Comment

Just what is this digital economy?

Dave Heatley from the Productivity Commission responds to a recent column on the Commission's report into the digital economy on how the Government can help to grow it.

“The way to grow our already burgeoning digital economy is to find and support innovative local entrepreneurs” says Richard MacManus. But that raises two questions: what is the digital economy? And having decided that, what is the best way to grow it?  The Australian and New Zealand Prime Ministers asked these questions of the two countries’ Productivity Commissions.

A major message in our report is that the digital economy is the sum total of economic activity conducted or facilitated through digital technologies. In countries like Australia and New Zealand, this is virtually the entire economy. The tech sector represents at most 10 percent of economic production.

If the digital economy meant just the tech sector, then you might share MacManus’s conclusion that finding and supporting innovative local entrepreneurs is the way to achieve growth. But the two Commissions did not look at how to grow the tech sector. What we did look at was those things that are under the control of governments that might grow the digital economy, more widely defined, and at the impacts of these technologies on the economy and society.

When MacManus, Aimee Shaw for The Herald, and Debrin Foxcroft for Stuff write about firms, they are talking about tech sector firms. Reflecting what we were asked to do, the Commissions’ report is mostly about consumers, non-tech sector firms, and the opportunities arising for both from the digital transformation of the economy.

The early effects of ICT were on the production side of the economy. Firms and governments adopted ICT to reduce their back-office costs. More recently, digital technologies are transforming transactions and the consumption side of the economy. Consumers in both Australia and New Zealand have been quick to adopt new technologies and take advantage of the reduced transaction costs and larger markets made possible by global and local digital platforms. But firms, particularly small and medium enterprises (SMEs) in both countries, have been slower to adopt these technologies.

The digital economy is a global phenomenon. Global companies have significant effects on the Australian and New Zealand economies, and it would have been irresponsible for us to downplay these. For example, the CEO of Trade Me – one of New Zealand’s digital success stories – recently said that the company is “having to share New Zealand with Facebook”. Whether you like or dislike Facebook, Google, Amazon, Netflix etc., they are undeniably part of the local economy and affect the daily lives of Australians and New Zealanders.

We found that Australia and New Zealand were more similar than different, and largely peripheral to global digital research and commercialisation. Looking at the international data, the overwhelming message is that, in recent years, digital innovation has become increasingly concentrated in a small number of firms, headquartered in smaller number of cities in a handful of countries.

For example, Google, just one of 44 digital platform firms in the San Francisco Bay Area, has a global R&D budget of around US$21bn. This is roughly three times the total revenue of the top 200 NZ tech firms. While the Commissions did not write off New Zealand's digital sector as too small to bother with, as Don Christie asserted, we were very conscious of this difference in scale.

Governments in many countries are uncomfortable about this increasing concentration. We found this in discussions with government officials from the UK, Canada, France and Italy. But it is not clear what, if anything, those countries can do about it.

Some have adopted national digital strategies to fund and support promising tech research and firms. But, national strategies can lead to a bidding war. This can be great for the innovators and incumbents who receive support, but costly to the countries and their taxpayers. Other strategies include regulation and procurement policies that protect local tech firms from foreign competitors. This lifts costs for domestic consumers, can cut them off from the latest technologies, and prolong the life of poorly-performing local firms. Moreover, if other countries retaliate, this can cut local firms out of potential export markets. Just about everyone loses.

Returning to our broader definition of the digital economy, what can governments do to grow it?

A feature of the digital economy is new business models, new products and services, and threats to existing firms. Governments need to adjust their policies to take account of such changes, regardless of whether they come from innovative local entrepreneurs, from trans-Tasman firms or from elsewhere. And let’s face it: government decision-making processes are slow by design.

Our report dealt with the issue of slow government responses to fast-moving technology. It highlighted three areas: regulation, government use of technology and our thirty-year-old trans-Tasman relationship.

First, regulation needs to be nimble and technology neutral. Old, inflexible regulation can have effects unintended when it was designed. For example, Australian and New Zealand copyright laws arguably prohibit cloud computing, mashups, and data and text mining. Conversely, inflexible regulation can make it difficult for existing firms to compete with new entrants, as auction houses found when Trade Me first appeared on the scene.

Second, governments can do a better job of using tech to make its transactions with citizens and firms fast and convenient. While small businesses in New Zealand find it easy to register vehicles online, other things are less easy. For example, convoluted non-digital era systems are rife in licensing and compliance for importing and exporting.

Last, we looked at how trans-Tasman cooperative actions could assist with growing the digital economy. Such actions are coordinated through the Single Economic Market agenda. We suggested additions to the agenda including streamlining trade compliance, improving cross-border consumer protection, moving ahead with electronic invoicing and trans-Tasman sharing of credit histories, and wider recognition of digital identities.

The Prime Ministers welcomed the report and directed officials to consider the report’s findings and proposed actions. We are confident that the package of actions we suggested will make a measurable difference to the Australian and New Zealand economies, and will create opportunities for innovative firms, including those in the tech sector.

Dave Heatley is an economist and IT entrepreneur. One of his start-ups – Echoview Software – won the 2018 Australian Digital Technologies Export Award.

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