The social economy: Unlocking value and productivity through social technologies

Here is the executive summary of a recent report featured online by The McKinsey Global Institute (MGI),  the business and economics research arm of McKinsey & Company. MGI was established in 1990 to develop a deeper understanding of the evolving global economy. Our goal is to provide leaders in the commercial, public, and social sectors with the facts and insights on which to base management and policy decisions.

MGI research combines the disciplines of economics and management, employing the analytical tools of economics with the insights of business leaders. Our “micro-to-macro” methodology examines microeconomic industry trends to better understand the broad macroeconomic forces affecting business strategy and public policy. MGI’s in-depth reports have covered more than 20 countries and 30 industries. Current research focuses on six themes: productivity and growth; the evolution of global financial markets; the economic impact of technology and innovation; urbanization; the future of work; and natural resources. Recent reports have assessed job creation, resource productivity, cities of the future, and the impact of big data.

MGI is led by three McKinsey & Company directors: Richard Dobbs, James Manyika, and Charles Roxburgh. Susan Lund serves as director of research. Project teams are led by a group of senior fellows and include consultants from McKinsey’s offices around the world. These teams draw on McKinsey’s global network of partners and industry and management experts. In addition, leading economists, including Nobel laureates, act as research advisers.

The partners of McKinsey & Company fund MGI’s research; it is not commissioned by any business, government, or other institution.

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What business can do to restart growth

Here is an excerpt from still another outstanding article written by Richard Dobbs, James Manyika, and Charles Roxburgh, featured online by The McKinsey Quarterly (September 2011), published by McKinsey & Company. To read the complete article, obtain information about the firm, access other resources, and sign up for email alerts, please click here.

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Instead of issuing narrow calls for lower taxes, the private sector should take the lead in making the case for driving growth through innovation and investment.

Adversity can be a great motivator. Confronted by oil shocks in the 1970s, governments and businesses together initiated a wave of innovation that boosted the supply and productivity of resources from energy to agriculture. This achievement set the stage for a 30-year decline in resource prices. Something similar is needed today—urgently. With consumers and governments both sidelined by outsized debts, the lever now must be a new wave of private investment. The goal is to reignite a virtuous cycle of value-added growth, productivity, and job creation of the kind the developed world last saw in the ’90s.

The division of labor is clear: if policy makers remove barriers that act as a disincentive to invest, as well as create the conditions in which business can thrive, the private sector can provide the skills and capital to deliver the innovation the world needs. We see five main areas of opportunity.

1. Bring private capital to public works.

In many developed economies, degraded infrastructure—airports, bridges, ports, power generation and transmission plants, railroads, telecommunications facilities—now drags down the global economy’s long-term growth and competitiveness. The American Society of Civil Engineers, for instance, estimates that the United States needs to spend $2.2 trillion over the next five years to bring its existing infrastructure up to what the organization calls a good condition. This is double the amount currently planned. Many European countries face a similar challenge.

Most governments simply don’t have the money. The creative alternative is to tackle the political challenges—heated debates over private ownership and proper rates of return, for example—and spur a new round of privatization. With strong balance sheets, companies and consortia could take over the operation of new facilities and provide the investment to upgrade old ones. Addressing regulatory barriers would also spur new spending on the infrastructure, such as power stations and telecommunications facilities, already in private hands. McKinsey Global Institute’s (MGI) rough analysis suggests that $200 billion of additional infrastructure expenditures a year could create around two million jobs.

2. Strengthen Internet ecosystems.

In mature economies studied by MGI, over the past 15 years the Internet has accounted for 10 percent of GDP growth, which accelerated to 21 percent in the past five years. The benefits were widely shared. One study of 4,800 small and midsize enterprises found that those with a strong Web presence grew more than twice as quickly as those with a minimal or no presence—and created more than twice the number of jobs. [See the full McKinsey Global Institute report Internet matters: The net’s sweeping impact on growth, jobs, and prosperity (May 2011).]

But more must be done to leverage the full power of the Internet ecosystem. While the United States currently has the strongest one, an expansion of broadband access and performance is needed to cope with rising demand and innovation. Meanwhile, Europe critically needs to go beyond the provision of Internet service, by creating more high-impact innovators. To encourage them, policy makers must ensure the Internet’s openness and competitiveness, invest to develop and retain the human capital needed to drive Internet innovation, and ensure the availability of capital so that fledgling innovative businesses can grow. If conditions are right, private-sector innovation and jobs will follow.

[During the remainder of this article, its co-authors discuss three additional "main areas of opportunity. To read the complete article, please click here.]

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With a few notable exceptions, business leaders have been slow to raise these issues. When executives make their voices heard, they too often issue narrow calls for lower taxes rather than advance broader ideas for creating a dynamic pro-growth agenda. It is time for the private sector to take the lead in making the case for driving growth though innovation and investment. That’s not just the social responsibility but also the self-interest of business.

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Richard Dobbs, James Manyika, and Charles Roxburgh are directors of the McKinsey Global Institute and directors of McKinsey & Company. They are based out of the Seoul, San Francisco, and London offices, respectively.