Latecomer Economies and National Digital Policy: An Industrial Policy Perspective

Abstract

The global economy is experiencing digital transformation with impacts felt in developing countries. Digital firms and capabilities, however, remain concentrated in advanced economies. These processes indicate an emerging source of global economic inequality and a widening of the technological gap. Recently, there has been a growth in interventionist digital policy in developing and emerging economies but research has so far made a limited analysis of how this might fulfil economic objectives and support technological catch-up. In this paper, we examine this growth of national digital policies and highlight how industrial policy objectives are important drivers of digital strategies. Examining a number of cases based on an extensive analysis of national digital policies, with a focus on China, we illustrate that these policies often aim at facilitating global integration and linkages. However, our analysis shows that, under certain conditions, more interventionist approaches can be vital in countering structural challenges. Challenges include the power of digital platforms, limitations of domestic digital firms, and limited ability to leverage digitalisation for broad-based national development.

1. Introduction

With the expansion of the internet and its importance in all sectors of the economy, digital resources are becoming central to economies (Azmeh, Foster, & Echavarri, 2019). Digitalisation and its economic implications are no longer limited to the advanced economies, with the internet driving profound changes in the economies of middle-income and low-income countries as well. This global spread of the internet, nonetheless, has not been mirrored by a similar expansion in the geography of digital service providers, firms and platforms, which still predominantly originate from a handful of advanced economies (Evans & Gawer, 2016). With unique organisational structures in terms of market strategy, platform business models, financial objectives, and demands of capital providers, such digital firms are able to maintain a global reach but with relatively ‘asset light’ investments outside their home countries (Rahman & Thelen, 2019). Parallel to these trends, a number of middle-income and emerging countries have begun to institute national policies and expand regulation around foreign digital firms, resources or data flows (Drake, Cerf, & Kleinwachter, 2016).

In this paper, we explore these activities from the perspective of industrial policy. We ask if such activities align with the industrial policy literature which forefronts policies that look to accelerate learning, promote technological growth and promote economic restructuring. We also explore the motivation for national digital policies, and how national digital policy coheres or departs from previous approaches to industrial policy.

This work is significant in that it unpacks national digital policies more comprehensively in order to provide insights on their potential value and limitations from an industrial policy perspective. These issues are becoming ever more relevant for developing and emerging countries as digitally-driven growth and digitalisation across economies become central to economic trajectories. Such work is therefore essential to support policy makers in considering the best paths to shape digitalisation and the expansion of the digital economy

We look to explore these questions as follows. In section two, we explore the ways that industrial policy has been discussed to date, highlighting a spectrum of approaches ranging from more inward-looking strategies that focus on leveraging the domestic market, to more outward-looking strategies, that focused on exports and integration in global value chains. While countries often adopted a mixture of approaches along this spectrum, different emphasis entails a different set of economic and industrial policies and degrees of state intervention. As digitalisation and digital economies are increasingly becoming central to developing and emerging nations, we highlight, in section three, why appropriate national digital policy might, in theory, align with the either of the two ends of this spectrum of industrial policy.

Accounts of the unfolding of national digital policies highlight some of the ways that emerging nations such as China and Indonesia have undertaken policy in sections four. These accounts suggest that digital industrial policy encompasses policy tools that align with well-known industrial policy, as well as new approaches that are relevant to digital technologies and the new business models that are common in the digital economy. Driven by the perceived unequal impacts from global digital firms as well as relatively broad ‘policy space’ available, there has been a growth in such policy with significant impacts, although such policies have been fairly fragmented to date.

In section five we discuss how these findings on national digital policy might be relevant in terms of thinking around industrial policy in a digital age. The work implies that softer policies are important to guide learning and support large domestic markets, but that at certain points more interventionist policies, to push technology transfer and shield infant firms from foreign competition can be important. Viable approaches, as we highlight, could however differ substantially between different types of economies.

In sum, this work suggests that national digital policy has expanded and requires attention from industrial policy scholars. As we illustrate, both interventionist domestic industry support and softer export-orientated policies can be supported theoretically and have been implemented in practice. Therefore we argue that analysis that looks towards ‘sequencing’, and conditions for such policy is important. These directions are likely to be vital to digital latecomer nations and provide lessons for strategic industrial policy in the future.

2. Latecomer economies and industrial policy

2.1. The evolving role of industrial policy in developing countries

The terminology of industrial policy has been used to outline a broad set of industrial, trade, technology, and education policies. While the meaning of the term might vary, it can generally be defined as any government policy that alters resource allocation in the economy towards activities that promise better prospects for economic growth and development (Pack & Saggi, 2006). For most of the twentieth century, debates on industrial policy can be summarised through three main questions that have received substantial debate:

The first question is how useful is industrial policy? Substantial debate has focussed on the value of such policies in helping lower-income countries to achieve growth and economic catching-up. According to conventional trade theory, nations behind the curve in terms of technology should compete based on low labour costs (Hunt & Morgan, 1995). The wage advantage of those countries will drive resources (capital and labour) towards exporting products in which those countries have a comparative advantage. To facilitate this process, the role of the government should be limited to the protection of property rights, maintaining a sound macroeconomic framework, and ‘getting the prices right’ (Amsden, 1991). Countries behind the curve would, therefore, grow through their natural labour cost differentials and consequently gain diffused technological transfers over time (Amsden, 2001). Seen from this perspective, industrial policy is harmful, distorting the allocation of resources in the economy (Krueger, 1998).

