Towards a Policy Framework for Promoting Cloud Computing Adoption in Developing Countries

By Khuong Minh Vu and Kris Hartley

Posted on September 5, 2017


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The following provides extensive excerpts from Professor Khuong Vu and Kris Hartley’s paper, “Towards a Policy Framework for Promoting Cloud Computing Adoption in Developing Countries.” The entire article is available as a downloadable pdf.

Introduction

The global economy is undergoing revolutionary changes brought about by the fourth industrial revolution. At the center of this transformation are three trends: the proliferation of platform economies, the extensive adoption of emerging smart technologies, and the strategic application of big data to improve decision-making. Embracing digital transformation allows firms, governments, and entire economies to achieve efficiency gains, upgrade technological capabilities, and strengthen the foundations of long-term growth and competitiveness. This new technological landscape will require prudent foresight and effective strategies on the part of both the private and public sectors. Shaping development in every industry and country, the defining features of this new digital paradigm will be transparency, learning, resource-sharing, co-innovation, and collective action, among others. Cloud computing will play a crucial role in this transformation. This article briefly examines the benefits of cloud computing, challenges associated with its adoption, and priorities for government intervention, based on surveys of firms and government agencies. From a theoretical and regression analysis, salient policy items are identified. The article concludes with a description of how these items can be incorporated into government interventions, and how governments can stimulate growth in cloud computing adoption for firm competitiveness and national economic development.

Cloud Computing Benefits and Digital Transformation

Cloud computing is a system whereby data is centrally stored and managed on internet-linked remote servers, allowing users to purchase capacity in variable increments. The equalizing effect of cloud computing, in terms of digital capabilities like data storage and analytics, is redefining competitive dynamics across industries and geographies. In particular, the implications of cloud computing for small and medium-sized enterprises are immense. Smaller businesses can now access world-class information services while avoiding up-front capital investment, the costs of maintaining in-house IT teams, and the risks of relying on privately owned hardware. Further, through cloud systems small and medium-sized businesses now have the data management agility, speed, scalability, efficiency, security, and innovative capacity, which is ideal for enterprises of any size. This shifts firm-level competitive dynamics from strategic IT investment to core competencies, and will likely disrupt the global competitive hierarchy in many industries. Cloud computing also enables firms and organizations to accommodate rapid growth, cope with uncertainty, and navigate business cycle fluctuations.

Cloud Computing Adoption: Global Trends

The vigorous upgrading of digital infrastructure and increasing awareness of cloud computing benefits are driving rapid adoption of cloud computing services. By 2015, less than 10 years since its introduction, cloud computing services accounted for roughly 75% of the total workload processed by data centers. This share is expected to reach 92% by 2020, with the number of cloud servers growing by 15% and traditional servers declining by 11% per year between 2015 and 20201.

 

Examining country-level data collected by BMI on cloud computing expenditure during 2016, two trends emerge. First, spending for cloud computing has grown rapidly, with an average annual growth rate (2010 to 2016) consistently high across all country groups: 42.5% for the worldwide sample, and ranging from a low of 29.4% (Latin America) to a high of 49.6% (Africa and the Middle East). Second, per capita spending for cloud computing varied significantly by country in 2016, ranging from 1% of the US value for Egypt and India to over 200% for Australia, Sweden, and Canada. Adoption remains notably low for developing countries. Cloud computing expenditure per capita is less than 10% of the US value for seven of 11 countries in Developing Asia, five of eight in Eastern Europe, and all seven Latin American countries.

Promoting Adoption of Cloud Computing in Developing Countries

Investment returns on cloud computing expenditure for firms and economies should make cloud computing a top policy priority for all countries, especially developing countries. The following provides insights for developing policy frameworks to promote cloud computing adoption.

 

Simple Platform Model of Cloud Computing Services

 

In viewing cloud computing services as a platform, the combination of supply-side (server capacity), demand-side (workload aggregation), and multi-tenant application models generates powerful economies of scale2. Achieving economies of scale, however, requires effective coordination. Models of network effects show that the equilibrium number of active users on a given platform varies depending on both application quality and facilitative policy3.

 

A simple platform model of cloud computing services for firms provides a useful illustration. A firm joins only if net gain is positive: the benefits of cloud computing services and gains from network effects exceed platform joining price. As shown in Figure 1, active users as a share of the population can settle into an equilibrium that is low (10%) or high (80%), either occurring with an initially expected share of 40%. Factors driving this disparity include the price, effectiveness of facilitation, and the initially expected fraction of users. The chance that these adoption dynamics will lead to a higher equilibrium level depends negatively on price, and positively on facilitation and expected fraction of users.

