Digital Innovation Reshaping Industry Chains

Abstract

Digital technologies have had profound and far-reaching impacts on the global economy in the past three decades. They have facilitated the digitalization of trade, and the optimization and restructuring of global industry chains. With data and information as the core factors of production, the digital revolution driven by technological innovation has given rise to new industries, and fostered the restructuring of global industry chains via the improvement of information communication and logistics infrastructure.

Digital technologies have reshaped existing resource endowments and comparative advantages. First, data has become a new core factor of production and an essential means of production (i.e., the “new oil”). Data is characterized by its near-zero marginal cost, replicability, and non-rivalrous nature. Unlike traditional factors of production, the transmission of data is no longer restricted by time or space.

Second, emerging technologies such as automation, artificial intelligence (AI), and the internet, as well as the rise of digital platforms, have transformed factors of production, and physical distance has become less important in the organization of industry chains. Digitization has therefore fostered more decentralized production and a more complex industry chain structure. In addition, the economies of scale and economies of scope for large economies are crucial for the development of the digital economy and industry chains. The US and China have leveraged their economies of scale to become giants in the digital economy, enabling digital platforms to increase user traffic and harness the full potential of their network effects.

Comparative advantages and resource endowments remain important for the distribution of global industry chains in the digital era. However, digital technologies are reshaping the traditional comparative advantages among major economies. The emergence of new markets, demand, and technologies are driving the development of new products and new industries. Technologies such as AI, blockchain, cloud computing, and new forms of organization for production and trade such as digital platforms are changing trade patterns while reducing logistics costs and improving production efficiency at the same time. The global industry chains are also undergoing profound changes in the process of digitalization.

Geopolitical tensions and COVID-19 conditions have brought disruptions and uncertainties to global industry chains. Economic restructuring in the digital era brings new challenges and opportunities to upgrade and restructure industry chains. Amid intensifying digital competition, major economies are introducing new policies and measures to facilitate economic digitalization, and build or consolidate advantages in digital industries and trade.

Under complex international trade conditions, we think China can fully leverage the economies of scale for a large country, encourage technological innovation, foster new markets, strengthen the digital industry chain, and facilitate the digitalization of China's industry chains. In our view, China can enhance its digital and data security while also encouraging data flows and the growth of digital markets and economies. By improving the management of data and digital platforms and deepening digitalization, China is poised to boost the efficiency and optimize the structure of its industry chains.

Authors of this chapter: WANG Naixi, WU Xiaohui, PENG Wensheng. Other important contributors: ZHU Feng, LIU Nan. Translator: Roy LIU. Editors: Kenneth HO, Jonathan BARLOW, WANG Naixi, WU Xiaohui, LIU Nan, LIU Xinran.

Digital technologies have had a profound impact on the global economy over the past three decades, and have significantly facilitated the structural upgrading of global industry chains, on their regional transfer, as well as on their adjustments. While China’s traditional economy (offline economy) is under pressure from global COVID-19 conditions, geopolitics, and competition from large countries, its digital industry is still developing rapidly, and digitalization and digital security are becoming increasingly important in global industrial competition.

However, the development of China’s digital economy and industry still faces numerous challenges such as intensifying global competition in technologies, data, and digital platform governance. How China competes globally by leveraging its core advantages, including its scale, while ensuring the security of its industry chains is a key issue.

5.1 Important Factors of Industry Chain Reform in Technological Innovation

The digital era has brought about new markets, demand, and productive forces, and data has become a new core factor of production. This further affects the resource endowment and comparative advantages of various economies. The zero marginal cost of data and the significantly weakening importance of physical distance in the platform economy are conducive to the regional diversification of production and trade. Economies of scale and economies of scope have become more prominent in the digital era than in industrial era: The platform model in the digital economy relies on massive data, user traffic, and network effects to reduce costs and improve efficiency. Amid deglobalization and competition among large countries, the economies of scale for a large country provide important support to the security and efficiency of industry chains in the digital economy.

In the digital era, data has become a new core factor of production¹ and an essential means of production (i.e., the “new oil”), but it differs from traditional factors of production. First, data has diverse sources of value. Both raw data and corporate efforts to collect, store, and analyze data are indispensable. Second, data is replicable and non-rivalrous.² A rise in the number of users neither weighs on the quality and supply of data, nor does it affect its use by other users. Information sharing and its free flows can generate greater value.