Such economic approaches have not, however, always lead to developing countries producing economic growth and structural transformation (Stiglitz, 2003). Different theoretical arguments have therefore been proposed to justify industrial policy. Market failures are regarded as playing a key role in limiting diversification in developing countries, particularly with regards to information and coordinating externalities and might be reduced through government support (Rodrik, 2004; Stiglitz, 2003). Further, government policy in facilitating technology transfer and in building technological capabilities in latecomer economies can be an important component of structural transformation (Lall, 1992; Mathews & Cho, 2000).

A second question is how inward-looking or outward-looking should industrial policy be? For long periods of the twentieth century, the influence of structuralism, dependency theory, and world-systems theory underpinned the argument that developing countries should break away from their adverse position in the international division of labour to achieve industrialisation and development (Wallerstein, 1974). This approach was manifested in a number of policies that focused on domestic market protection through the use of tariffs on imported final goods in order to promote domestic manufacturing through import-substitution industrialisation (ISI). The success of the East Asian economies was initially attributed to their outward-orientation with the state limiting itself to ‘getting the basics right’ (World Bank, 1993). Subsequent research, however, argued that interventionist policies were key factors behind the East Asian success, but in contrast to core ISI approaches, highlighted that industrial policy could be implemented in both import-substitution and export-oriented regimes (Amsden, 2001; Wade, 2003).

A third question is to what extent government intervention should aim to actively shape a country’s position in the global economy. For scholars such as Justin Lin, industrial policy would largely conform to strengthening the ‘natural’ comparative advantage of a country, to help private firms and to exploit these advantages. Others, such as Ha-Joon Chang, have argued that industrial policy can be more radical and define the comparative advantage in order to achieve development, rather than conform to existing comparative advantages (Lin & Chang, 2009).

In recent years, especially following the financial crisis of 2008, there is a growing appreciation that government intervention has a role to play in industrial growth and development. It is important to shape appropriate institutions and support firms in exports, as well as supporting backwards and forward linkages to ensure broader national economic impacts (Gereffi & Sturgeon, 2013; Rodrik, 2004). Few, however, argue that a return to full-scale ISI would be fruitful given the changes in the global economy in recent decades. The fragmentation and inter-connectivity in global production and trade through global value chains may limit the type of industrial policy developing countries might pursue (Gereffi, 2014). Domestic-orientated policies that look to create or substitute for whole industries are increasingly challenging when production is complex and defined by specialisation within connected and regional networks (Baldwin, 2016).

The extent of industrial policy will also relate to the ‘policy space’ available for industrial policy. Policy space had shrunk in recent decades due to the expansion of the scope of the international trade regimes that discipline the use of such policies. Multilateral and especially bilateral and regional agreements have limited the ability of countries to undertake such policy, in exchange for increased market access (Shadlen, 2005). While this does not necessarily negate all space for industrial policy (Mayer, 2009), it is likely to limit certain approaches.

2.2. Industrial policy perspectives on technology learning and innovation

These perspectives on industrial policy have been translated into different approaches to technology acquisition and learning in industrial development.

Amsden and Hikino (1993) argued that late-industrialising countries in the twentieth century have developed their industrial capacities through processes of learning, based on borrowing and improving technology that had already been commercialised by more advanced economies. The role of the state in promoting learning processes has been an important issue with scholars highlighting the potential for learning from foreign direct investments and through exporting (Lall, 1993). Given lower human capacities and technology base within latecomer economies, industrial policy can support firm acquisition of technology and skills. Nations might thus look to spur strategic sectoral partnerships or through foreign licencing, supporting technological linkages. In other cases, the use of national investment funds to create or gain access to key international technologies provides a starting point for technological acquisition (Mathews & Cho, 2000).

Even with linkages, technology skills and knowledge should not be taken as given.Thus, the goal of domestically-orientated industrial policy is to push domestic firms to acquire key technologies and then to localise and adapt them to support domestic industries. Industrial policy can aid institutional development by supporting focal sectors, particularly where intensive processes such as reverse engineering are used to break apart foreign technologies to understand their working and then recreate them (Freeman, 1988). Processes of technology localisation require intensive local effort, and industrial policy can protect firms as they move from initial low-quality reverse-engineered copies of technologies (Chang, 2003; Lall, 1992). For greatest benefit, such activities will often focus on strategic sectors, whether that be those with a focus on the most transferable resources or ‘general-purpose technologies’ that can then be leveraged across the economy (Mathews, 2002). Thus, in the developing trajectories of countries such as Korea and Japan, large national networks and government support policy have supported technology and skills development in specific areas such as semiconductors (Freeman, 1988; Kim, 1997).