Image: Simple platform model of cloud computing services

Given the relationships among these variables, three policy insights emerge. First, raising awareness about the benefits of joining cloud computing platforms should be a policy priority for both governments and cloud services providers. A low-cost approach with high potential impact, this policy not only increases the expected fraction of potential users but also expands the population of interested firms. Second, price has a crucial effect, especially if the expected fraction of users is low; low prices may be necessary to develop a critical mass of potential users. Third, facilitation is important, as it increases both the intrinsic value of platform applications and the benefits of network effects.

 

Cross-country Regression Analysis

 

A simple cross-country regression of the level of cloud computing systems per capita on country-specific characteristics reveals meaningful insights (details of this regression analysis is presented in “Towards a Policy Framework for Promoting Cloud Computing Adoption in Developing Countries,” Khuong Vu and Kris Hartley, LKYSPP working paper, 2017). The findings show that cloud computing adoption (as measured by spending per capita) has a statistically significant partial link with a number of policy variables. Controlling for per capita income and other factors, cloud computing adoption is positively associated with penetration rates of broadband and smartphones, openness to international trade, and urban population share. The negative association between adoption and software piracy suggests that firms can gain access to the capabilities they need at below-market cost, reducing the benefits of cloud computing.

 

Survey of Vietnamese Firms and Government Agencies

 

Our recent survey of Vietnamese firms and government agencies provides further policy insights for promoting cloud computing adoption. The survey focuses on firms and government agencies familiar with cloud computing services. The sample of 364 firms and 98 government agencies is concentrated in Vietnam’s two major cities – Hanoi and Ho Chi Minh City. Key results of the survey are elaborated below.

 
  • Benefits of Cloud Computing Adoption
    Survey respondents have a positive perception about the benefits of cloud computing. Top benefits for businesses are agility, scalability, competitiveness, profitability, and customer services; those for government are efficiency and performance, agility, complexity reduction, scalability, and customer services. The positive perception was shared by both adopters and non-adopters, but the assessment by the former is stronger. This implies that use experience strengthens positive perceptions about cloud computing.

     

  • Obstacles to Cloud Computing Adoption
    Both businesses and government agencies see software piracy as the most important obstacle to cloud computing. This perception is consistent with the finding mentioned previously about the negative link between piracy and cloud computing expenditure per capita, and further justifies the inclusion of piracy as one of ten pillars in the Asia Cloud Computing Association’s (ACCA) annual Cloud Readiness Index (CRI).

     

    For businesses, the top five obstacles to cloud computing adoption besides piracy, in descending order, are lack of awareness of the benefits of cloud services, concerns about security and privacy, limitations in product offerings of cloud computing services, and budget constraints.

     

    Top obstacles for government agencies are similar except for two differences. One is that concern for security and privacy is a greater obstacle for government than lack of benefits awareness. This is consistent with what might be expected about the national security sensitivities of government data. Second, while businesses and governments share the top four obstacles, they diverge on the fifth; businesses cite budget constraints while governments cite corruption in ICT asset procurement [ICT stands for information and communications technology]. These are again consistent with expectations: firms may be more vulnerable to budgetary issues, while governments may be more vulnerable to corrupt practices.

     

  • Priorities for Government Intervention
    Survey respondents are consistent across both groups regarding public policy measures to promote cloud computing adoption, ranking improvement of ICT infrastructure (broadband connectivity and network reliability) and government role as a lead user as the highest priorities. Respondents are also consistent for other top priorities: raising the awareness of the benefits of adoption, providing financial support/incentives, formulating an effective strategy for promoting adoption, and forming a national steering committee to promote cloud computing. These findings underscore the importance of raising awareness, reducing the cost of transition to cloud computing services, and enhancing the effectiveness of facilitation and coordination, as suggested previously in the Simple Platform Model of Cloud Computing Services.
Analysis and Policy Implications

The research in this study reveals the fundamental elements of a policy framework for developing countries to promote cloud computing adoption. Such a framework can be structured around three priorities:

  • raising awareness about the benefits of cloud computing adoption;
  • improving the net gains from cloud computing adoption (i.e. increasing benefits and reducing costs);
  • and enhancing the effectiveness of coordination in facilitating cloud computing adoption.
 

