T H E E C O N O M I C I M P A C T O F I T, S O F T W A R E, A N D T H E M I C R O S O F T E C O S Y S T E M O N T H E G L O B A L E C O N O M Y

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1 Global Headquarters: 5 Speen Street Framingham, MA USA P F WHITE PAPER T H E E C O N O M I C I M P A C T O F I T, S O F T W A R E, A N D T H E M I C R O S O F T E C O S Y S T E M O N T H E G L O B A L E C O N O M Y October 2007 Sponsored by Microsoft E X E C U T I V E S U M M A R Y Economists have long recognized the important role information technology (IT) can play in a country's development. To better understand that role, and to quantify the direct benefits to local economies, in 2007 IDC conducted a study of the economic impact of IT in 82 countries and regions. The study found that not only does IT drive significant growth in skilled jobs, but that spending on software creates a disproportionate share of that job growth. The study also found that companies selling products that run with or on Microsoft software, or that service and distribute Microsoft software here referred to as the Microsoft ecosystem play a key role in driving the IT industry's overall contribution to job growth and economic development. Considering these countries in aggregate, IDC found the following: Global IT spending in 2007 will be 2.5% of GDP, rising to 2.75% by Countries range from a high of 3.6% (Singapore, Denmark, Sweden) to a low below 0.5% (Pakistan, Nigeria). The median is 1.5%. IT spending in 2007 for the 82 countries and regions covered in this study will be $1.2 trillion. These countries represent 99.5% of global IT spending. Global IT employment (IT professionals in the IT industry and IT-using organizations) will rise in the four years between 2007 and 2011 by 7.1 million jobs, from a 2007 base of 35.4 million. The county adding the most new IT jobs during this period will be China, followed by the United States. Global spending on packaged software will be just 21% of total IT spending in 2007, but because software drives activity in the services and distribution sectors, as well as in IT using organizations, it will account for 50% of IT employment. IT employment is expected to grow 4.7% a year from 2007 to 2011, three times higher than global non-farm employment. -related employment is expected to grow at a faster rate of 5.7%. Of the 7.1 million new IT jobs created from 2007 to 2011, 4.6 million will be software-related. The IT market will drive the creation of more than 100,000 new businesses between 2007 and Many of these companies will be small and locally owned. The emerging economies are forecast to drive over 25% of the new IT jobs over the next four years. These jobs will be driven by an evolving highly skilled labor force, an opportunity which is extremely important in developing a competitive economy.

2 The Microsoft ecosystem more than half a million hardware, software, services, and channel firms as well as end user organizations running Microsoft software-- employs 42% of the global IT workforce. These employees will pay more than $500 billion in taxes in In 2007, the companies in the Microsoft ecosystem will earn more than $400 billion in revenues, and, in 2008, invest close to $100 billion in local economies. For every unit of revenue dollar, euro, peso, etc. that Microsoft will earn in 2007, other companies will earn S T U D Y B A C K G R O U N D Since 2002, IDC has been conducting studies on the economic impact of IT, software, and the Microsoft ecosystem and partner community on local economies. This impact comes in the form of job creation, related tax revenues, company formation, and increased IT spending This study extends that work to coverage of 82 countries and regions. For more information on study methodology and definitions, see the document "Economic Impact Study Methodology and Definitions, October 2007." T H E I M P A C T O F I N F O R M A T I O N T E C H N O L O G Y Since the 1990s, economists have diligently studied the economic impact of IT on firms and on countries in terms of growing industrial output and improving productivity. Dale Jorgenson of Harvard and Khuong Vu of the University of Singapore, for instance, showed in 2005 how technology's share of world GDP growth has gone from 11% in the late 1990s to 15% in the early 2000s. 1 In 2003, Erik Brynjolfsson and Lorin M. Hitt of the MIT Sloan School and the University of Pennsylvania documented the importance of technology to productivity growth of 500 Fortune 1000 companies. 2 Given these findings, growth of the IT sector is critical to the world economy and each of the countries we study. But what can we say about the IT sector and the global economy? Spending on IT, which will reach $1.24 trillion in 2007 worldwide, is expected to grow 6.1% a year from 2007 to That growth is almost twice the expected growth of global GDP. IT spending is now 2.5% of GDP, up from a low of 2.3%. By 2011 it should be 2.8% of GDP. That ratio varies by country, from a high of 3.6% (Denmark, Singapore, Sweden) to a low below 0.5% (Nigeria, Pakistan). The median is 1.5%. IT spending provides revenues for more than a million companies selling hardware, software, and services. Those companies, in turn, employ 35.2 million people in 2007, 14.7 million of whom work for companies in the Microsoft ecosystem. Together, these employees and companies will pay more than $1 trillion in taxes in "Information Technology and the World Economy," Dale W. Jorgenson and Khuong Vu, Scandinavian Journal of Economics, December "Computing Productivity: Firm-Level Evidence," Erik Brynjolfsson and Lorin M. Hitt, MIT Sloan School of Management, working paper , June IDC Economic Impact Study, IDC