With the expansion of global value chains (GVCs), ideas of learning and technology acquisition have changed, as firms linking into these networks. Initially, this will come through a firm providing simpler goods or services in GVCs and potentially upgrading their activities over time (De Marchi, Giuliani, & Rabellotti, 2018; Schmitz, 2007). Early linkages to advanced firms serve as the basis of technology transfer and incremental learning. These firm-orientated processes of linking into GVCs, technology upgrading and specialisation can be accelerated by the state. This acceleration can take place through policies for supporting international producer presence in their home countries, and facilitating local firms to partner with those foreign firms to allow them to develop, both of which can support technological linkage (Amsden, 2001; Head, Ries, & Swenson, 1999). In terms of national policy, there may be an initial lack of skills. Thus training or retraining is an important process in kick-starting early technology adoption (Kim, 1997). An important trend in GVCs is the increasingly modular nature of production, which provides the ability for firms to operate within clearly defined and increasingly standardised areas (Sturgeon, 2002). The more clearly specified nature of modular production allows firms the ability to increasingly specialise in specific stages of production, and link into global networks (Liu, Xie, & Wu, 2015). For developing nations, the rise of technologically skilled firms thus comes less through supporting domestic capabilities but in the way that domestic firms through technological and institutional exposure, are able to learn and compete globally (Fuller, 2016). China recent success in high technology industries, for example, has been argued to be connected to the increasing exposure of domestic firms to the discipline of the global financial market institutions. In terms of learning this exposure has guided firms to invest in building specific capabilities within components of modularised production (Fuller, 2013; Huang, 2008).

With the expansion of locally- (and regionally-) orientated markets in many emerging nations, local markets become an important step in firm learning and a stepping stone to move into GVCs. Given the contextual specificities of local markets in terms of use context, marketing, language and so on, domestic firms can develop a competitive advantage over foreign firms (Brandt & Thun, 2016). Local markets can allow firms to develop and refine their technologies, marketing and services, particularly those located in larger developing and middle-income markets (Brandt & Thun, 2011; Whang & Hobday, 2011). In these contexts, industrial policy measures that support the exposure of these firms to move beyond the local focus are key to longer-term success. Increasingly in this nexus of local markets, and moving into specialisation in global value chains, the innovation systems literature has been a starting point, where national trajectories revolve around ensuring appropriate institutions and linkages are in place to ensure learning and capability building in national economies (Rodrik, 2004).

3. Implications of the digital economy and digitalisation

3.1. The digital economy and digitalisation in production

The impacts of the digital transformation have been increasingly felt over the previous two decades, particularly in the global North. However, with the bourgeoning of recent literature – on the digital economy, the ‘Fourth Industrial Revolution’, Industry 4.0, the future of work – it may be that impacts on production are only just beginning to unfold (e.g. Brynjolfsson & McAfee, 2014; Schwab, 2017).

Interest in the implications of digital issues on the economy originally surfaced with the growth of the internet, and the subsequent expansion of digital-only firms focusing on products and services. (Brynjolfsson & Kahin, 2002; Tapscott, 1996). Over time, the expansion of the digital economy has facilitated significant new economic sectors, digital innovation and business models. As internet use has expanded globally, work has also begun to include more substantial analysis of developing countries within these processes (e.g. UNCTAD, 2017; World Bank, 2016). In recent years, discussions have shifted, with an increasing focus on the way digital technologies, services, products, techniques, and skills are becoming a core aspect of every sector. This process is often referred to as ‘digitalisation’, is defined as the transition of businesses through the use of digital technologies, products and services (Brennen & Kreiss, 2016)¹. This shift is especially relevant for the analysis of global production, where more established sectors are increasingly being disrupted and with growing concerns amongst policy makers as to how to deal with the implications of digital services, automation of production and expansions of data.

Whether it be the expansions of the digital economy or growth of digitalisation, digital information flows, services and data associated typically have a cross-border component. This might be in terms of servers, platforms, services and data centres located in different jurisdictions from users, or in the ways that data is able to rapidly flow between different actors (Meltzer, 2015). These trends have broad implications for production. Increasingly, tangible products are linked to digital tracking, transactions and exchange. Goods and services are increasingly embedding data flows which are key to their operation and/or intelligence (e.g software, cars, and household goods) (Malecki & Moriset, 2007). Exchange of goods and services through e-commerce also has important implications for global trade (Azmeh, Foster, & Echavarri, 2019).

3.2. Motivations for industrial policy

The digital economy and digitalisation are becoming an ever more important element of production including in developing and emerging countries. This process leads to questions about the emergence of industrial policy focussed on digital economies and digitalisation. In this section, we explore how industrial policy in this area might be an evolution or a break from previous generations of industrial policy.

Intuitively, one might look to analyse digital industrial policy as an evolution along previous paths of industrial policy aligned to ever more complex global production networks. Digitalisation has driven increasingly modular, dynamic and changing global production networks (Foster, Graham, Mann, Waema, & Friederici, 2018; Thun & Sturgeon, 2017), and there is evidence of expanding demand for digital products and services in emerging markets, which imply broader domestic opportunities (Mayer, 2018). The close connection between digitalisation and the cutting-edge of innovation also suggests an ever closer alignment of industrial policy linked to building appropriate innovation systems (Ciuriak, 2018). These factors align with ‘softer’ industrial policy, acknowledging that technologies and data will further couple firms into global networks with states looking to support integration into digitalised value chains and regional markets (Sampath, 2018). As well as broader environment and industry regulation, industrial policy would evolve towards digital skills building, softer support for infrastructure, domestic innovation systems and platform ecosystems, as well as resolving significant market failures in the sector (such as digital platform dominance or tax issues) (following Bukht & Heeks, 2018; Ciuriak, 2018; Sampath, 2018).

