Can cloud computing spur economic growth and job creation? In SIIA’s recent report, Guide to Cloud Computing for Policymakers, we say that the biggest benefit of cloud is “the boost it can give to other economic activity through the provision of more effective and less expensive computing capabilities.” It’s worth emphasizing this point and reviewing some recent economic studies that back it up.

A recent study by Federico Etro finds that cloud computing tends to increase business formation in European economies. Cloud computing reduces the costs of entry into a market by shifting fixed capital expenditures on information technology into operating expenses that depend on the size of a company’s output, spurring the formation of new firms. It’s easier for companies to get started when they can buy the computing services they need rather than invest in expensive large-scale computer hardware and software.

Etro considers the effects of two possible routes for cloud computing’s diffusion in Europe: a slow dispersal that reduces the fixed costs of entry by 1% and a rapid one that reduces these costs by 5%. In either case, the contribution to economic growth is significant. After one year, even a slow diffusion of cloud computing increases annual economic growth by five basis points (0.05%). After five years of rapid diffusion, annual economic growth is four-tenths of one percent (0.4%) higher than it otherwise would be.

A rapid diffusion of cloud computing would create almost 400,000 additional small and medium sized business in Europe after five years, Etro estimates. The bulk of these new firms are concentrated in wholesale and retail trade and real estate and other business activities. It would create a short-term increase of one million jobs in Europe, and reduce the European unemployment rate by one-half of one percent (0.5%). Though it’s true that the efficiencies of cloud computing could reduce the number of people performing IT-related tasks, the overall effect would increase jobs. He estimates that 8 jobs would be created for every job lost.

These are impressive results. But they derive from examining only one benefit of cloud computing – the reduction in capital costs that allow new firms to enter the market. Another European study by the Centre for Economic and Business Research takes into account the economy-wide costs savings and new revenue opportunities made possible by cloud computing in five European countries.

Cloud computing reduces costs for existing firms by reducing their capital expenditures, their labor costs, and their power costs (since they no longer need to service large in-house computers). Cloud computing also allows existing companies to scale to bring products and services to new markets and meet unpredictable short‐term demand peaks. Companies can leverage cloud computing to earn extra revenue that they might otherwise have missed if they had to invest in new computing equipment or software in order to expand output. CEBR takes these effects into account, along with the new business formation effect, and estimates that adoption of cloud computing will generate a cumulative increase in output of 763 billion euro in these countries, and an increase in employment of 2.3 million between 2010 and 2015. By 2015, annual economic benefits are predicted to be in excess of 177 billion euro and the annual increase in jobs expected to be 446,000.

Which sectors stand to gain most from the cloud? A follow-up study by CEBR breaks it down. Distribution, retail & hotels accounts for 233 billion euro of the cumulative economic gain through 2015, and government, education and health will gain the largest number of jobs – 801,000 – over this period. Banking has the second highest economic gain with 183 million euro and manufacturing is the second biggest beneficiary of job gains at 501,000 jobs. So the economic benefits are wide-spread.

These results are no doubt promising, but all studies of the impact of a new technology should be subject to some degree of uncertainty. We can never make perfect predictions of what lies ahead. But these reports suggest that cloud computing can have substantial benefits for economies struggling with issues of growth and unemployment.

The policy implications of these studies need to be made explicit. The message to policy makers is to be alert for policies that can inhibit the growth of cloud computing. As our earlier study noted, dissipating the economic advantages of cloud computing by imposing inefficient localization requirements or limits on cross-border data flows will hurt those who depend on enhanced computer services to flourish and provide jobs. Policy makers seeking to maximize economic gains in hard times should avoid these counterproductive requirements.

For SIIA policy updates including upcoming events, news and analysis, subscribe to SIIA’s weekly policy email newsletter, Digital Policy Roundup.