October 23, 2020
In the 21st century, rapid development of the digital economy has facilitated
production and made people’s daily lives more convenient via online transactions,
logistics tracking, mobile payment, and telecommunication.
The digital economy is playing an increasingly important role in the national
economy. While there is no widely accepted definition, the term “digital
economy” generally refers to economic activities based on digital operations,
information technology and telecommunication technology.
The COVID-19 outbreak in early-2020 accelerated development of the digital
economy. To contain the pandemic, most countries imposed restrictions on social
gatherings and the movement of people to varying extents.
At the peak of the pandemic earlier this year, around 1,000 cities across the
world implemented social distancing rules at the same time, and over 250 cities
were locked down. Restrictions on social contacts forced many companies to
switch to online interactions with employees and clients, and digitalization
became the key to maintaining business operations.
To improve competitiveness, many companies significantly accelerated the
implementation of digital strategies. A survey among 2,569 companies globally
shows that the COVID-19 outbreak brought forward the global digitalization
process by at least 5–7 years.
Figure 1: Number of cities implementing social
distancing rules and imposing lockdowns
Source: ACAPS, CICC Research
Figure 2: COVID-19 accelerates corporate digital
strategies
Note: The data is based on Twilio’s survey about
corporate digitalization amid COVID-19 among 2,569 entrepreneurs in the US, UK,
Germany, Australia, and Japan.
Source: Twilio, CICC Research
Platform economy: A new business model
The platform economy represents the
most typical business model and an important driver of value creation in the
digital economy.
Traditional business platforms are common – shopping malls are platforms that
connect consumers with producers, while talent centers are also platforms that
connect job seekers with recruiting companies. However, these platforms require
physical space and connect a relatively limited number of people.
The platform economy, on the other hand, comprises digital platforms based on
digital hardware and technologies such as data collection and data analysis. It
can reduce physical space restrictions and connect a wider range of people.
Figure 3: Based on different business types, digital platforms can be
divided into three categories
Source: The Business of Platforms (Harper Business, 2019),
CICC Research
A “winner-takes-all” situation?
As the platform economy grows rapidly, strong platforms tend to
monopolize the market because the platforms’ strengthening network effect “locks
in” users and increases their social and welfare costs of switching to other
platforms, which creates a “winner-takes-all” situation.
At present, giant platform companies already have large user bases and strong
network effects. These companies could have an increasingly strong “lock-in
effect” on users as they improve their technologies, understand user
preferences more accurately, and create more value for users.
Furthermore, strong platform companies develop their own ecosystems as they
integrate relevant peripheral businesses onto their platforms, provide support
for these businesses, and obtain feedback from clients. Thus, strong platforms
create a value network in which multiple transactions are matched and diverse
participants complement each other.
When platforms grow to a certain degree, building a comprehensive ecosystem
leveraging economies of scope will create new and dynamic growth drivers and
support sustained expansion of platforms, in our view. For example, Amazon
integrates its e-commerce, entertainment, finance, and marketing management
businesses onto its cloud computing-based platform, creating a platform
ecosystem.
Service trade to become a new growth driver
With regard to international trade in economics, goods and services are
usually divided into two categories: tradable and non-tradable.
Generally speaking, goods are tradable. For example, refrigerators,
air-conditioners, and mobile phones made in China can be exported to Europe,
and airplanes made in Europe can be exported to China.
However, services are generally regarded as non-tradable. This is because service
activities often require interaction between people, but people cannot move
freely across borders.
However, digital economy applications have reduced the cost of remote
communication, so that the tasks or transactions that used to require interaction
between people can now be done without interpersonal contact.
This is particularly important amid the COVID-19 pandemic. The digital economy
partly overcomes the barriers to the movement of people, making services more
tradable. The future development of the digital economy may go beyond our
traditional knowledge.
Service trade can enhance
productivity
Public policies can play an important role in boosting development of
the service sector. The government can enhance the tradability of the service sector
by promoting infrastructure construction for the digital economy.
The COVID-19 outbreak has prompted governments around the world to step up
construction of broadband, 5G, and other digital infrastructure to improve
efficiency. On the other hand, public policies can encourage competition,
reduce monopoly, and make it easier for the service sector to integrate with
the digital economy. Such policies may enhance the openness of internet
platform companies such as Facebook, Google, Tencent, and Alibaba. To some
extent, these companies have already begun to monopolize the industry.
Whether they will become contributors or obstacles to innovation in the service
sector depends on how public policies guide them.
For more details, please see our report New
structures, new issues: Macro and theoretical analysis of the digital economy published in October 2020.