However, there is a lack of motivation to share data due to market competition and the cost of acquiring and processing data. In addition, national security could be compromised when it comes to cross-border data flows. As a result, the governance, production, and use of data differ sharply from traditional factors of production. To facilitate data use, it is important to determine proper data ownership, protect the interests and privacy of data owners, and ensure secure and efficient cross-border data flows. Major global economies attach great importance to data. China has gained certain advantages in underlying data resources thanks to its large population and the sizeable user base of its internet platforms.

Data infrastructure is crucial for the development of industry chains. Declining cost and significant improvement in the capabilities of data collection, storage, and computing hold the key to the development of big-data application technologies. According to the Global Computing Index Assessment Report (2020),³ a 1ppt increase in the computing power index can boost the digital economy and GDP by 3.3‰ and 1.8‰ on average. The efficiency of data storage and computing has improved significantly since Amazon launched its cloud computing services in 2006. Developed countries remain dominant in cloud data.

China has built 5 mn standard server racks. Its computing power has reached 130EFLOPS,⁴ and the demand for computing power is growing rapidly. Data centers in China are mainly located in the resource-tight eastern regions. Meanwhile, western China boasts rich resources such as renewable energy, and enjoys comparative advantages in large-scale development of data centers catering to computing demand in eastern regions.

In February 2022, the National Development and Reform Commission (NDRC) and other regulators launched the “east data, west computing” initiative to build national computing hubs in the Beijing-Tianjin-Hebei region, Yangtze River Delta region, Guangdong-Hong Kong-Macao Greater Bay Area, Chengdu, Chongqing, Inner Mongolia, Guizhou, Gansu, and Ningxia, with plans for 10 national data center clusters. By developing an integrated computing network of data centers, cloud computing, and big data, the initiative takes full advantage of western China’s rich computing resources to meet data computing demand in eastern China, thus facilitating the digitalization of industry chains.

The large-scale use of data has also brought about some new challenges which impede the efficient use of data in a secure environment. First, illegal data collection and use, data leakage, and insufficient privacy protection pose challenges to the use of data. For example, some data companies take advantage of crawler software to illegally scrape data from internet platforms. In September 2019, big data companies were investigated for their illegal data scraping businesses.⁵ Starting in November 2019, the Ministry of Public Security cracked down on mobile applications’ illegal collection of personal data, and shut down more than 100 mobile applications.⁶ However, legal and appropriate data scraping helps address problems such as data islands.

In addition, core data has the potential to significantly impact national and corporate security. Therefore, it has become an increasingly important target of competition among large countries. The leakage of core data can have far-reaching impacts on key industry chains. For example, in September 2021, the US Department of Commerce⁷ asked major silicon chip producers, including TSMC and Samsung, to voluntarily share key supply-chain information, such as orders, inventories, and sales. This information, often seen as highly confidential, was sought to enhance transparency within the supply chain. The Department also hinted at the possible use of the Defense Production Act to mandate the sharing of data if necessary. Such data can help US companies maintain competitive advantages, adjust their industrial plans based on global supply and demand conditions of silicon chips, and improve their key position in the global industry chain of silicon chips.

Automation (including the use of robots) helps mitigate the impacts of contraction of the labor force caused by population aging. Automation before the digital era boosted labor productivity and resulted in the reallocation of employment across industries and the aggregate fall in the labor share.⁸ Automation and artificial intelligence (AI) have the potential to reduce the labor intensity of certain industry chains, decrease the importance of cheap labor as a comparative advantage, and possibly replace human labor in more complex jobs that require cognitive judgment in the future.⁹ However, the overall impact of automation and AI on the labor market remains unclear.¹⁰ Automation and AI have not yet led to large-scale reshoring for the production of labor-intensive manufactured goods.¹¹

However, the emergence and expansion of digital platforms, the sharing economy, the gig economy, and the increasing popularity of teleworking may affect the distribution of labor factors and the structure of industry chains. Jobs related to digital platforms and the gig economy typically require diverse skills and greater flexibility. The flexibility in working time and location helps optimize the allocation of labor resources. According to the International Labour Organization,¹² the sharing economy in China has attracted plenty of part-time workers and urban jobseekers that face difficulties in securing employment, and has acted a reservoir for the labor market.

