The economic imperative to accelerate Switzerland’s digital transformation

In many ways, Switzerland is a highly successful country with a successful economy – as exhibits 1 and 2 show:  While real GDP growth has been rather low for a while, lagging that of the US in relative terms and with a steadily widening gap, levels of per capita income are very high (>20% above the US), which means that Switzerland is growing slowly, but off a high base, and Switzerland’s real GDP growth has still been ahead of the EU and its big neighbors for quite some time now.

What’s more, public and private infrastructure generally work well, and society enjoys high levels of trust and cohesion, despite Switzerland’s cultural and language diversity, thanks to shared values and history, the importance of local communities, stable institutions, and Switzerland’s unique system of government and public administration.

Looking at the roots of Switzerland’s economic success, it becomes clear that the Swiss economy’s current enviable position rests on farsighted investments, made over generations, into human capital, shared infrastructure, and a history of entrepreneurship and innovation.  Switzerland’s communities and Swiss firms have consistently responded to emerging challenges and opportunities by investing in strengthening their competitive position.  Those investments have generated leading global positions in a broad range of sectors such as banking and insurance, manufacturing and industrial goods, high-value consumer products and luxury goods, life sciences, med-tech and healthcare.

Nothing is broken and so much works so well in Switzerland – conditions that do not always make an obvious case for change.  At the same time, it is also clear that the world is changing rapidly and in meaningful ways – technology and climate change, new global economic dynamics and geopolitical rivalry.  Some of those changes, together with monetary and fiscal policies in Switzerland’s main trading partners in Europe, the US, or Asia, have already translated to persistent, long-term upward pressure for the Swiss Franc, to historically high levels.  The interventions of the SNB have offset some of this pressure, but these official actions have limits in the long run.  While many Swiss firms, including in export-heavy industries, have shown remarkable resilience, the pressure on efficiency and productivity will only increase in the foreseeable future – with or without higher tariffs elsewhere.

At the same time, the pace and magnitude of digital change, driven by technology, is faster and more transformative today than ever before. Digital transformation, the widespread adoption of new technologies – including AI – and of design thinking and new ways of working, enables organizations to improve customer experience, deliver value in new ways, increase efficiency end-to-end, and continue to innovate how things get done.  While only one of several forces, digital transformation will remain central to the competitive strength of firms, sectors, and national economies in the years ahead.

For small advanced economies in general, performance in externally-oriented activities tends to be the primary productivity growth engine.    This is particularly the case in Switzerland, where world-leading firms in the sectors mentioned above have been at the core of Switzerland’s success, usually supported by ecosystems of successful medium and smaller-sized firms, many of which are also global market leaders in their own right.
 

To retain their competitive edge, and for Switzerland to continue to prosper, it is critical for these internationally-facing firms and sector ecosystems to achieve sustained productivity growth.  Increasingly, Switzerland’s productivity growth will depend on how well anchor firms, key sector ecosystem players, and the public sector, work together to build and evolve the capabilities needed to succeed in the digital age – and do that in ways that are consistent with the country’s positioning, tradition and cultural norms.  

Digital transformation can also help alleviate another challenge the Swiss economy has been facing for years now: Switzerland already suffers from a shortage of skilled labor.  Swiss unemployment is low – just over 4% compared to 6% across the EU27, on a harmonized basis - and there are limits on migration.  If done well, digital and AI transformation makes labor more productive, and the more Swiss employers manage to increase labor productivity enough to reduce the need for new “supplementary” talent, the more that might ease some of the recent pressures in the talent market and will allow Switzerland to focus on inward migration of highly-skilled talent that in turn helps it to be an innovation champion and further increase GDP per capita.  

Underpinning this assumption is an expanding body of private- and public-sector research, including the recent OECD paper estimating the macroeconomic impact of AI to net 0.25 to 0.6 percentage points in total annual Total Factor Productivity (TFP) growth or 0.4 to 0.9 percentage points to annual labor productivity growth over the next decade in the United States, with other developed countries not far behind. 
 

To be clear, digital transformation is happening in Switzerland.  The IMF AI Preparedness Index awards Switzerland a reasonably high score, among the top ten out of 174 economies, based on their readiness in four areas (digital infrastructure, human capital and labor market policies, innovation and economic integration, and regulation).   Swiss private and public sector organizations have been spending considerable time and resources on digital transformation for some time now – even if often not always with the same “intensity”, ambition and dynamism seen in other parts of the world and the US or Asia in particular. 

Swiss technical universities such as ETH and EPFL are world-renowned academic powerhouses with global standing. It is not a coincidence that DisneyResearch|Studios are located at ETH in Zürich, pushing the boundaries of technology in the service of story telling.
Switzerland is also home to a lively startup scene, although Swiss start-ups tend to not be as generously funded as many of their peers in the US or parts of Asia.  That, too, is getting better - both, locally and by attracting foreign venture capital, at the same time as Zürich‘s continues to evolve as tech talent hub for global „big tech“, such as Google, Microsoft, and most recently OpenAI.