An alternative, however, is to suggest that digital changes are leading to serious structural problems, where the ‘market cannot ensure a persistent structural change and technology upgrading’ (Lauridsen, 2010, p. 15). Such an argument is well supported by critical literature on digital technologies that they tend to expand systemic inequalities in developing countries. Such arguments are present in the literature on the digital divide where the uneven acquisition of digital skills and capabilities lead to systematic divides across and between across nations (Warschauer, 2003). In digitalised production, rapidly evolving digital technologies across production sectors also highlight growing structural challenges across the global economy (e.g. Foster et al., 2018; Murphy & Carmody, 2015).

Structural challenges have also been aligned with the expansion of platforms in the digital economy, which are at the core of the global diffusion of digital tools, data and services. Platforms as they grow typically display ‘network effects’, driving ‘winner-takes-all’ monopolies which have been shown to have significant impacts on competition (Srnicek, 2016). There are a number of additional characteristics of those platforms that are important to understand. Firstly, the rise of digital platforms is associated with important shifts in the objectives of financial capital. Contrary to the shareholder revolution that drove firms in the last decades of the twentieth century, the rise of digital platforms is associated with processes of ‘patient capital’, driven by the goal of long-term market dominance (Rahman & Thelen, 2019). While some digital platforms have become profitable, a large number have sustained ongoing losses with seemingly little impact on support from financial capital. Financial backing is translated into rapid global expansion often including acquiring domestic platforms in the markets in which they enter (Rahman & Thelen, 2019). Secondly, the growing intermediary role of digital platforms is also deepening disembedded production relationships between platform owners and platform users. Platform owners are often far away from production are able to shape and extract value from domestic actors (Foster et al., 2018). Data is also becoming more prevalent in production and consumption, and increasingly central to the competitive advantage of leading firms (Zuboff, 2018). There has, however, been a significant asymmetry between those who own data and can use data (within and across countries) which market mechanisms have rarely eradicated (Srnicek, 2016; Weber, 2017). These more critical arguments signal new forms of inequalities and core-periphery relationships emerging. They suggest that more systematic and interventionist approaches in developing countries may be appropriate to overcome these structural challenges.

In sum, there is an evolution of production where digital technologies and data are becoming increasingly central to economies and will, therefore, be a central focus of future industrial policy. As outlined, it is unclear how these developments align to the documented debates on industrial policy, and patterns of technological learning and innovation. An argument can be made that these changes represent an evolution with ever more global, dynamic, and interconnected networks of production. More critical work, however, suggests that the structural inequalities that are emerging are more problematic and may require different approaches.

4. National digital policies

Reflecting those developments outlined in previous sections, states are implementing policy that impacts on digital firms and/or data flows. In this section, we focus on the expansion of national digital policies highlighting examples from a number of developing and emerging economies, including a more detailed analysis of China as a successful digital latecomer.

The analysis of the cases draws on a range of data sources. There is limited relevant scholarly material on national digital policy from an economic, but there is an extensive archive of business reports, interviews with key CEO, firm case studies and corporate intelligence on the sector which highlight the trajectories of policy-making. This material is synthesised as a key source to map the development of the sector. Our analysis was also triangulated with semi-structured interviews with policy officers at a number of leading global firms in which the strategies and policies of in the digital sector were discussed. This included twenty interviews with key digital global firms, platforms and industry specialists. To support the section on Chinese policy, we also undertook a systematic analysis of policy, guidance and discussions related to digital with a Chinese-Mandarin speaking research assistant. In total, 21 key policies were explored (as well as exploring the surrounding discussion of these policies) and this allowed us to build a clear picture of national digital policy. In line with best practices, this variety of empirical sources allowed extensive cross-checking and triangulation on key statements and policy positions to ensure reliability to build the narrative of this work (Creswell & Miller, 2000). Further validation came through early drafts of this paper being presented to experts in the areas of internet policy and Chinese policy at three key international conferences,² with feedback and extensive discussion being incorporated into this work.

We discuss the findings below, focussing on the case of China as a digital latecomer in detail, before examining national digital policy more broadly in other emerging nations. We also reflect on the nature of ‘policy space’ in this arena.

4.1. National digital policies in China

China has instituted a broad set of policies related to digital firms, services and data flows in recent years. These policies were initially sporadic and closely entwined with censorship and national security concerns (Chen, 2015). Yet policies focussed on digital have also integrated economic policy goals which have yielded rapid success. Such policies can be linked to the emergence of internet platform giants such as Alibaba, Baidu, Tencent, and Sina Weibo; a vibrant e-commerce sector; and emergent digital innovation more recently in areas such as data, industrial digitisation and machine learning. A particular focus of Chinese digital policy has been to promote Chinese platforms by limiting foreign competition. This focus reflects the crucial infrastructural position of platforms in the digital economy and their role in the overall infrastructure of data in the digital economy and beyond.