According to a survey of digital platform workers in 2019,¹³ about 50% of those surveyed had a bachelor’s or higher degree, while more than 60% had retained the same income source they had before beginning to work on digital platforms and have thus added platform-based work to their income-earning activities. The popularity of teleworking based on digital technologies was boosted during the COVID-19 pandemic. In 2020, about 42% of the US workforce worked from home full-time and only 26% worked on-site,¹⁴ while the number of traditional workers working as digital nomads grew 96% from about 3.2 mn to about 6.3 mn.¹⁵ Digital platforms, the sharing economy, the gig economy, and teleworking have effectively expanded the labor force, changed traditional working methods, and empowered workers with different skills and educational levels to participate in the division of labor and cooperation. This bodes well for optimizing the allocation of factors of production such as labor, and for improving productivity.

Economies of scale have played a key role in various industrial revolutions. In the digital era and the platform economy, economies of scale and economies of scope hold the key to reducing costs and improving efficiency. Frontrunners in the digital revolution such as the US and China boast the largest markets and the highest number of internet users in the world. While the overall market of the EU is sizeable, it is also fragmented due to differences in institutional mechanisms, languages, and cultures. This weighs on the economies of scale of digital technologies and platforms.

One of the contributors to the success of US digital platforms is their active integration into global markets and efforts to take full advantage of global markets and industrial scale. US platform companies have much higher overseas revenue exposure than their Chinese peers. For example, overseas revenue accounts for over half of total revenue at Google, Facebook, and eBay, while Alibaba Group’s international revenue contribution is considerably lower, at 7% in 2021.¹⁶ Due to lack of overseas experience, Chinese platform companies have not managed to effectively expand in overseas markets. Under deglobalization, China’s large domestic market remains a major advantage for platform companies to grow. We believe these companies can leverage the enormous domestic market in China to expand their global presence and market share, which we believe will help further improve economies of scale.

The foremost focus of international competition in the digital era is strategically important digital innovations, such as AI, 5G, cloud computing, blockchain, and big data. As the world’s biggest economy and a large technological power, the US is a pioneer in the development of core digital technologies and infrastructure, and remains a leader in a number of key areas thanks to its economies of scale. The country’s abundant advanced human capital and technological resources are the cornerstone of its leadership of the global digital economy. The US leads in data analysis technologies, but China is working diligently to catch up.

Digital industries are the foundation of the new economy. Despite a relatively late start, China’s digital industries are thriving on the back of the country’s enormous market, strength in learning and incremental innovation, well-established manufacturing industries, and solid government support. We expect China to catch up with leading developed economies in digital infrastructure over the coming years, and think its strong telecom infrastructure will support digital transmission. China is already leading the world in the penetration rate of 5G, which is an accelerator of digital industries.

The economies of scale for large countries facilitate the development of digital industries, and provide important support for the digital economies of China and the US. For example, the US and China lead other economies in the public cloud market (Fig. 5.1) thanks to the sheer size of their economies. Cloud services tend to have high requirements for underlying architecture, and advanced digital infrastructure and underlying data are essential for the development of the cloud industry. The subscription-based and pay-per-use business model of cloud computing lowers the threshold for purchases and use, which is conducive to scaling up user base.¹⁷

Fig. 5.1

Note Both horizontal and vertical axes are in US$ mn (in logs). Source Statista, Haver, CICC Global Institute

China and the US enjoy economies of scale in the public cloud market (2020).

Fig. 5.2

Note The percentage of US households using a particular technology. Source Our World in Data, CICC Global Institute

The digital era typically involves a much shorter interval between the introduction of new technologies and their large-scale use.

The development of China’s emerging technological industries such as internet of things (IoT) and virtual reality (VR) relies on cloud computing and 5G’s low-latency and high-bandwidth data transmission capabilities. Substantial cloud-based computing drives the rapid development of the cloud industry from the demand side, and gives rise to strong cloud service companies such as Alibaba Cloud and Tencent Cloud. For example, the public cloud market tripled from US$55.85bn to US$170.9bn over 2016–2021 in the US, and grew nearly sevenfold from US$3.84bn to US$26.09bn in China.¹⁸