Looking beyond academia and “big tech”, Switzerland’s open-source ecosystem benefits from the combination of tech talent, infrastructure and Switzerland’s reputation for privacy and neutrality.  Talk about digital transformation and innovation is en vogue in the media, panel discussions, and events hosted by business and academia, but off-stage many experts acknowledge that there is still ample space to catch up.

The key question is thus:  What would it take for Switzerland to accelerate further and become a true innovator and shaper of digital transformation that translates into real competitive advantages, as Switzerland has been with previous waves of innovation?
To thrive in this digital century and retain their competitive position, Swiss business and public sector leaders need to work together to accelerate Switzerland’s digital transformation with the same spirit of entrepreneurship and innovation that made Switzerland successful to this day. 

Together, they need to leverage technology and data to…

• Foster innovation and productivity growth to compete abroad
• Transform sector ecosystems at home, and the public sector to support them
• Enrich jobs, lives and communities
   

Many European countries are moving at speed on digital transformation, now including AI, from large neighbors like France or Germany, to the more comparable small advanced economies of the Nordics.  Initiatives include AI strategies to accelerate the deployment of AI into industry, investments in digital infrastructure, as well as public support for R&D and skills.  

To be fair, things are beginning to move faster in Switzerland as well:  With ALPS, operated by ETH-linked Swiss National Supercomputing Centre (CSCS) in Lugano, Switzerland is now home to one of the world’s fastest super computers, which will be used not only for weather data, but also to train foundational models as well as world-class data scientists. As the questions around digital trust gain in prominence, Switzerland is well positioned to translate its traditional strengths into the age of AI.

However, to get a sense of the scale and intensity of action in leading economies, it is useful to look to Asia.  Singapore, a leading small economy, is particularly instructive.  Singapore has put digital transformation at the centre of its economic strategy.  There are heavily-resourced initiatives in areas such as world-leading digital infrastructure, substantial research funding for innovation, digital and AI technologies, technology-focused productivity support schemes for small and medium enterprises, extensive lifetime skills support, regulatory sandboxes in areas such as fintech, dedicated visas for high tech/digital talent, support of VCs that are funding digital firms, and the transformation of public services.  Action plans have been developed to support and strengthen digital transformation in multiple sectors, and a long-standing Smart Nation strategy to guide action.  Singapore tops the IMF AI Preparedness Index with a score of 0.8, ahead of the US and other small advanced economies (Denmark, the Netherlands, Estonia, Finland), and Switzerland.  

The reality of each sector and player is of course more nuanced than we can do justice to with this aggregated macroeconomic perspective. Competitive pressure to embrace digital transformation, however, will only increase – at least for Swiss champions competing in international markets – whether MNC or SME – but ultimately established ecosystems at home.

It is not all business, either.  The digital maturity of the Swiss public sector has a key role to play in this process as well, as it can help everyone lift productivity and reduce transaction costs wasted on paper and red tape.  Many public sector entities are asked to do more with less.  Public sector and community stakeholders, together with the Swiss private sector, also need to help shape Switzerland’s digital transformation in a way that maintains a relatively high level of sovereignty and independence, traditionally core pillars of Switzerland’s identity as a nation and its economic model, and increasingly hard to maintain in a world that increasingly depends on digitally connected ecosystems dominated by large countries or multi-national corporations that have the resources to maintain and grow them.

Small advanced economies have limited margin for error.  They need to ensure that they remain close to the productivity frontier in order to compete successfully in global markets.  This explains the intensity of efforts across many small advanced economies, and is instructive for Switzerland.

If Swiss firms and public sector entities do not remain at the frontier by truly embracing and accelerating digital transformation, they risk an accelerating erosion of competitive strength over time – with increasingly negative consequences for the competitiveness of the entire Swiss economy. 
On the other hand, leveraging digital transformation to amplify typically Swiss propositions, quality, and continue to lift productivity from today’s very high levels would help continue the extraordinary Swiss story in the digital age and create strong competitive advantages based on new and often complementary capabilities.

Considering all of this, the economic imperative to accelerate Switzerland’s digital transformation is clear.  The key question for private and public sector leaders is thus not “if”, but rather “how” and “when”.  Finding the right answer to both involves making decisions under uncertainty. While Switzerland could so far afford to forego expensive first mover advantages in many areas due to its existing strengths, and learn from others, it is also clear that the cost of catching up will only increase over time. 

Hence it is crucial to make the right decisions now to accelerate Switzerland’s digital transformation and secure the right options for a successful digital future.