In Lewis Carroll’s sequel to “Alice in Wonderland”, the novel “Through the Looking Glass”, Alice is instructed by the Queen: ‘Now it takes all the running you can do to keep in the same place; if you want to get somewhere else, you must run at least twice as fast as that!’. This sentiment reverberates through developing countries as they navigate the rapid pace of technological progress. With the advent of ChatGPT, the rise of the Metaverse, and new technologies for industry, running fast is not enough – the emerging world must double its speed to bridge the gap and catch up.1
In the post-COVID era, the role of digital technologies for industry suggests three outcomes: a win for companies that had already scaled digital technologies, a reality check for those that were still scaling up, and a wake-up call for those that hadn’t started on their industry 4.0 journeys.2 Digital is no longer optional. While firms in industrialized countries have already adopted and are applying many of the ground-breaking digital technologies, most developing countries, especially least developed countries (LDCs) have not yet undergone a ‘digital transformation’, i.e. they have not yet adopted or are not yet using digital technologies to transform their economy.
The low adoption rate of emerging technologies and the inadequate digital connectivity in developing countries and LDCs3 (see figure below) continue to widen the digital divide, which is mainly rooted in the lack of basic infrastructure, particularly in LDCs. According to the International Telecommunication Union (ITU), 75% of the population in LDCs are offline, while the International Energy Agency (IEA) reports that only 55% of people in LDCs have access to electricity.4 Poor basic (e.g. energy supply) and digital infrastructure (e.g. broadband, data centres, cloud services) continue to impede LDCs’ uptake of digital technologies and are key barriers for countries to effectively capitalize on the opportunities the digital economy offers. Addressing basic infrastructure deficits is crucial to incentivize firms in LDCs to adopt digital technologies and to lay the foundation for the transformation to a digital economy.
Many firms in LDCs lack the necessary awareness, digital culture, human resources, managerial skills, infrastructure and capital to leverage digital technologies for growth. To leapfrog legacy technologies, sector-specific production and technological capabilities must be developed through investment in technological infrastructure and capacity development to adapt to existing technology; skills upgrading; access to foreign technology that can be adjusted to local needs (i.e. digital technologies that can be integrated into existing local production systems), government incentives (e.g. tax incentives, investment promotion) and regulated competition. Latecomers need to also be provided with learning opportunities to diffuse technologies and enhance their own innovation capabilities.
Digital transformation will only succeed if SMEs go digital
The digitalization of small and medium enterprises (SMEs) is pivotal for inclusive digital transformation, especially in LDCs. According to the World Bank, SMEs drive economic growth and development, and represent about 90% of businesses and more than 50% of employment worldwide. Moreover, they contribute up to 40% of national income (GDP) in developing economies (see figure below).5 In other words, not only do SMEs account for a major share of total private sector entities in both developed and developing countries, they also substantially contribute to employment creation and economic output. Yet their digitalization rates remain low.
SMEs face multiple challenges ranging from affordable access to digital technologies, integration of new technologies into their existing production systems, as well as inadequate basic production capacities and enabling infrastructural capabilities. The lack of SMEs’ readiness and weak supportive environment, particularly in LDCs, to leverage the opportunities of digitalization for economic transformation and to exploit the benefits of 4IR technologies continues to hamper firms’ climb up the technological development ladder and their economy’s overall growth. If SMEs fail to digitalize, the benefits of the digital transformation will not be shared broadly and will leave segments of the population behind.
Digital transformation can only be realized if governments address both supply- and demand-side constraints. On the supply side, ubiquitous connectivity will be decisive for achieving digitalization goals in developing countries and among SMEs. Governments must ensure that enabling conditions to adopt emerging technologies are created (access to infrastructure, information and external know-how). Innovation in three key areas is crucial, namely technology, regulation (including the removal of regulatory bottlenecks), and business models.