Economies of scale are particularly important for industry chains amid the digital revolution. The interval between the introduction of major technological innovations and their large-scale application has shortened markedly (Fig. 5.2), and the importance of scale effect has shifted from hardware to software. For digital platforms, user traffic represents their distribution channel, content is essentially marketing, and scale is a key contributor to the success of platform companies.¹⁹

For example, content platforms such as Douyin, Kuaishou, and Xiaohongshu have leveraged their very high user traffic to venture into e-commerce retail, while live-streaming e-commerce has further boosted their user traffic and scale. In addition, WeChat Pay was largely marginalized at first as it could not scale up to expand its user base. It was not until 2015 that it quickly expanded into the electronic payment market by taking advantage of its existing social networks to allow users to send electronic red envelopes during the Spring Festival Gala. A total of 20 mn users sent or received red envelops on Wechat that night, and the number of red envelopes received and sent exceeded 1bn.²⁰ WeChat Pay has thus rapidly scaled up, significantly reducing costs and improving efficiency.

Non-e-commerce platforms are able to rapidly improve economies of scale in the e-commerce retail sector on the back of their enormous user base and traffic. This inclusiveness and user traffic facilitate the participation of various types of companies (especially small and micro ones) in the industry chain. For electronics manufacturing, China accounted for 37% and 24% of global exports and imports related to information and communication technologies in 2021.²¹ For China, it is crucial to fully leverage the economies of scale and maintain competitive advantages to develop core digital economy applications such as digital platforms and industrial internet. In addition, economies of scale in the digital industry itself can effectively foster China’s economic development, as well as digital transformation and upgrading of its industry chains.

5.2 Technological Innovation Reshapes Economy and Industry Chains

Technological innovation is an important engine for industrial development, and a core driving force for the formation and development of industry chains. In addition to mitigating inefficient and costly industry chains, large-scale technological innovations are also inclined to give rise to new industry chains and support their sustained development.

Digital innovations encourage the development of new products and the rise of numerous smart products and new industry chains that are characterized by the collection and transmission of data through the internet. More and more companies are applying new technologies to traditional products to increase product value and generate new revenue.²² For example, software, computing power, and sensors are crucial for the automobile industry in the digital era. Automobiles have also become increasingly complex amid the rising importance of electronics and software. The software lines of code (SLOC) for automobiles rose significantly from about 10 mn lines in 2010 to about 150 mn lines in 2016. Automobiles are gradually transitioning from hardware-defined to software-defined.²³

Technological innovations tend to reshape traditional service models and create new services. Traditional offline industry chains such as catering, culture & entertainment, tourism, and payment services are migrating online.²⁴ Data shows that online ride-hailing accounts for approximately 40% of global ride-hailing market revenue in 2021, and the online market may grow rapidly at a CAGR of 13.1% over 2022–2028.²⁵ The revenue of Didi, Uber, and Lyft rose by 31%, 57%, and 36% YoY to about US$26.95bn, US$17.46bn, and US$3.21bn in 2021.

The music industry is also transitioning from records and tapes to streaming, and music services such as online streaming have grown rapidly in the past decade (Fig. 5.3). For example, Spotify’s MAU and paying subscribers more than doubled over 2016–2021.²⁶ The structure of industry chains has changed drastically in some industries that are more affected by digitalization. For example, the e-commerce business has expanded rapidly, especially in Asia.

Fig. 5.3

Note US music industry revenue by format (US$ bn in 2021 dollars), 1973–2021. Source RIAA, CICC Global Institute

Music industry transitioning from records and tapes to streaming.

Fig. 5.4

Note Percentage of mobile payment in total amount of non-cash payment business. Source Wind, CICC Global Institute

Limited market share for Alipay and WeChat Pay in payment market.

The industrial revolution led by digital technologies has led to changes in the organization of production and trade. Digital platforms have risen and played an increasingly important role in the division of labor and restructuring of industry chains. Platform companies have grown rapidly over the past 20 years. They accounted for five of the 10 largest listed companies in the US and Hong Kong stock markets (by market value) in 2015 and seven in 2020.²⁷ However, the operation and expansion of digital platforms have also posed some challenges, especially regarding market competition and the protection of investor and consumer rights.

Effective regulation and platform governance are important for the healthy development of platform companies. In recent years, China and the US have made inroads in strengthening regulation of platform companies and platform governance. However, the new features of digital platforms have also resulted in some new challenges. First, digital platforms are essentially information intermediaries backed by new technologies. They enjoy significant network effects, economies of scale, and economies of scope, and large scale and enormous data form the cornerstone of their success.