3 The IT sector (IT-producing and IT-using companies) is expected to add 7.1 million new jobs between now and The growth rate of the IT labor force is expected to be 4.7% a year between 2007 and 2011, about three times the growth rate of the overall global labor force. This growth in the IT labor force will result in aggregate new tax revenues to governments between 2007 and 2011 that will add up to $592.4 billion. The advantages of a growing IT sector are more subtle than the raw numbers alone suggest. IT jobs tend to be higher skilled than most others, particularly in emerging economies. Countries with higher levels of computerization can be more competitive in world markets. During the 1997 Asian financial crisis, for example, we saw that countries with higher levels of computerization were able to recover sooner. A strong IT sector is critical to competing in an integrated global economy. Figure 1 compares the "IT economy" with the general global economy. 8% Figure 1 IT and the Global Economy Growth Expected from % 4% 2% 0% GDP IT Spending Total Workforce IT Workforce T H E E C O N O M I C I M P O R T A N C E O F S O F T W A R E Just as IT is a critical contributor to the strength of the global economy, software plays an important role in building the IT industry. On a global basis, packaged software operating systems, applications, and development tools for everything from ultra portable computers to large mainframes accounts for 21% of total IT spending, although that percentage can vary from as high as 27% (the U.S.) to under 5% (Armenia and Vietnam). But that spending travels beyond software companies themselves. Because software is more complex to sell, service, and support than hardware, dollar for dollar, software generates more downstream economic activity than hardware IDC IDC Economic Impact Study,

4 IDC's analysis of the IT services market, for instance, shows that for every dollar of packaged software sold, there is another $1.25 in revenue that goes to IT services firms. That software revenue and additional services revenue also drive revenue in the distribution channel. These multiple revenue streams pool to help fund employment. As a result, the 21% of IT spending on software mentioned above drives 50% of IT employment, as shown in Figure 2. Figure 2 The Economic Impact of IT Spending, 2007 IT Employment, 2007 Hardware & Services 79% 21% Vendors Channel & Services Firms Workers Hardware Vendors Channel & Services Firms Non Workers 63% 37% $1.23 Trillion 35.4 Million The importance of software to the IT economy is clear in the following ways: Spending on software is growing faster than spending on IT overall 7.9% a year between 2007 and 2011, compared to 6.1% for all IT spending. -related job growth during that time will, therefore, be faster 5.7% -- compared to overall IT labor growth of 4.7%. 's share of the new 7.1 million IT jobs to be created between 2007 and 2011 will be more than 60%, amounting to 4.6 million jobs; an even higher percentage of the $600 billion in new IT taxes to be generated will be software-related. Of those 4.6 million new software-related jobs, 1.2 million will be in the five big emerging economies of Brazil, Russia, India, China, and Mexico (BRICM) and nearly another million in the emerging economies in the rest of the world. This growth in the highly skilled professional labor pool is especially important to developing countries. The emerging economies will represent close to 60% of the new IT companies created from 2007 to Of these new companies, more than 25% will be software or services companies. Most of the rest will be involved with IT distribution. 4 IDC Economic Impact Study, IDC