Following the stories of successful digital firms in China, the beginnings of many can be traced to an origin of building generic copies of international digital resources. This is best seen in the examples of the development of popular online resources and applications. Take, for instance, Pony Ma now CEO of Chinese internet giant Tencent. Ma began his journey in the late 90’s cloning internet chat application ICQ to create QQ a popular online chat application that became the base for other services (Epstein, 2011). The culture of ‘cloning’ emerged from a number of factors. Clearly, lower intellectual property enforcement in China made cloning acceptable to both Chinese firms and authorities (Mertha, 2005). Moreover, much of the essential code that defines digital products and services (such as web scripts, server code and databases) are often either openly available or offered within open-source frameworks online.

The outcome of cloning has been highly competitive markets. For instance, many popular international platforms have tens of clones (Lu, 2010). There has often been competition from international firms such as eBay, Google and Uber at this early stage. The outcome of this hypercompetitive market is rapid localisation. Digital resources are highly malleable and very well suited to incremental improvements. Chinese firms have typically modified their services based on their knowledge of domestic markets – focussing on national, regional and niche customers, supply chains, markets, user experience or culture (Thun & Sturgeon, 2017).

The evolution from a range of competing firms to a smaller number of leaders is a well-known story of digital markets. In China, active policy has played a significant role in the firms that eventually succeed. Why and how specific technologies become more closely regulated appears sector specific. For social media and blogging it occurred due to national security and censorship concerns (Negro, 2017; Sullivan, 2012). For online ride-sharing services, the push for regulation came with the complaints at a municipal level where taxi services were being decimated by Uber and Didi (Butt, 2016). For AI and cloud computing, stronger regulation emerged with the growing realisation by the government of their strategic importance (Yu, Xiao, & Zhang, 2016). As an outcome, the state has taken up a more active role. In early generations of digital innovations, this came through tactical blocking of data, particularly to international firms using the ‘Great Firewall’ where firms who survived followed the strict requirements negotiated with senior state officials (Wui, 2011). As digitalisation has grown, policy has become the more typical approach to shape sectors where rules place stringent conditions on firms (e.g. MFPRC, 2015; MTPRC, 2016; SCPRC, 2015a). For example, digital finance rules, following broader financial rules, require local ownership of firms. For digital transport services, interim rules prohibit ride-sharing firms from subsidising rides and support only licencing of experienced taxi drivers (putting a stop to Uber’s business model in China).

Interventions – either in manipulating data flows or in stringent policy – have led to broadly similar outcomes, a reduction to a few larger local firms, with international firms leaving the market. In China, the emergence of oligopoly type competition in many sectors has led to the same three companies, the so-called B.A.T (Baidu, Alibaba, Tencent) controlling the key resources. These firms are by no means state-run. They remain independent, competitive and significant proportions of their ownership are held by international investors, as detailed below. But, they are trusted by the political establishment and are willing to trade-off their activities against rules when this is politically prudent. As new important digital innovations have emerged, following the template of digital firms elsewhere, these firm are now able to enter new sectors through their control of key platforms, or else expand through mergers and acquisitions.

Developing the financial market to support the digital economy has also been key to the rise or large Chinese digital firms. The limitation of state-controlled financing of the ’80s and ’90s in funding new technology projects led to the gradual opening of the Chinese market to foreign capital, with foreign firms becoming dominant in the venture capital industry in China by the early 2000s (White, Gao, & Zhang, 2002). Investments have often operated through quasi-offshore model enabling them to circumvent some of the legal barriers related to foreign exchange and investments (Zhang, 2016). Such investments have played an important role in funding leading digital firms. Pony Ma, for example, stated in 2002 that it was very likely that he would have sold Tencent in 1999 if it wasn’t for seed funding of USD 1 million from US VC firm IDG Capital (Zhang, 2016). Chinese policy makers have more recently looked to promote a commercially-oriented Chinese venture capital industry (Lin, 2017; Zhang, 2016), These policies have led to a rapid expansion in the Chinese venture capital industry which is estimated to have accounted for 38 per cent of total global venture capital investment, slightly below the leading market the United States (Fannin, 2019).

With the expansion of large and well financed digital firms in China, in recent policy and plans, these firms are becoming the centre of overarching national goals that focus on innovation and upgrading. Examples of this link include the much discussed ‘Made in China 2025’ plan (Industry 4.0 focussed) as well as others such as Internet+ (digital infrastructure focussed) and Offline-to-Online (e-commerce focussed) policies. In such policies, successful digital firms (often the aforementioned digital oligopolies) are typically supported and subsidised by the state to provide platforms as an infrastructure where less innovative firms can use these services to modernise (e.g. regional taxi services, industrial production, offline retailers, factories) (e.g. SCPRC, 2015b, 2017). Starting from the 12th five-year plan, and as a consequence of the ambitions for modernisation, Chinese firms have also been implored to innovate and then compete in international markets (SCPRC, 2011). Chinese digital firms have followed this template by becoming active in funding and acquiring start-ups globally. A significant trend in China is the growing number of regional acquisitions by leading digital firms. Alibaba, for instance, has bought controlling stakes in Asian e-commerce organisations such as the regional Lazada Group and Indian firm PayTm, signalling their expansion plans. These acquisitions appear to often be less about technological transfers and more focused on facilitating regional expansion through acquiring established platforms. The extent to which policy is driving this process is open to question. There are growing suggestions that the state is now playing catch up to innovations emerging in the large oligopoly firms in areas such as AI and data (Webster, Creemers, Triolo, & Kania, 2017). Given that a number of high profile policies have been associated with the BAT firms,³ there is also the suggestion that these firms are starting to capture Chinese policy in some areas (Gao, 2018). It will be interesting to see how effective policies will be in shaping a wider set of Chinese digital firms to be able to be more innovative actors in global markets in the future.