We should take into account various factors to assess whether a platform company is monopolistic, including the definition of the market in question. While Alipay and WeChat Pay accounted for more than 90% of the third-party mobile payment market in 2020, mobile payment accounted for about 10% of the total non-cash payment business (Fig. 5.4), and the market share for small-amount payment was even lower. The market share of Alipay and WeChat Pay remained well below that of banks and credit card issuers. In addition, large digital platforms usually operate in multiple markets, and related markets should also be taken into account when assessing monopolistic practices.

Moreover, it is difficult to assess whether digital platforms seek market dominance by offering products and services at below-cost prices. For example, search engines such as Google and Baidu, entertainment platforms such as Netflix and Spotify, and social networking platforms such as WeChat tend to provide their services for free or at low prices below marginal cost.²⁸ The reason is that the low marginal cost and multilateral market nature of their products and services enable digital platforms to provide high-quality services to users at low cost, and their main revenue comes from fees levied on merchants operating on their platform or other related markets.

Digital technology innovations have had a far-reaching and profound impact on the distribution and organizational structure of global industry chains (Table 5.1). The digital revolution has given rise to new core factors of production such as data and changed some traditional factors of production, thus reshaping the resource endowments and comparative advantages of different economies and the global distribution of industries. Thanks to the near-zero marginal cost and network effect of digital technologies and platform services, countries with large economies and internet sectors enjoy advantages in the development of digital industries and the digital transformation of traditional industries.

The platform organizational model guides the complex division of work location and value creation. Digital platforms make it possible to distribute work across different regions on a large scale, and workers in low-income countries benefit from participating in the online labor market. In addition, instead of establishing overseas branches, companies can optimize global production and distribution through platforms and big data analysis. The platform model lowers the cost of search and matching, and allows small and micro enterprises in different regions to reach clients and integrate into the large market.

New industries of the digital economy tend to be more reliant on specific resources, which drives dynamic adjustments of comparative advantages for different economies. For example, cloud computing and cryptocurrency mining require substantial amounts of cheap energy,²⁹ and the production of smart cars depends on resources such as lithium, cobalt, and nickel. In addition, economies with abundant human capital with expertise in AI and big data may also have advantages.

In addition, digital technologies reduce trading costs and improve corporate efficiency. Digital technologies in transportation and warehousing help reduce logistics costs. Digitalization also facilitates cross-regional and cross-border trade in services such as education and healthcare, and markedly lowers barriers to trade and costs for certain services. As a result, some economies may gain new comparative advantages or strengthen their traditional comparative edges. Digital technologies such as blockchain and smart contracts foster trust, reduce transaction costs, and facilitate contracts, boding well for the development of contract-intensive industries. Non-economic factors, including political ones, may also have a decisive impact on the formation and reshaping of industry chains.

Table 5.1 Digitalization affects international division of labor and trade and reshapes industry chains.

Service sectors have become much more tradable in the era of the digital economy. Digital technologies have markedly cut the cost of international communication, and large platform companies have made long-distance services more feasible and convenient. For the time being, companies still mainly rely on overseas branches to facilitate cross-border service trade. However, along with the further digitalization of the economy, remote service provision on the back of digital technologies may become increasingly popular. This should expand the varieties of tradable services.

However, according to the United Nations Conference on Trade and Development, while the value of digitally-delivered trade in services continued to grow between 2006 and 2020 and exceeded US$3trn in 2020, about 90% of the services were provided by high-income or high-and-middle-income economies. The digital divide may hinder low-income economies from benefiting from this new trade model.

The global structure of industry chains has changed drastically in some industries, and regions with economies of scale have become home to the digital industry chains. For example, nearly US$1.8trn of global digital platform revenue (US$3.8trn) was generated in Asia in 2019, and most B2B e-commerce platforms are headquartered in Asia, followed by North America and Europe.³¹ However, digitalization has not resulted in large-scale changes in the structure of industry chains for sectors such as pharmaceuticals, textiles & apparel, home appliances, equipment manufacturing, photovoltaics, and lithium-ion batteries. That said, a growing number of Chinese firms from these sectors are expanding overseas, especially in R&D, maintenance, sales, and production & assembly.

