A new OECD paper breaks down the policy problems posed by digital transformation and offers a checklist for policymakers coming to grips with it.
When WhatsApp was bought by Facebook in 2014 for US$19 billion, it had 300 million active users and processed 50 billion messages per day — but only employed 55 staff.
Such “scale without mass” — the ability to reach millions of users across the globe from a low cost base — has been enabled by the spread of the internet, and is one example of how digital transformation is changing the economy.
But while these shifts are creating incredible opportunity for businesses, they are also fomenting new policy challenges for government and undermining some of the standard tools of public policy.
“Overwhelmingly, current policies are predicated on tangible products and assets, on fixed geographic boundaries and locations, on transaction costs that limit the scale and scope of interactions and offerings, and on supply and demand conditions that reflect scarcity,” argues a paper recently published by the OECD.
“The digital transformation is dramatically affecting all of these factors and the efficacy of policies based upon them.”
The report breaks down this shift into seven “vectors” changing the way society and the economy work, and considers the policy implications for each.
1. Scale without mass
What is it? Core digital products and services, notably software and data, have marginal costs close to zero. Combined with the global reach of the internet, this allows these products and the firms and platforms that use them to scale very quickly, often with few employees, tangible assets and/or no geographic footprint.
Example of policy implications? The scale effect of being digital may allow the rapid acquisition of market share — though viral success can also be fleeting. This suggests governments should ensure barriers to entry and innovation are low, and adjust size-based approaches such as thresholds for tax exemptions on small imports and categorisation based on number of employees.
2. Panoramic scope
What is it? Digitisation facilitates the creation of complex products that combine many functions and features (such as the smartphone) and enable extensive versioning, recombination and tailoring of services. Interoperability standards enable the realisation of economies of scope across products, firms, and industries.
Example of policy implications? Policies may need to span multiple policy domains, requiring co-ordination across historically separate issue areas and a more multidisciplinary perspective. This may argue for high-level principles as opposed to narrow rules, a shift from strict harmonisation to interoperability, and the convergence of policy oversight authority.
What is it? Digitally accelerated activities may outpace deliberative institutional processes, set procedures and behaviours, and limited human attention. Technology also allows the present to be easily recorded and the past to be probed, indexed, repurposed, resold and remembered.
Example of policy implications? Guiding policy principles may be preferred to specific rules that may be quickly rendered obsolete. New approaches such as the use of regulatory sandboxes and the exploitation of data flows and big data analytics may both accelerate and enable more iterative and agile policymaking.
4. Intangible capital and new sources of wealth creation
What is it? Intangible forms of capital like software and data are receiving greater investment. Sensors that generate data allow machinery and equipment (eg. jet engines, tractors) to be incorporated into new services. Platforms enable firms and individuals to monetise or share their physical capital easily, changing the nature of ownership (eg. from a good to a service).
Example of policy implications? Policymakers may want incentives for investment more aligned with the economics of digital innovation and production (eg. R&D, data, IP). The ability to efficiently market services derived from capital equipment (as opposed to direct investments) may have implications for incentives to invest as well as measures of investment and productivity.
5. Transformation of space
What is it? Thanks to their intangible, machine-encoded nature, software, data, and computing resources can be stored or exploited anywhere, decoupling value from borders, and challenging traditional principles of territoriality, geographically-based communities and sovereignty. This separation creates opportunities for jurisdictional arbitrage.
Example of policy implications? Policies relying on geographical specifications like nexus, rules of origin or defined markets may need to be revised, to consider other points along the process of value creation and distribution (eg. location of value creations vs value delivery). This separation of value creation from use increases the need for policy interoperability between countries and regions.
6. Empowerment of the edges
What is it? The end-to-end principle of the internet has moved the intelligence of the network from the centre to the periphery. Armed with computers and smartphones, users can innovate, design and construct their own networks and communities through mailing lists, hyperlinks and social networks.
Example of policy implications? Public policies will need to consider reorientation away from centre (large institutions) and toward more granular units like individuals. This includes policies ranging from digital security and data stewardship to labour and social policies.
7. Platforms and ecosystems
What is it? Lower transaction costs of digital interactions reflect the development not only of direct relationships but also digitally empowered multi-sided platforms, which in turn contribute to further reducing transaction costs in many markets. Several of the largest platforms essentially serve as proprietary ecosystems with varying degrees of integration, interoperability, data-sharing, and openness.
Example of policy implications? Public policies need to reflect on the shift of markets toward platforms which may increase efficiencies while re-intermediating and re-concentrating activity that may have implications for maintaining sufficient competition. Governments may need to rethink the provision of public services to take advantage of platforms.
Policy development checklist
The report also includes a checklist for policymakers working on a response to digital change, based on the seven factors outlined above.
Scale without mass
- Do your size-based (eg. SME or de minimis) policies account for small firms with large revenues and extended (global) reach?
- Do your competition policies adequately address the ability to scale quickly due to low transaction costs and in many cases network effects as well as reinforcing data flows that may make create a barrier to entry?
- Do your policies (eg. trade) that make a distinction between manufacturing and services still apply to digitally enabled products?
- Are your policies neutral in terms of treatment of traditional firms as opposed to digitally enabled firms who may be a new entrant with a new business model?
- Is your current administrative structure well-aligned with the cross-cutting demands of digital scope that frequently crosses policy domains?
- To facilitate the exploitation of economies of scope and accelerate policymaking have you considered providing some regulatory relief to firms by creating spaces for policy experimentation (eg. sand boxes, policy labs)?
- Is there scope for replacing overly specific regulations that may be quickly obsolete with more general principles that allow greater flexibility?
- Have you considered how best to use new big data analytics to improve the design, implementation and evaluation of policies on a continuous basis?
- Do your policies follow the data and make provisions for who owns the data, has control over it and is accountable for its stewardship?
Transformation of space
- Do your policies that incentivise investment account for purchase of capital services as a current expenditure as opposed to the outright purchase of the capital goods?
- Do your statistical measures adequately capture flows (including cross border) of digitally delivered services (eg. cloud computing) or payments for use of intellectual property?
- Do your policies that are based on geographic concepts like nexus, country of origin or defined markets take into account the ability of digitally enabled firms to provide products and services with little or no physical presence?
- Have you considered policy initiatives that directly connect value creation to a place such as tourism, natural resources or geographically branded products (eg. Tennessee whisky, Parma ham)?
- Are you exploiting the growth of geolocation data to develop smart cities which in turn can root value creation locally and provide valuable lessons for policymaking across levels of government?
Empowerment of the edges
- Have you developed policies that exploit the ability to more accurately target policies to individuals, specific businesses or exact locales?
- Have you considered the use of blockchain technologies that can augment government authentication and verification services?
- Are you adapting, extending and making portable policies (eg. labour, social policies) from institutions to individuals?
Platforms and ecosystems
- Have you considered developing public platforms or partnering with commercial platforms to deliver government services and execute public policies?
- Have you sought to develop a cadre of civil servants with technical expertise that can help inform policymaking and its implementation?