Regarding awareness of the benefits, governments should work with business associations, cloud computing service providers, and academic institutions to organize conferences and workshops that share research about emerging trends. Further, taking a lead role in adoption, supported for example by a “cloud-first strategy,” can be an effective way for governments to raise awareness and motivation within the business sector.

 

To raise the net benefits of cloud computing adoption, there are a variety of policy measures:

  • support for upgrading ICT infrastructure (especially broadband connectivity and network reliability);
  • stronger controls on software piracy;
  • and direct financial incentives.

From the supply side, governments can encourage cloud computing service providers to improve and diversify their product portfolios, and allow more competition as a price and quality control mechanism. The latter is dependent in part on openness to international trade, enforcement of fair and equitable business practices, and liberalization of capital markets to encourage borrowing among small and medium-sized enterprises.

 

To enhance effectiveness of coordination, governments should form national steering committees to monitor cloud computing industry conditions and progress. Guiding principles for this initiative are illustrated by the “SMART” model for ICT governance, consisting of five components: Strategy, Monitoring, Accountability, Rethinking, and Trust. [The SMART model is outlined in “ICT Diffusion and Production in ASEAN Countries: Patterns, Performance, and Policy Directions” (Khuong Vu, Telecommunications Policy, April 2017).]

  • For strategy, policy priority should focus on hard (ICT) and soft infrastructure, control of piracy, and clear communication about the roles and mechanisms of regulations.
  • Monitoring is essential for understanding the dynamics behind industry progress and cloud computing adoption. Monitoring should be built around meaningful and measurable key performance indicators (KPIs) with thorough benchmarking against national peers and international best practices.
  • Accountability implies the need for a steering committee that includes representatives of government, user firms, and cloud computing service providers. This committee would convene frequently to discuss KPIs and review policies, and could also oversee an awareness campaign by publishing reports and press articles.
  • Rethinking involves high-level conceptual evaluation of computing power and data storage as utility services, and identification of long-range opportunities for both businesses and government.
  • Finally, building trust is crucial for helping businesses manage risks associated with adoption. This includes a policy commitment to ensuring system security and resilience (minimization of interruptions), a product of infrastructure quality and management resourcing.
Conclusion

The frontier of possibilities presented by cloud computing is just now being fully realized, and governments must be forward-thinking in understanding and embracing these trends. The implications for economic growth are immense: cloud computing has the potential to revolutionize global competitive dynamics in many industries by equalizing the information and analytical landscape between large and small firms. This transformation represents an opportunity for economic growth, particularly in developing countries, and it is crucial that governments approach the coming fourth industrial revolution with speed, pragmatism, and ambition.

 

This brief study has identified several areas for policy intervention. Areas urgently needing attention include ICT infrastructure, software piracy control, cloud computing industry development (including competition, price, and quality), and a rebalancing of the firm-level cost/benefit calculus through financial incentives and other inducements for adoption. Further, governments should move forward with a clear and consistent strategy based on a robust understanding of firm needs and industry capacities, and on evidence about firm- and macro-level benefits and challenges. This can be facilitated by a steering committee with representatives from across the industry landscape.

 

In developing countries, the policy challenges associated with facilitating the development of a healthy cloud computing industry are the same challenges that attend most government interventions: the need for clearer and more consistent vision and strategy, better coordination within government and across the public and private sector, stronger capacities and resource commitments for basic facilitative elements like infrastructure, and more effective promotion of open markets, transparency, and fair competition. Governments that address these challenges will enable their private sectors to fully claim the benefits of cloud computing, with economic growth certain to follow.

 

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1 Cisco Global Cloud Index: Forecast and Methodology, 2015–2020. White Paper, Cisco Public.
2 “The Economics of the Cloud”, Microsoft, November 2010.
3 Levin, J.D., 2011. The Economics of Internet Markets, National Bureau of Economic Research, NBER Working Papers: 16852.

 

Khuong Vu is an Associate Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore. His research and teaching concentrate on economic development and policy analysis.

 

Kris Hartley is a Research Affiliate at the Center for New Structural Economics at Peking University, and Nonresident Fellow at the Chicago Council on Global Affairs.

 

Download the pdf of “Towards a Policy Framework for Promoting Cloud Computing Adoption in Developing Countries” to read the full article.

 

These excerpts from “Towards a Policy Framework for Promoting Cloud Computing Adoption in Developing Countries” are published on TAP by permission from its authors, Professor Khuong Vu and Kris Hartley.

 

 


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