5 It is good news, then, that the countries with the fastest growing base of software-related employment are expected to be in emerging economies, such as Azerbaijan (number one), Russia (number two), and Vietnam (number three). A third of the countries we studied should see growth of their softwarerelated employment between now and 2011 of 10% or more. Figure 3 shows the addition of new IT and software-related jobs between 2007 and Millions Figure 3 Job Creation Worldwide Other New Jobs SW Related New Jobs Between 2007 and 2011 there should be growth of 7.1 million new IT jobs 2007 Base T H E C O N T R I B U T I O N O F T H E M I C R O S O F T E C O S Y S T E M We have seen how software helps drive a strong IT industry; now we look at the role the Microsoft ecosystem plays in building the software economy. The ecosystem of companies that have product or service offerings involving Microsoft software is large and diverse. IDC estimates that there are at least half a million companies in this ecosystem. For example: Microsoft partners and OEMs sell PCs and servers running Microsoft software; software vendors write applications that run on Microsoft platforms; retail outlets and resellers employ people to sell and distribute these products; and service firms install and manage Microsoft-based solutions, train consumers and businesses on Microsoft products, and service customers for their own applications. Principal measures of the impact of the Microsoft ecosystem: The Microsoft ecosystem employs 42% of the people working in the global IT industry. Those employees and companies will pay $514 billion in taxes this year. Figure 4 shows ecosystem investment by category IDC IDC Economic Impact Study,

6 Figure 4 Investment by the Ecosystem Investments by the Microsoft ecosystem, including infrastructure, people, marketing and business development, are expected to be nearly $100 billion in 2008 $100,000 $75,000 $50,000 $25,000 $0 Total IT Ecosystem Investment Hardware Investment Investment Services Investment While the IDC research sized the number of employees in the Microsoft ecosystem, and not the number of companies, IDC estimates that as many as two thirds of IT vendors offer products or services that run on Microsoft platforms, or include Microsoft products among those that they distribute and support. Most of these companies are small, local firms. The subset of the Microsoft ecosystem that excludes channel firms, whose revenues IDC does not track, will generate $425 billion in revenues in Those revenues are expected to help fund $100 billion in investment by that subset of the Microsoft ecosystem in 2008 for research, development, marketing, sales, and support for Microsoft-related products and services. Most of this money will be spent in-country. For every dollar (or other unit of currency) Microsoft will make in 2007, that ecosystem subset will make $7.79. R E G I O N A L V A R I A T I O N S The IDC study shows a diverse economic and IT industry landscape, from the high-growth but small IT markets of Armenia ($32 million in 2007 IT spending, growing 26% a year) and Vietnam ($1.4 billion in IT spending in 2007, growing 13% a year) to the slower growth but larger markets of Australia (IT spending growing less than 4% a year) and the United Kingdom (an $84 billion market in 2007 growing at 5.5% a year). Most of the regions included in this study have a mix of large countries and small, emerging and developed. Asia Pacific, for instance, contains both the second largest market for IT products and services outside the U.S. (Japan--$106 billion in IT spending in 2007) and the number one growth country for new IT jobs (China--1.5 million between now and 2011). 6 IDC Economic Impact Study, IDC