Digital technologies make it efficient and cost-effective for companies to expand overseas. For example, they enhance computing power to facilitate R&D, and reduce labor use and operating costs on the back office end on the back of ERP, SaaS, and PaaS. They also lower the cost of machine debugging, operation, and maintenance via industrial internet. In addition, digital technologies reduce the fixed costs of offshore operations, and leverage overseas endowments such as lower labor and land costs in emerging economies, and the advantages of Europe and the US in skills, contracts, and institutional quality. This is conducive to improving profitability and competitiveness.

Current digital technologies are unable to support reshoring for the time being. While digital technologies can reduce a variety of fixed costs in foreign direct investment (FDI), they are less effective at compensating for the developing countries’ lower labor costs in many industries. Empirical studies have not found notable signs of reshoring so far. According to the Congressional Research Service (CRS), the cost reduction from automation does not make a compelling business case for reshoring in the textiles & apparel sector. For example, Adidas opened two robotic “Speedfactories” in Europe and in the US in 2016 and 2017, respectively, in an attempt to leverage 3D printing technologies to reduce reliance on human workers and shorten production time. However, the firm relocated its factories back to Asia after a few years. Similarly, Nike has long been relying on a large network of contract manufacturers.³²

5.3 New Economy and New Industrial Policies

The digital economy’s contribution to the global economy is increasing, and has become an important engine of global economic growth. We believe China can actively foster the development of the digital economy, as well as the digital transformation and upgrading of industry chains, to cope with the pressure and challenges from non-economic factors on China’s development and on upgrading global industry chains.

The global economy and industry chains are facing the most severe challenges since the Second World War. While COVID-19 and geopolitics weigh on the security and stability of global industry chains, they have also given rise to new development opportunities for the digital economy. The emergency response of various countries to COVID-19 has put unprecedented pressure on logistics, production and trade. However, this has also facilitated the development of the digital economy, and accelerated the digital transformation and intelligent upgrading of traditional industries. The proportion of global service trade rose rapidly during the pandemic, and the platform economy and e-commerce have trended upwards. In addition, China has strengthened its advantages in electronics manufacturing industries, which are an important part of digital economy infrastructure.

Various countries are attaching high importance to industry chain security, and the development of China’s digital economy faces challenges from both internal and external environments. First, China is subject to external constraints on core technologies for digital industries. Second, restrictions on digital trade and investment in various countries have increased significantly.

Amid deglobalization and growing international geopolitical tensions, major economies have moved quickly to introduce and implement strategies promoting development of the digital economy and digital industries. The number of policy documents on cutting-edge digital industries introduced by major countries in 2021 was about 1.5 times that of 2017.³³ Developed economies attach great importance to improving the core competitiveness of digital industry chains and accelerating their localization and diversification. In March 2021, the EU released 2030 Digital Compass: the European way for the Digital Decade. The document proposed that the production of cutting-edge and sustainable semiconductors in Europe, including processors, should be at least 20% of world production in value by 2030. In May 2021, the EU unveiled a supply chain diversification plan aimed at reducing its reliance on overseas suppliers in six strategic areas, including semiconductors, raw materials, and active pharmaceutical ingredients.

Government support has played an important role in facilitating the development of advanced technologies such as digital technologies. The US Defense Advanced Research Projects Agency (DARPA) began to attach importance to AI technologies and conduct related research ever since the 1960s. Considering the threat from Japan, the US provided US$1bn in funding for the development of advanced computer hardware and AI technologies through the Strategic Computing Initiative (SCI) in 1983–1993.³⁴ AI technologies developed rapidly in the US supported by the SCI, with the development of technologies such as the Autonomous Land Vehicle project and its sister project Navlab. They provided a technological foundation for autonomous driving. In 1986, the US and Japan signed the US-Japan Semiconductor Agreement, in which Japan agreed to limit the exports of semiconductors. In 1987, the US government and a number of US-based semiconductor manufacturers formed the Semiconductor Manufacturing Technology (SEMATECH) consortium to provide member companies with R&D resources, share research results, and improve efficiency in innovation.