Innovation in technology includes investments in electricity grids and the establishment of robust digital infrastructure and connectivity. Government regulation should focus on providing fiscal incentives, easing both administrative burdens and access to finance; and public funds should be allocated to modernize frameworks with the aim of aligning connectivity objectives with competition laws. Innovative business models should be based on increased collaboration between the government, private sector, academia and the international development community to facilitate more efficient network deployment and transfers of knowledge, technologies and best practices.
On the demand side, more incentives for the adoption and application of digital technologies should be targeted at end users, SMEs and start-ups, and public administrations. This requires serious investments in digital literacy and skills through capacity development programmes to encourage and accelerate digital transformation in learning and business, thereby mitigating potential job displacement. Moreover, governments should use fiscal policy to introduce targeted subsidies to lower the costs of connectivity and encourage digital adoption among firms and people.
Support from the international development community is also pivotal for narrowing the digital divide, to strengthen the enabling environment and build capacities in developing countries and LDCs. International policy coordination can facilitate technology transfer through proven channels such as international trade and foreign direct investment (FDI) to enhance the resilience of LDCs and SMEs against future shocks.
The digital transformation must take a whole-of-society approach
There is growing global demand for a new direction of economic development and progress that is compatible with the Sustainable Development Goals (SDGs), i.e. economic models that are people- and earth-centred. For industrialization, trade and sustained growth to occur within a green economy, countries need to intensify the use of renewable energy, digital technologies and circular production principles. If accompanied by the right policies and bolstered by collaborative national and international efforts, digital transformation can unlock inclusive growth, sustainable manufacturing, resource efficiency and a better quality of life for all. That is, digital transformation does not only strengthen socioeconomic resilience, it can also be a key enabler in advancing global climate commitments.
Despite the fact that there is no one-size-fits-all solution, some general recommendations can be made for developing countries and LDCs to develop and improve their digitalization capacities. Efforts need to focus on establishing (i) the framework conditions related to regulations and digital infrastructure (e.g. the institutionalization of multi-stakeholder approaches to industrial policy formulation, which relates to the broader ecosystem within which firms operate); (ii) the institutional setting for policy formulation (close collaboration between the private and public sectors, academia and civil society to promote learning, experimentation, coordination and monitoring); (iii) collaboration between innovation ecosystems (i.e. an enabling ecosystem consisting of policies and regulations, investors, incubators and accelerators as well as educational institutions), and (iv) channels for international collaboration and technology transfer (enabling firms and countries to share knowledge and experiences on how to identify opportunities and address the challenges of using advanced digital technologies).
UNIDO with other UN sister agencies and development partners provides technical cooperation in industrial development and fosters networks for collaboration. The Global Alliance on AI6, the Partnership for Green Hydrogen, and support for the circular economy and digitalization are only some examples of spaces within which LDCs and developing countries can take action. Digital benchmarking, statistics and policy advisory services are tools firms and governments can exploit to advance further.
By embracing digital transformation, developing countries, LDCs and SMEs can bridge the technological gap, unlock new opportunities, and contribute to sustainable development. In this context, governments must play a catalytic role in championing large-scale green initiatives and ensure that no one is left behind in this transformative journey. Running twice as fast to catch up is indeed a tremendous challenge, but it is not an impossibility.
This article is based on a policy brief that UNIDO and Arun Jacob produced for the United Nations Economist Network.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
- This article is based on the policy brief that UNIDO and Arun Jacob produced for the United Nations Economist Network.
- McKinsey (2021). COVID-19: An inflection point for Industry 4.0.
- UNIDO (2022). Propelling LDCs in the Digital Age.
- Zou, Kamiya, Metelitsa (2023). SDG Action, Boosting technology transfer to support the SDGs in LDCs.
- The World Bank. Small and Medium Enterprises (SMEs) Finance.
- UNIDO (2023). UNIDO’s Global Alliance on AI, UNIDO launches Global Alliance on AI for Industry and Manufacturing (AIM-Global) at World AI Conference 2023.