7 Figure 5 shows job growth by region. 10% Figure 5 IT Job Growth by Region Growth Expected from % 6% 4% 2% 0% North America Western Europe European Union Central & Eastern Europe Middle East & Africa Latin America Asia Pacific BRICM The 82 countries that this study covers can be clustered into four major groups: (1) The large, developed economies, such as Japan, U.S., Canada, UK, France, Germany, and Italy. These six countries alone account for two-thirds of IT spending worldwide and three-quarters of spending on packaged software (2007). They typically have large services sectors, sophisticated applications running on computers even in small and medium businesses, and low software piracy. and services together account for more than 80% of their IT spending. is already critical to their economies. (2) The large, emerging economies, most specifically Brazil, China, India, Russia, and Mexico, that have large and diversified domestic markets, as well as large populations. These five countries account for 9% of IT spending but less than 5% of software spending worldwide. As a result, for the group, software accounts for only 12% of IT spend compared to the worldwide average of 21%. and services account for only 46%. In these countries, there is a wide disparity between the computer operations of the large multinational organizations and the smaller domestic-facing companies in terms of computer sophistication, application deployment, and software piracy (which tends to be low in a few sectors, but high in general). These economies are, however, growing in IT spending much faster than the first group. (3) Smaller developed countries, such as Denmark or Belgium, or countries in transition, such as South Korea, Taiwan, and Singapore. These countries have either the computerization profiles of developed countries or profiles that sit between the first two groups. But neither camp has the population nor the economic heft of the first two groups. Many countries are quite interesting here, such as Israel, with a strong export business and thriving venture capital, and Taiwan, which in many respects is both group one and group three at the same time IDC IDC Economic Impact Study,

8 (4) Smaller emerging economies, that range from the fast growing Eastern European countries, to some of the very small countries in the Middle East and Africa, Asia or Latin America. The computerization profile of these countries can vary widely, and can change rapidly, as IT spending can be tied to specific modernization projects that come and go. Table 1 provides a cross-region comparison on several data points: Table 1 Regional Summary of Economic Impacts Worldwide North America Western Europe European Union Eastern Europe Middle East & Africa Latin America Asia Pacific BRICM IT Spending $ 1,231 $ 493 $ 376 $ 378 $ 46 $ 31 $ 43 $ 242 $ 109 IT Spending 2007 ($B) 6.1% 5.1% 5.7% 6.0% 12.8% 9.9% 10.8% 6.1% 13.3% IT Spending Growth % 3.3% 2.6% 2.5% 1.7% 1.3% 1.4% 2.0% 1.6% Spending, 2007 ($B) $ 264 $ 132 $ 79 $ 77 $ 6 $ 5 $ 6 $ 36 $ 13 Spending Growth, % 8.3% 6.8% 6.9% 14.1% 10.8% 10.5% 7.0% 14.7% as a % of IT Spending, % 27% 21% 20% 13% 15% 15% 15% 12% IT Employment IT Employment, 2007 (M) IT Employment Growth, % 3.5% 2.6% 3.1% 9.6% 7.1% 8.1% 5.4% 8.6% Employment, 2007 (M) Employment Growth, % 5.2% 4.6% 5.0% 13.9% 10.5% 8.3% 7.1% 11.4% Employment as a % of IT Employment, % 66% 57% 55% 40% 38% 49% 36% 30% Ecosystem Impact Ecosystem Revenues, 2007 ($B) $ 424 $ 166 $ 123 $ 126 $ 20 $ 14 $ 18 $ 83 $ 106 Ecosystem Investment, 2008 ($B) $ 95 $ 42 $ 28 $ 28 $ 4 $ 2 $ 3 $ 16 $ 7 Ecosystem Revenue per Microsoft Revenue, S U M M A R Y This study shows that the IT industry plays a critical role in economic growth throughout the world and that the economic impact of the software sector is much greater than its proportion of IT spending would suggest. Microsoft-related employment is 42% of global IT employment. These professionals in the Microsoft ecosystem are employed at 500,000 IT-producing companies as well as by end-user organizations that work with Microsoft software in some facet of their business. These companies and employees are significant economic contributors to their local economies through income and other taxes and through local investment in sales, training, infrastructure, and business development, C o p y r i g h t N o t i c e External Publication of IDC Information and Data Any IDC information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Vice President or Country Manager. Copyright 2007 IDC. Reproduction without written permission is completely forbidden. 8 IDC Economic Impact Study, IDC