In recent years, major economies have increased investment in technological innovation. Data from Eurostat shows that companies in the information and communication technology (ICT) industry account for 39.9% of the world’s top 2,500 companies in R&D spending in 2021. The CHIPS and Science Act involves a total investment of more than US$280bn, including: 1) US$52.7bn in subsidies for US silicon chip manufacturing, R&D and workforce development; 2) a 25% investment tax credit for companies that set up silicon chip factories in the US; and 3) about US$200bn for fostering innovation in areas such as AI and quantum computing. The European Commission also plans to invest EUR1.98bn via the Digital Europe Program, with a focus on AI, cloud data space, and quantum communication infrastructure, among others.³⁵

Major economies have also taken various measures to encourage and support corporate R&D investment. The EU and the US allocate a similar percentage of government spending to R&D, but R&D spending in the commercial sector as a percentage of GDP in the US is much higher than that in the EU. In the US, the corporate sector is the largest contributor to R&D investment. For high-tech startups, the amount of venture capital investment increased from US$2.59bn in 1985 to US$130.92bn in 2018.³⁶ Notably, the amount invested in the software information industry remains the largest, accounting for more than 20% of the total. In the early stage of internet commercialization in the US, venture capital investment in the country grew rapidly, giving rise to well-known names such as Google and Yahoo. Since 2000, China’s corporate R&D spending as a percentage of GDP has risen markedly and is gradually approaching levels of corporate spending in the US.

Major economies are striving to establish an environment conducive to platform development. The platform economy is still growing and is being refined, and the effective regulation and governance of digital platforms remains a key research topic for regulators in various economies. The core aim of the US’s digital strategy is to consolidate its global competitiveness. The country focuses on forward-looking strategic deployment, digital industry development, R&D of advanced technologies, and digital transformation of the real economy, and emphasizes a free and open global digital market. However, the EU focuses on building a unified digital ecosystem, improving regulations for the digital economy, and enhancing regulations for privacy protection.

Meanwhile, there is a digital divide between the large number of developing countries and developed countries. Most developing countries do not have a mature digital governance mechanism in place, and their regulation and governance systems vary. Emerging market countries such as India, Brazil, and Indonesia take a more protectionist and conservative approach to digital governance in a bid to protect their domestic markets and maintain digital security. In some African and Middle Eastern countries, the proportion of the digital economy to their overall economies is low, and their governments have not formulated development strategies for the digital economy. In our view, digital governance has yet to attract the attention it is due in these countries given the growing significance of the digital economy, and overall regulation remains relatively relaxed.³⁷

At the core of global digital governance is the trade-off between the free flow of data across borders and data localization. The US advocates information globalization characterized by the free flow of data, but the country does not relax control on important domestic data. It has banned the outflows of sensitive domestic data, includes foreign companies that store or collect sensitive personal data of US citizens in screening, restricts the entry of overseas digital companies in core fields into the US, and authorizes regulators to garner extraterritorial data through long-arm jurisdiction.

Meanwhile, the EU’s General Data Protection Regulation (GDPR) emphasizes the secure cross-border management of personal data. It encourages the free flow of data within the EU, includes countries and regions that comply with the EU’s data protection standards in their “white list”,³⁸ and determines whether cross-border data flows are allowed through ex-ante regulations. China attaches high importance to data security. The Cybersecurity Law promulgated in 2017 requires operators of critical information infrastructure to store important data and personal information in China.

Emerging economies tend to restrict cross-border data flow, and aim to protect their domestic digital industries through data localization. However, the actual implementation of their data localization depends on the digital governance capabilities and on the dependence of their digital economies on foreign countries. For example, Vietnam requires multinational internet service companies to set up data centers there. India, on the other hand, remains undecided on data localization. In 2018 and 2019, India introduced two versions of the Personal Data Protection Bill, which stipulated that sensitive and critical personal data must be stored in India, but the bill was withdrawn in August 2022.³⁹ The reason is that India is a hub for IT service exports, and it processes sensitive data in sectors such as healthcare and finance for other countries. The bill is highly likely to discourage overseas demand for Indian IT services.

