Digital Economy Dispatch #004

10th October 2020

What is the Digital Economy?

Quite embarrassingly for a "Professor in Digital Economy", one of the questions I struggle with most is the one I receive most often:

What is the Digital Economy?

Most simply, the digital economy includes all the economic impacts of digital technology adoption and use across a wide set of domains. However, this broad perspective means that the term is so encompassing that it is practically meaningless. Almost all businesses make use of digitized assets in some form, even if this is limited to email and websites Additionally, they increasingly rely on digital technology to manage and improve their operation and performance,

Defining the scope and extent of the digital economy is therefore challenging, with interpretations dependent on the definition source and how the resulting analysis is expected to be used. Let's explore some of these discussions, and consider three particular viewpoints that highlight how our understanding of the digital economy is affected by these perspectives. These reveal how the digital economy is seen in terms of its impact on government policy, statistical measurement of industry growth in key sectors of the economy, and an assessment of the flow of online commerce.

Government Policy Perspective

Governments and politicians tend to use broad descriptions of the digital economy that highlight its importance in driving policy changes, particularly in times of political uncertainty and slow economic growth. Hence, the UK government’s inclusive definition of the digital economy as “both the digital access of goods and services, and the use of digital technology to help businesses”. Meanwhile, the Organization for Economic Cooperation and Development (OECD) considers the term to encompass all economic impacts of digital transformation in business and society.

Statistical Measurement Perspective

Meanwhile, stricter measurement and analysis of the digital economy requires a tighter scope. Statisticians and policymakers define the digital economy according to industry and output. Typically, this may cover Information and Communication Technologies (ICT) including manufacturing and services, and digital content involving everything from e-commerce to music to architecture. Specific industries could be selected using Standard Industrial Classification codes to define the core activity of registered businesses. This means businesses categorized in certain industries (e.g., ICT) are considered part of the digital economy while those in other categories (e.g., pharmaceuticals) are not. Their economic activity, evidenced through employment profiles, reported income, taxes paid, can be used as a basis for assessing activity in the digital economy.

E-commerce Perspective

The narrowest definition of the digital economy is to consider it as the combination of two key mechanisms: e-commerce transactions, i.e., the trading of goods or services over computer networks such as the Internet; and the deployment of enabling infrastructure such as hardware, software, and telecommunications networks to support e-commerce. This mechanistic view enables measurement by monitoring online commercial transactions together with the purchase, installation, and support of the technology facilitating the flow of goods and services. Both of these elements can be reasonably estimated. For example, in terms of online commercial transactions, figures from CapGemini indicate that UK online retail sales reached £133bn in 2016, an increase of £18bn, or 15.9%, year-on-year.

And the Answer is...?

With this set of viewpoints as background, the estimated size of the digital economy can be determined using hybrid approaches, and the results can vary considerably depending on the scope selected. Accenture, for example, examines how digital aspects add value to the entire economy by tracing the use of digital skills, equipment, and intermediate goods and services in the production of all goods and services to offer a comprehensive view of what constitutes a digital economy. Their analysis shows that 22% of the world’s economic output is linked to digital skills and capital. Based on this definition, the US digital economy is the most developed, accounting for 33% of national GDP. Furthermore, 43% of the US workforce and 26% of its national capital is capable of supporting economic activities related to digital technologies. Elsewhere, digital economies range in value from more than 30% in the UK and Australia to 10% in China.

From Digital Economy to Digital Transformation

A lot has changed in the 20 years since Dan Tapscott introduced the term “digital economy” and began to explore its implications for business and society. Although defining the term remains a challenge, the more exciting developments have been in driving our thinking about the implications of the digital economy for individuals, businesses, and society. Rather than see digital transformation as a technology issue to be figured out by the IT team, or partitioned as a problem to be sorted out by a separate ‘chief digital officer’, more digitally-mature organizations view digital transformation as an opportunity to revise business practices, realign operations toward core values, and form a stronger relationship between creators and consumers of services.

That's the real impact of the digital economy.

Digital Economy Tidbits

Covid Has Accelerated Innovation. Perhaps Forever. Link.A new study by the London School of Economics (LSE) and the Confederation of British Industry (CBI) has been looking at the accelerating impact of Covid on digital innovation. Over 90% of the companies surveyed believe that covid-driven innovations are permanent, and that they have increased the pace of innovation in those companies. While some of this change has clearly been due to necessity (e.g., supporting remote workers) it is encouraging to see the scale and extent of this acceleration of digital innovation. Perhaps this will be one of the main “silver linings” for the dark cloud of the past few months.The State of AI 2020. Link.A very good analysis with a specific focus on AI adoption in Digital Health.Latin America Digital Transformation 2020 Report Link.A comprehensive review of digital transformation trends in LatAm. Really useful indication of the trends, opportunities, and challenges for digital transformation.Summer Reading List from MIT SMR. Link.No-one will forget the summer 2020.From a business perspective, we have seen disruption to many established ideas and approaches. The MIT Sloan Management Review has published a collection of articles from the last few months that offer a fascinating insight into the challenges and the new thinking that's starting to emerge.