4.2. National digital policy in other emerging nations

China’s national digital policies are the closest to what might be described as overt industrial policy, but they are by no means the only nation undertaking national digital policy. These types of activity have been documented in a wider set of countries across the globe. ECIPE’s “Digital Trade Estimates’ database (ECIPE, 2017) has tracked these policies in areas such as competition policy in the digital sector, data policy, public procurement, standards, tariffs and taxation. In addition, as shown in Table A1, broader national approaches to digital and data are beginning to be combined under more coherent data protection, digitalisation and/or Industry 4.0 plans in a number of middle and lower income countries.

Table A1. Examples of recent policies incorporating digital industrial policies

Asia

Malaysia (Industry 4.0 Framework), Thailand (Thailand 4.0 National Strategy), Philippines (I3S Plan), Vietnam (PM Directive 16), China (Internet+ Plan, Made in China 2025), Singapore (Smart Nation Plan), India (Make in India Strategy, National e-commerce strategy), Indonesia (Government Regulation No. 82)

Latin America

Brazil (ProFutro Plan, E-digital strategy), Chile (Estratégico Industrias Inteligentes), Mexico (Industry 4.0 Roadmap)

Africa

South Africa (IPAP2017-2019 Plan)

Source: Authors construct extending (Santiago, 2018).

Many of these policies are still in the early implementation, or at a strategy, roadmap or broad framework stage. Hence, the focus of these policies is still relatively broad, and often embed ideas copied from foreign digital campaigns and policy (particularly WEF-driven Industry 4.0 and the EU’s GDPR). They do, however, include a number of local contextual issues (e.g. digital adoption in Thailand, South Africa; Smart City discourses in Singapore, India). Even with this broad focus, many include aspects which align with industrial policy discussions – looking to expand the impact of digital technologies or concerned with mitigating risks that come from changing forms of production and as a result of these technologies.

Indonesia, for example, has long implemented local content requirements (known as TKDN in Indonesia) in a number of industries. In 2016, this policy was expanded to digital technologies such as laptops, smartphones, and tablets (MoI, 2016). Regulations demand that such products contain no less than 30 per cent of local content. New rules to meet these requirements on smartphones sold in Indonesia allow firms to include seven locally-made apps or fourteen locally created games, with at least one million active users for each app/game. Another localisation option is for firms to invest Rp 550–700 billion (US$42-53.48 million) in innovation in Indonesia and this rule has contributed to some recent high profile investments in Indonesia, such as Apple. The Indonesian government is also implementing data localisation regulations that require foreign firms to store data produced locally on local services. The motivations behind this policy are mixed. Economic factors are, however, an important part of this policy and seen as a way to boost investments in data centres and digital infrastructure (USTR, 2017).

In Brazil, industrial policy has often emerged in the use of special tax regimes. In these scenarios, firms receive tax reductions or tax exemptions if they can prove to undertake certain activities in line with those supported by the government. For instance, REPES (Special Tax Regime for Exporting IT Services Software and IT Services Firms) was first instituted in 2005 provides tax relief on firms exporting at least 50 per cent of their turnover. The Lei da informática (Computer law) provides tax exemptions for IT firms investing in local hardware and is considered to be an important policy in supporting the IT sector (Zylberberg, 2016). These rules tend to focus on domestic software and IT services but the very recent e-digital plan implies potential further expansion in incentives in areas such as cloud computing, local data centres and industrial automation.

4.3. Policy space

For digital leaders, particularly the US, national digital policy is seen as problematic. Core to the business models of digital platforms and those involved in digitalisation are businesses models which embed cross-border data flows and expanding globally in ‘asset-light’ ways. Thus, national digital policy impacts on the profits of firms, and limits the models of global growth that have been core to their success (Bauer, Lee-Makiyama, van der Marel, & Verschelde, 2014). With these challenges, digital firms, trade bodies and technology alliances have advocated limiting the ability for states to undertake national digital policies.

