Digital economy

Overview

The digital economy is a portmanteau of digital computing and economy, and is an umbrella term that describes how traditional brick-and-mortar economic activities (production, distribution, trade) are being transformed by the Internet and World Wide Web technologies. It has also been defined more broadly as the way "digital technologies are transforming work, organizations, and the economy." The digital economy is backed by the spread of information and communication technologies (ICT) across all business sectors to enhance productivity. A phenomenon referred to as the Internet of Things (IoT) is increasingly prevalent, as consumer products are embedded with digital services and devices. According to the WEF, 70% of the global economy will be made up of digital technology over the next 10 years (from 2020 onwards). This is a trend accelerated by the COVID-19 pandemic and the tendency to go online. The future of work, especially since the COVID-19 pandemic, has also contributed to the digital economy. More people are now working online, and with the increase in online activity that contributes to the global economy, companies that support the systems of the Internet are more profitable.

Digital transformation of the economy alters conventional notions about how businesses are structured, how consumers obtain goods and services, and how states need to adapt to new regulatory challenges. The digital economy has the potential to shape economic interactions between states, businesses and individuals profoundly. The emergence of the digital economy has prompted new debates over privacy rights, competition, and taxation, with calls for national and transnational regulations of the digital economy.

Definition

The digital economy, also referred to as the new economy, refers to an economy in which digital computing technologies are used in economic activities. The term digital economy came into use during the early 1990s. For example, many academic papers were published by New York University's Center for Digital Economy Research. The term was the title of Don Tapscott's 1995 book, The Digital Economy: Promise and Peril in the Age of Networked Intelligence. According to Thomas Mesenbourg (2001), three main components of the digital economy concept can be identified:

E-business infrastructure (hardware, software, telecom, networks, human capital, etc.), E-business (how business is conducted, any process that an organization conducts over computer-mediated networks), E-commerce (transfer of goods, for example when a book is sold online). Bill Imlah states that new applications are blurring these boundaries and adding complexity, for example, social media and Internet search. In the last decade of the 20th century, Nicholas Negroponte (1995) used a metaphor of shifting from processing atoms to processing bits: "The problem is simple. When information is embodied in atoms, there is a need for all sorts of industrial-age means and huge corporations for delivery. But suddenly, when the focus shifts to bits, the traditional big guys are no longer needed. Do-it-yourself publishing on the Internet makes sense. It does not for a paper copy." The digital economy is variously known as the Internet Economy, Web Economy, Cryptoeconomy, and New Economy. Since the digital economy is continuously replacing and expanding the traditional economy, there is no clear delineation between the two integrated economy types. The digital economy results from billions of daily online transactions (data exchanges) among people, organizations (businesses, educational institutions, non-profits), and distributed computing devices (servers, laptops, smartphones, etc.) enabled by Internet, World Wide Web, and blockchain technologies.

Development of the concept

There are varied definitions of the digital economy. There are multiple similar concepts for broadly the same phenomenon. According to the OECD, the Digital Economy can be defined in three different approaches:

Bottom-up approach: characterizing industries' and firms' output or production processes to decide whether they should be included in the Digital Economy, Top-down or trend-based approach: first identifying the key trends driving the digital transformation and then analyzing the extent to which these are reflected in the real economy, Flexible or tiered approach: breaking the Digital Economy into core and non-core components, and thereby finding a compromise between adaptability and the need to arrive at some common ground on the meaning of the term.

Bottom-up definition

Bottom-up definitions define the Digital Economy as the aggregate of a specific indicator for a set of industries identified as actors in the Digital Economy. Whether an industry is considered an actor depends on the nature of the products (narrow) or the proportion of digital inputs used in production processes (broad). Hence, from a bottom-up and narrow perspective, the Digital Economy is "all industries or activities that directly participate in producing, or crucially reliant on digital inputs." For instance, McKinsey adds up the economic outputs of the ICT sector and e-commerce market in terms of online sales of goods and consumer spending on digital equipment. While this definition is adept at measuring the impact of digitalization on economic growth, it only focuses on the nature of output and offers an incomplete view of the Digital Economy's development. In a bottom-up and broad perspective, the Digital Economy is "all industries using digital inputs as part of their production process". Examples of digital inputs include digital infrastructure, equipment, and software but can include data and digital skills.

Top-down definition

Top-down definitions identify broad trends at play in the digital transformation and define the Digital Economy as the result of their combined impact on value creation. These include such spillovers as changes in labor market demand and regulations, platform economy, sustainability, and equality. Unlike the bottom-up definition, the top-down definition has units of analysis extending beyond firms, industries, and sectors to include individuals, communities, and societies. While the latter definition is more inclusive, the IMF notes that it is subjective, qualitative, and open-ended, thus limiting meaningful comparative analysis.

