading partner for mostcountries Largest trading partner in goods,2014 LatinAmerica 66 16 18 Africa 56 32 12 Asia Pacific 51 17 32 Europe 36 61 3 15 12 42 100%= 1 million websites Hosting location oftop 1 million websites,20132 % 31 1 Includes United States and Canada for location of top 100 websites requested by users 2 Based on Pingdom analysis of Alexa top 1 millionwebsites NOTE: Data omitted for some small nations as indicated ingray SOURCE: : UNCTAD; TeleGeography, Global Internet Geography; Pingdom; McKinsey Global Instituteanalysis McKinsey & Company18

  19. Flows remain concentrated among a few leading countries, however data flows show more broadening of scope thanothers % of worldtotal Top15countries Next 20countries Allothers Global goods flowdistribution 2005 2014 Global services flowdistribution 2005 2014 13 14 13 14 $10.6 trillion $19.0 trillion $2.5 trillion $4.9 trillion 21 22 23 23 62 63 65 66 Global FDI flowdistribution Global data flowdistribution 2005 2014 7 2014 5 2005 4 2 11 17 16 16 $1.39 trillion $1.63 trillion 4.8 Tbps1 211 Tbps1 77 79 79 86 1 Tbps = terabits persecond NOTE: Numbers may not sum due torounding McKinsey & Company19 SOURCE: : UNCTAD; IMF; TeleGeography, Global Internet Geography;McKinsey Global Institute analysis

  20. The biggest online platforms have userbases on par with the populations of the world’s biggestcountries Active users of online platforms vs. country population,million Onlineplatforms1 Countries2 Facebook China 1,590 1,372 1 4Q15 or latest available 2 2015population SOURCE: Facebook; Twitter; Alibaba; Fortune; Statista; Population Reference Bureau; McKinsey GlobalInstitute analysis McKinsey & Company20

  21. Individuals are participating inglobalization, and 914 million have cross-border social mediaconnections Social networking users with at least one foreignconnection 914million International travelers 429million Cross-border e-commerceshoppers 361million People livingoutside homecountry 244million Cross-border onlineworkers 44million Cross-border onlinestudents 13million Students studyingabroad 5million NOTE: Numbers adjusted to account for overlap between platforms and for individuals making multiple international trips in the sameyear. SOURCE: Facebook; AliResearch; US Department of Commerce; OECD; World Bank; McKinsey Global Institute analysis McKinsey & Company21

  22. 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 worldtotal Connectedness indexrank Flowintensity 1–10 11–25 26–50 >50 100+ 70–99 <70 Flows value represents total goods, services, and financial inflows andoutflows. 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 & Company22

  23. 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 worldtotal Connectedness indexrank Flowintensity 1–10 11–25 26–50 >50 100+ 70–99 <70 Flows value represents total goods, services, and financial inflows andoutflows. 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 & Company23

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