The US has directed this agenda particularly in the actions of the powerful US Trade Representative (USTR) and its ‘digital trade agenda’. Linked to this agenda, the main report on trade barriers, the ‘National Trade Estimate Report on Foreign Trade Barriers’ (USTR, 2017) added a new sub-section in 2017 which discusses Digital Trade. Countries who deviate from expected norms on digital rules might then be included on US watch-lists. As such, countries who deviate from these new norms of free trade around digital are likely to feel pressure in political discussions, trade retaliation and negotiations with the US. Indeed, these types of barrier are one part of tariffs being undertaken by President Trump (e.g. USTR, 2018).⁴

The US, alongside other technology leaders such as Japan, have also been supporting the inclusion of ‘digital trade’ chapters within negotiations on bilateral, regional and multilateral trade agreements that seek to regulate the use of national digital policies (Azmeh, Foster, & Echavarri, 2019; Meltzer, 2015). However, with resistance to new rules on digital trade in the WTO; and with regional agreements that includes strong digital trade clauses stalled or in negotiation (e.g. CPTPP, RCEP), countries do not yet face strong binding rules. Lobbying efforts are liable to continue, however, particularly with respect to China, who is seen as the ultimate target within reports by US tech associations (Azmeh, Foster, & Echavarri, 2019).

5. The emergence of digital industrial policy?

We now return to thinking about frameworks for industrial policy. We highlight the more general character of such activities, before focussing how the emergence of national digital policy aligns with different positions in the industrial policy debate.

5.1. General approaches

As highlighted in the examples discussed, there appears to be growing examples of national digital policies that align with the broader definitions of industrial policy. A number of additional comments should be made to this statement. National digital policies have not always been discussed in terms of economic goals (or industrial policy). For example, they are often linked to broader agendas of ‘sovereignty’, national security or personal data protection. The economic objectives have either been hidden or emerged as a spillover effect. This can change over time and there is evidence, for example in discussions of the Chinese firewall and Indonesian data rules, that even if economic agendas were not initially the main goal they have become more central over time. In areas such as data, platforms and digitalisation, nations are slowly adopting an industrial policy mindset, but this often occurs in fragmented ways. This might be expected, however, given that policy understanding around digital technologies is still in its infancy. This paper also differs from other industrial policy accounts, in that it is an ex-ante analysis of activities that are still unfolding in contrast to common ex-post research on industrial policy which inevitably presents tidier conclusions.

It is also crucial to highlight that industrial policy is developing quickly not only due to the growing centrality of digital technologies, but also the relatively large ‘policy space’. US leadership, technology firm activities and the broader political economies of digital trade are pressuring developing and emerging countries to undertake more open digital policy. Nevertheless, binding rules are relatively limited at the moment, there are significant grey areas in current rules, and slow progress at present within digital trade at the WTO and within RTAs. This is a dynamically changing area, but with ‘policy space’ available we can expect to see more strategic digital industrial policy emerging, both as a way to counteract challenges around the digital economy, as well as a way to shape economies as digitalisation becomes more important.

Where national digital policies have been undertaken, the focus has been in a number of areas. Firstly, policy emphasis on nurturing domestic markets, and ensuring domestic firms are part of these markets, are key objectives. Secondly, national digital policy also looks to shape the activities of foreign digital firms through attempts (not always successfully) to control data flows or shape rules of interactions. Finally, national digital policy is emerging with more emphasis on digitalisation and particularly the opportunities and challenges of the digitalisation of industry.

The specific types of policy instrument that are being applied somewhat align with more traditional industrial policy instruments. Well-established approaches to industrial policies that shape competition, including domestic licencing rules, localisation rules and partnership requirements are being adapted for the digital era. These instruments are liable to be particularly crucial for global digital firms, due to the ‘asset-light’ models of global scaling that have been associated with these digital firms. Localisation and partnership rules fundamentally disrupt platform models. Beyond policy instruments which resemble previous industrial policy, a more unique set of policy tools is emerging – data blocking, data localisation, data protection frameworks, source code and algorithmic transparency. These rules have similar objectives to previous industrial policies but highlight a broader set of tools being used as industrial policies in this area.

5.2. Considering industrial policy perspectives

Perspectives diverge in the literature on industrial policy. There are those who, while agreeing that industrial policy can be important, tend to advocate for relatively soft actions by government, particularly by supporting integration into global value chains. Others see the decline of space for industrial policy through binding trade rules as a serious limitation on the ability of states to pursue developmental policies and structural transformation for developing countries.

At least at this early stage, neither of these positions appears to have precedence in terms of national digital policy. The development of national digital firms in cases such as China are driven by private digital firms who have emerged with a focus on domestic markets and with support of private capital, often international, have been able to expand. Given malleable digital technologies and the mobility of knowledge around digital technologies, state-induced linkages and technology transfer appear less important to early firm expansion.

Notwithstanding this overall picture, an interventionist industrial policy may still play a crucial role in driving forward the expansion of digital economies and domestic digital firms and shaping the activities of foreign firms. In particular, the highly uneven global nature of digital and the importance of winner-takes-all ‘network effects’ on platforms is an important consideration. In the longer term, there is the risk that leading global digital firms can expand and take an almost infrastructural position in sectors. In addition, the risks of hoarding of data may limit entrance in future data-driven sectors such as AI. Therefore, emerging and developing policy makers are beginning to focus on strategic interventions to ensure domestic firms presence, or to facilitate more or appropriate operations by global platforms. These appear to be an important component of driving national development goals forward and limiting structural inequalities.