Flexible definition

To reconcile the bottom-up and top-down definitions of the Digital Economy, Bukht and Heeks stated that the Digital Economy consists of all sectors making extensive use of digital technologies (i.e. their existence depends on digital technologies), as opposed to sectors making intensive use of digital technologies (i.e. simply employing digital technologies to increase productivity). Under this definition, the Digital Economy is stratified into three nested tiers:

Core: comprising the digital sector and associated core technologies. Examples include hardware manufacturing, software and IT consulting, information services, and telecommunications, Narrow scope: the digital economy comprising digital services and the platform-based economy, Broad scope: the digitalized economy comprising digitalized sectors such as e-Business, e-Commerce, advanced manufacturing, precision agriculture, algorithmic economy, sharing economy, and gig economy. These digitalized sectors phenomenologically give rise to the Fourth Industrial Revolution.

Elements of the digital economy

The Digital Economy consists of all sectors making extensive use of digital technologies (i.e. their existence depends on digital technologies). However, digitalization spans many economic sectors, making it far from trivial precisely delimit the digital economy within the entire societal economy. A narrow definition would typically just encompass core digital sectors that refers to the provisioning of digital technologies, products, services, infrastructure, and solutions, as well as all forms of economic activities that are completely dependent on digital technologies and data elements. This includes key sectors like information and communication technology (ICT), but also other economic activities such as internet finance and digital commerce that are not seen as a part of the ICT-sector. Broader definitions also include industrial digitalization, i.e. the production quantity and efficiency improvement brought about by the application of digital technology in traditional industries, as an important extension of the digital economy into the wider societal economy. Examples of industrial digitalization in traditional sectors include remote sensing, automated farming equipment, GPS-route optimization, etc. However, few studies include industrial digitalization in the digital economy.

Information technology

The information technology (IT) sector of the U.S. now makes up about 8.2% of the country's GDP and accounts for twice its share of the GDP as compared to the last decade. 45% of spending on business equipment are investments in IT products and services, which is why companies such as Intel, Microsoft, and Dell have grown from $12 million in 1987 to more than half a billion in 1997. The widespread adoption of ICT combined with the rapid decline in price and increase in the performance of these technologies, has contributed to the development of new activities in the private and public sectors. These new technologies provide market reach, lower costs, and new opportunities for products and services that were not needed before. This changes the way multinational enterprises (MNE) and startups design their business models.

Digital platforms

A digital platform operator is an entity or person offering an online communication service to the public based on computer algorithms used to classify content, goods, or services offered online, or the connection of several parties for the sale of goods, the provision of a service, or the exchange or sharing of content, goods, and services.

Most of the largest digital platform companies are located in either the United States or China.

Digital trade

In the U.S. in the 1990s, the Clinton Administration proposed The Framework for Global Electronic Commerce. It contained the promotion of five principles used to guide the U.S. government's actions towards electronic commerce so that the digital economy's growth potential remains high. These five principles include the leadership of the private sector, the government avoiding undue restrictions on e-commerce, limited government involvement, the government's recognition of the Internet's unique qualities, and the facilitation of e-commerce on a global basis. Governments have primarily restricted digital trade through three means:

Data flow restrictions: regulations that require that companies store data (e.g. personal information, business records, financial data, government data) in a particular country or go through a process before transferring the data abroad. For example, the EU's GDPR law only permits transfers of data on EU individuals to countries that have implemented certain data privacy safeguards and been certified by the EU. Data localization requirements: regulations that require that data be stored on servers within a country Digital services taxes: taxes on revenues from the sale of digital services or goods (e.g. online sales, digital advertising, e-commerce, data, streaming). By 2022, 29 countries had digital service taxes.

Gig economy

Gig work is labor that consists of temporary and flexible jobs usually done over delivery apps and rideshare services such as Grubhub, Uber, Lyft, and Uber Eats. It can be desirable to those who want more flexibility in their schedule and can allow workers to make additional income outside of their traditional jobs. Most gig work supplements workers' traditional jobs. The full size of the gig economy and number of workers is not yet known. Katz and Krueger estimated that only 0.5% of gig workers make most of their income off of platforms like Uber, Lyft, Grubhub, and DoorDash. Since these workers are considered independent contractors, these companies are not responsible for giving its workers benefits packages like it would for regular full-time employees. This has resulted in the formation of unions between gig and platform workers and various reforms within the industry. Blockchain and Tokenized equity-sharing gig economy platforms or applications are being developed to accelerate the gig economy as a full-fledged digital economy contributor using new technologies.

Impact on retail

The digital economy has had a substantial impact on retail sales of consumer product goods. One effect has been the fast proliferation of retailers with no physical presence, such as eBay or Amazon. Additionally, traditional retailers such as Walmart and Macy's and GAP have restructured their businesses to adapt to a digital economy. Some retailers, like Forever 21, have declared bankruptcy as a result of their failure to anticipate and adapt to a digital economy. Others, such as Bebe stores have worked with outside vendors to completely convert their business one that is exclusively digital. These vendors, such as IBM and Microsoft, have enabled smaller retailers to compete with large, multi-national established brands.