Complex regulations on data flows increase corporate operating costs and risks and affect the development of global industry chains. After the EU-U.S. Privacy Shield Framework was invalidated in July 2020, Facebook came under strict scrutiny for its transmission of European user data back to the US. In October 2022, US President Joe Biden signed the Executive Order on Enhancing Safeguards for United States Signals Intelligence Activities, which substantially pushed forward the new framework for data transmission between the US and Europe and provided a more stable environment for digital companies to expand in the two regions. In addition, multinational technology companies such as Facebook, Google, Amazon, and Zoom have decided to set up data centers in Singapore, which may help Singapore become one of the world’s most dynamic data center markets.⁴⁰

The digital economy and digital industry chains are booming. Amid growing geopolitical differences, we believe that ensuring digital security, facilitating technological innovations and competition, and improving industry-chain efficiency are important issues in the digitalization of global industry chains.

First, we believe governments could value data as a factor of production, improve digital governance, ensure digital security, and effectively balance efficiency, equity, and security. Governments could strengthen regulations and advocate industry self-discipline to prevent companies from violating relevant laws and regulations such as the Cybersecurity Law, the Data Security Law, and the Personal Information Protection Law. Governments could also encourage companies to increase investment in scientific research and leverage technologies such as privacy computing to make data available but invisible during data flows. Companies should strengthen data analysis and improve the efficiency of data utilization without comprising original data or privacy protection.

From our point of view, while facilitating data localization, governments could closely monitor cross-border data flows in accordance with the guidelines for data export security assessments released in July 2022. In addition, governments may consider formulating a white list mechanism in due course and include eligible organizations or entities onto the list to improve the efficiency of cross-border data flows.

Second, we think China could strengthen corporate governance of digital platforms, improve regulatory frameworks, and facilitate law-based platform management. The competitive environment for the platform economy has improved in China due to strengthened governance and regulations in recent years.⁴¹ While preventing platform companies from taking advantage of their scale to hinder innovation and form a winner-takes-all market, we should, in a scientific and appropriate manner, define the operating markets of platform companies, guard against excessive regulation and impediment of innovation, and encourage digital platforms to make effective use of network effects and existing scale to compete in the global markets with platform giants from the US and Europe. It is also important to improve the protection of consumers and small and micro enterprises, crack down on differentiated pricing based on consumer data, remove false information on the internet, maintain consumer trust in platforms and the digital economy, and make switching platforms straightforward for consumers.

Third, we believe governments could continue giving full play to economies of scale for large digital economies. China should continue to take full advantage of its domestic market, improve economies of scale in demand, and accumulate factors of production such as data. As of June 2021, the number of rural internet users in China had reached about 297 mn, but internet penetration rate in rural areas remained relatively low at 59.2%.⁴² Therefore, the government could further strengthen the development of rural digital infrastructure and focus on investing in digital villages. In addition, governments could encourage and support Chinese digital platforms and industries to expand in overseas markets, and hence gradually grow to reach global scale.

We think governments can also play an active role in helping lower policy and other barriers for Chinese companies to go global, and create a level playing field for Chinese companies to compete in overseas markets. We suggest attaching greater importance to digital cooperation with countries in Southeast Asia and other neighboring countries, and fostering the emergence of an inclusive and expanding regional digital ecosystem with China at the core.

Fourth, we suggest leveraging the experience of the contactless economy amid COVID-19 conditions to improve the tradability of service sectors. It is essential to accelerate the removal of tangible physical barriers or invisible institutional barriers, build a two-way opening mechanism that boosts synergies between domestic and overseas markets and facilitate mutual development,⁴³ and foster high-standard opening-up of digital service trade. Amid limited progress in implementing the General Agreement on Trade in Services, we suggest paying attention to the formulation of rules for regional cooperation in service trade.

On the back of China’s large market and industrial clusters, we believe governments can work on forming regional rules and mechanisms for digital service trade that are in the interests of various parties involved and on removing behind-the-border barriers to digital service trade, thus creating a favorable environment for China’s service trade to go global.

Core technological innovation and advanced human resource are key engines for developing the digital economy. Governments could increase investment in basic science and long-term technologies that are characterized by high costs and risks so as to facilitate corporate innovations, in our view. In addition, industrial policies could be better targeted to avoid wasting resources. For example, industrial policies could lend more support to areas that are plagued by difficulties in mass production and slow client acquisition.

We also think that the government could encourage the corporate sector to increase R&D investment to stimulate innovation. The government could give adequate emphasis to the role of the capital market, optimize market-oriented resource allocation, and encourage the integration of high-tech companies. Given the technological constraints for China, we think the government could take full advantage of the country’s economies of scale and demand and foster domestic and international cooperation in R&D.