The idea of sequencing of policy has been highlighted as one way of overcoming the impasse around industrial policy directions, with a goal to move towards analysis of the dynamics of industrialisation and an understanding or when and under what conditions different types of policy levels might be used (Chang, 2011; Mathews & Cho, 2000). It is therefore more appropriate to also think about such sequencing around national digital policy. Previous literature often centralised the importance of ‘infant industry’ protection or other support by states to select strategic sectors to protect domestic firms from competition as they learn and grow. For digital firms, industry protection has occurred through a number of policies such as internet filtering, data localisation and frameworks which disrupts the business models of foreign firms. These, however, might be better described as ‘graduate industry’ protection. Graduate industry protection is more emergent when sectors grow or are perceived to be of strategic importance the state takes an active role, shaping sectoral conditions, introducing support or policy which benefits local firms to ensure they are able to scale and not limited by powerful foreign competition.

Evidence of additional points of intervention relates to how nations may want to leverage digital technologies and data. Policy that encourages domestic digital firms to be platforms for wider national development is a goal that may allow digital latecomers the ability to leverage gains more broadly. Similarly, interventionist measures which drive firms to move beyond domestic markets such as the softer subsidies and infrastructural support of Chinese ‘belt and road’ initiative are likely to become crucial in supporting firms to rapidly become key nodes in value chains and to ensure they are able to compete in international markets over time.

It should be noted that this analysis has tended to focus on larger, emerging economies with the ability to use domestic market power as a tool to support domestic firms and leverage international firms. This will likely differ in other economies. For small economies with relatively high technological capacities and limited economies of scale, a more digitally-open approach might be useful to integrate digital leading firms. There is also the potential for regional digital policy (e.g the Digital Single Market in Europe, regional e-commerce masterplans) which could support smaller nations using aligned markets (Azmeh, Foster, & Echavarri, 2019; Foster & Azmeh, 2019).

6. Conclusion

In this paper, we have highlighted the growth of national digital policy in emerging and developing countries. Thinking about such policy in terms of the history of industrial policy and technology learning highlights a valuable perspective to understand the nature of national digital policy, and think about economic trajectories in the future. States may implement national digital rules to encourage domestic digital economies and digitalisation, but also with the aim to reduce structural inequality that can rapidly emerge in this area. Owing to the lack of enforceable rules at a global level, there is also broad ‘policy space’ under which countries might undertake more active policy to facilitate catch-up.

In terms of the specifics of industrial policy, we have been able to highlight a growing set of activities that have been undertaken in developing and emerging countries that both extend historic approaches to industrial policies (around localisation and infant industries) into the digital domain, and more novel approaches such as those linked to data flows. Thus digital industrial policy should be seen as becoming part of a wider industrial policy agenda, and one that is becoming more important as digital economies are growing. This is particularly the case as evidence grows that digital platforms and digitalisation are leading to structural uneven impacts related to digital ownership and control as well as uneven data flows.

Our analysis has outlined how national digital policy supports approaches that facilitate economies in becoming part of complex production networks. Core to these processes are firm driven change, often initially deriving from local market development but with potential to expand into regional markets. Given the potentials for rapid knowledge spillovers of digital knowledge, and rapid localisation and incremental development of digital technologies, state-driven approaches to technological learning are likely to be less pressing.

Nevertheless, using the idea of industrial policy sequencing, specific interventions made by states are still crucial. In particularly, the support for so-called ‘graduate industries’ with a focus on key sectors has included more protectionist activities to support domestic firms. Policies that ensure leveraging of digital technology gains in an even way throughout the economy suggest industrial policies that ensure technology localisation and linkages. These moments of intervention are particularly important given that digital systems have tended to rapidly move to dominance through ‘network effects’ and hoarding of data. These interventions can be clearly justified on both market failure and broader structural grounds.

Given this is a relatively new area and this ex-ante account of an emergent phenomenon, further research is required, particularly on the implementation and impacts of national digital policy and the way that digital industrial policy may emerge as a coherent area of policy going forward. In addition, the overlap between certain domains of national policy and censorship and national security mean that certain approaches are likely to be highly problematic. Nevertheless, national digital policy signals new directions forward in industrial policy that might potentially offer new economic opportunities for developing and emerging countries.

Acknowledgements

The paper was supported by small grants from The Sheffield Institute of International Development (SIID) and the Information School, University of Sheffield. The authors would like to thank research assistant Yaming Fu for her work on compiling, collating and translating Chinese digital policy material used in this paper. Additional thanks to Jaime Echávarri-Valdez for insightful comments and inputs on early drafts of this paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Digitalisation, which covers the broader implications of the growth of digital technologies, is seen as separate to the underlying technical processes of digitisation by which information is converted into from analogue to digital flows (see Brennen & Kreiss, 2016).

2. For internet policy, work was presented at the Internet Policy and Politics conference (IPP, 2016) and the Association of Internet Research conference (AoIR, 2016). For Chinese policy, work was presented at the China Management Research Frontiers Conference 2017.

3. Arguably policy-making is captured by the BAT firms. For instance, domestically focused Internet+ policies were led by Tencent founder Pony Ma, external trade focused policy the e-World Trade Platform (e-WTP) has been led by Alibaba founder Jack Ma.

4. For example technology transfer in the case of AI in China and Made in China policies have been used in justification for trade tariffs (in more traditional sectors) by Trump.