Ebook The Economic Impact of Cloud Computing on Business Creation, Employment and Output in Europe
The introduction of a general purpose technology can provide a fundamental contribution to promote growth and competition, and it can help the economy to recover from a severe downturn as the current one. In this article we employ the endogenous market structures approach (Etro, 2007a, 2009) to study the economic impact of an innovation in the hardware-software field which is going to have a profound effect on the market structure of many sectors and on the global macroeconomic performance in the next years. This innovation is associated with cloud computing, the new frontier of the Internet era, a technology through which information will be stored in servers and provided on line as a service to clients in a pay-as-you-go manner. Firms will be able to adopt this service on demand, so as to avoid large up-front costs (that are currently necessary for hardware and software equipment) and spend in ICT according to their production necessities - see Dubey and Wagle (2007) and Armbrust et al. (2009) for early reviews of the topic. This will have a large impact on the cost structure and through it on the production possibilities of all firms, especially small and medium size enterprises (SMEs). Our focus will be mainly on the theoretical impact of this innovation on the creation of new firms and products, on the empirical evidence about the impact of its introduction for the European economy and on the implications for policies supporting cloud computing adoption. This allows us to apply the theory of endogenous market structures to examine a macroeconomic experiment that can be hardly approached within the neoclassical or New-Keynesian frameworks.
In the next Section 2 we will describe the nature of the general purpose technology represented by cloud computing, its genesis and its likely impact on the economy and on the structure of many markets. As we will see, the introduction of cloud computing is going to reduce drastically the fixed costs of entry and production, turning part of them into variable costs related to the production necessities. This will have a positive impact on entry and competition in all sectors where fixed ICT spending is crucial. The positive association between ICT innovations and competition is well known, and policymakers recognize that it may work in both directions: on one side competitive sectors adopt ICT innovations earlier and become more productive, on the other side ICT adoption enhances competition. For instance, the e-Business Watch of the European Commission (2008) notices that “while it seems obvious that increasing levels of competition can push companies to adopt and use ICT, the opposite might well also be the case. In fact, ICT and the usage of the internet have drastically impacted on certain sectors such as banking and reshaped the competitive scenario” (p. 42).
In Section 3 we will describe our approach to the estimate of the economic impact of cloud computing. We will adopt a standard macroeconomic model augmented with endogenous market structures and will simulate the impact of a gradual reduction of the fixed costs of entry. The experiment will be based on a dynamic stochastic general equilibrium model calibrated on the European economy and translated in empirical results on the basis of Eurostat data. In this sense, this paper provides a simple application of the endogenous market structures approach to macroeconomics. However its results should be only seenas preliminary and temptative: further work is needed to improve the match
between our theoretical foundations and the empirical exercise.
Section 4 will present the results. Starting from conservative assumptions on the cost reduction process, we will show that the diffusion of cloud computing will provide a positive contribution to the annual growth rate (in the order of 0.2%), contributing to create about a million new jobs through the development of a few hundred thousand new SMEs in the whole EU-27. We will present the results for each country and for each macro-area. The driving mechanism behind the positive contribution of cloud computing to output works through the incentives to create new firms, and in particular SMEs. One of the main obstacles to entry in new markets is represented by the high up-front costs of entry, often associated with physical and ICT capital spending. Cloud computing allows potential entrants to save in the fixed costs associated with hardware/software adoption and with general ICT investment, and turns part of these costs into variable costs. This reduces the constraints on entry and promotes business creation. The importance of such a mechanism is well known at the policy level, especially in Europe, where SMEs play a crucial role in the production structure. Again the e-Business Watch of the European Commission (2008) emphasizes this aspect clearly: “SMEs form significant industry segments in the EU and account for the majority share in EU employment. Thus, they require specific policy attention. While their strength lies in the flexibility with which they can adjust to changing market conditions, their small size makes them less able to face high up-front costs.”(p. 53).
Our analysis will emphasize a mechanism of propagation of the effects of cloud computing which depends on the endogenous market structures. Through business creation, the adoption of cloud computing is going to enhance competition in each sector and to increase production and lower mark ups. This will have a positive impact on consumption so as to contribute to the recovery of the EU economy. Most of all, part of these effects are going to be positively related to the speed of adoption of the new technology. Our results are only preliminary and future research should try to improve the calibration of a the oretical model or the estimation of an empirical model. Moreover, alternative methodologies would be helpful in crosschecking the validity of our results. Beside our quantitative results, our main contribution relies in the description of a mechanism through which cloud computing is likely to create a positive effect on GDP, employment and business creation. We need to notice that our approach neglects other positive effects exerted by the introduction of cloud computing, mainly the creation of new and multilateral network effects and the positive externalities due to energy savings, whose consideration would be subject to excessive uncertainty. Therefore, we can look at our estimates of the impact of cloud computing on the economy as conservative estimates.
Section 5 discusses policy implications. Since a large part of the positive effects of cloud computing are positively related to its speed of adoption, our investigation suggests that policymakers should promote as much as possible a rapid adoption. For instance, governments could finance, up to a limit, the variable costs of computing for all the firms that decide to adopt a cloud computing solution. These policies may be easily tuned to optimize the process of adoption of the new technology and to strengthen the propagation of its benefits within the country. In a context as the European one, smaller countries would be able to obtain larger gains from similar policies at least in the initial phase, because they would easily attract foreign investments from the larger countries. In a period of increasing limits to other forms of fiscal competition, especially in the integrated market, a policy of subsidization of cloud computing could generate substantial capital flows toward smaller countries with good general infrastructures (think of Malta or Luxembourg in the E.U.).
The article draws the conclusions in Section 6. The Appendix contains an advanced treatment of the analysis.
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