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Playing catch-up in the digital economy

Smitha Francis     January 11, 2019

The increasing diffusion of ICT in developing countries including India and the greater ICT-led convergence across sectors that we are witnessing now follows the emergence of the inter-related digital technology systems driven by Big Data, the Internet of Things (IoT), robotics (or computation-intensive automation), online platforms, and what is being called artificial intelligence (AI). Several platforms (such as e-commerce, sharing service platform, e-payment platforms, etc.) as well as cloud, Blockchain, etc. are now available as "infrastructural" services and an increasing range of other digitised services (such as data analytics) are being offered through all of them. Both of this reduce the upfront cost of setting up businesses. Where risk capital is available, this is enabling fast followers and new disruptors from India to self-organise, scale up rapidly, and often emerge as significant players. This has been seen in the emergence of a few home-grown companies like Flipkart, Ola, Paytm, Byju, etc. Driven by new business models associated with digital technologies and seemingly leveraging our strength in the IT software and management domains, service sectors such as retail, transport, restaurants, hospitality, education, finance, etc. are thus undergoing significant digital transformation. But in addition to services, new technologies as well as new business models are also being applied to modernise and rejuvenate mature technologies and even traditional technologies. The new technology systems are thus poised to transform the manufacturing and agricultural sectors too, altering existing product lines and launching new product cycles. How rosy are the prospects for India in sustainable catching up in this digital economy?

While many of these technologies are in the initial phases of their lifecycles, which makes catching up relatively easy, follower firms from countries like India face several challenges. First of all, there are continuing interactions between these evolving technological systems, which will likely lead to the emergence of subsequent new ones. Abilities to catch up successfully in initial phases and be able to set standards therefore become fundamental to the catching up trajectory. Lifecycles of new upstream and downstream products/services that may emerge will involve much shorter phases of maturity than before and this makes catching up more difficult during their mature phases.  

However, the new digital technologies have innate characteristics like non-excludability, non-rivalry, etc. which differentiate them from the previous generation of micro-processor-based technological systems that had set the ICT revolution in motion in the early 1970s. This has meant that lead innovators in digital markets create excludability and erect entry barriers through various business strategies aimed at sustaining and consolidating their monopoly positions. Some of these strategies include expansion of IP protection into new spheres, embeddedness of software along with the hardware in networked products, exclusionary pricing practices, acquisition of competitors and innovator start-ups from developing countries, etc.

However, the central barriers to new entrants in the platform businesses currently dominating the digital space are the platform owner's proprietary control over its design and "ownership" of networked data. The leadership position of the platform owner in any particular market segment (such as Google in web search, Amazon in e-commerce or Uber in sharing service space) tends to get entrenched due to its advantageous capabilities of data collection and analysis. By their very nature, the benefits from data analysis increases with the size of users on any one side of these so-called multi-sided markets. Thus the asset and knowledge asymmetries between lead firms and followers are presently getting entrenched through their control over extracted data, which combined with their other competitive strategies to prevent new entry and abort competition from follower firms, gives them monopoly positions. Further, value gets concentrated given the latter's proprietary ownership of platform design and monetisation of the data extracted. This also means that the immense opportunities to small businesses that utilise these platforms do not usually lead to the same wealth generation capabilities for them as the owners of the platforms or cloud (or Blockchain or AI).

What is even less acknowledged is that many lead platform-owing firms like Amazon, Google, etc. have been entering into several verticals in the production space. Advances in data analytics combined with greater sets of data such companies gain access to through their various business strategies are enabling them to develop and offer totally new products that can displace existing products in totally different industrial segments. This has begun to happen in a variety of industries, starting with the electronics industry, but not limited to it. In the electronics industry several new networked products are being launched, for instance, by platform companies such as Google (Home), Amazon (Echo), etc., which can now interact with their user as well as their environment (including with each other). For example, Amazon's latest offering Echo Show is an Alexa speaker with a display, which can give the owner news briefing with a quick video overview of the happenings around the world, in addition to several other uses people have come to expect digital assistants to do.

New digital technologies are thus getting increasingly integrated into the production of goods and services in myriad ways. At least some of these new products are disrupting the market for incumbent products of the mass production era. These clearly go beyond robots. The increased use of sensors in devices and application-driven machines, and the growth in networked devices are continuously increasing the scale and scope of real time data extraction. For instance, many cars (and other vehicles soon) are coming with pre-installed IoT apps and devices, which capture huge amounts of data related to the vehicle, user, traffic, pollution, etc.

The current phase of the ICT revolution thus brings together synergies in hardware and software capabilities together with access to data of all kinds. Without improving her indigenous capabilities in electronics hardware production rapidly to leverage as well as forge synergies with India's software capabilities, India faces the risk of witnessing another wave of import surge especially in electronics and further erosion of its manufacturing base across other industries. Such impact will vary depending on the existing levels of capabilities in various industries, indigenous entrepreneurs' abilities to foresee the synergies and leverage capabilities across different areas and activities, and the government's abilities to put in place the necessary ecosystem to improve the first two capabilities through a systemic approach.

At the same time, with profound applications in diverse sectors and the potential for addressing a variety of social problems, data ownership also has critical implications for both innovative capacities and development trajectories. Advancements in the new technological systems such as artificial intelligence, network technologies, robotic process automation and cloud robotics, blockchains, etc. are also contingent on Big Data. There is thus a challenging policy task to strike a balance between data needs for innovation on the one hand, and issues surrounding privacy, data protection, and the ethics of data use, on the other side. India needs to put in place national standards related to privacy, security, and data use in accordance with her socio-economic and strategic imperatives. Data security and data privacy are no longer another set of luxury goods for the well-to-do who can buy the same from specialised data security firms and add to the existing range of inequalities that our societies are afflicted with.

Moreover, lack of security standards for the current and emerging generations of networked and other products and not ensuring indigenisation of core ICT infrastructure networks, components and services is a call to disastrous consequences for national security given the vast range of channels through which security may be compromised (as has been recently seen in media reports on certain foreign companies). India should be eager to follow the example of a growing number of countries including the US, UK, Australia, South Korea, Japan, etc. who have now banned or restricted Chinese telecom manufacturers in their countries to protect their national security. Unlike the earlier generation of internet-linked products, there is an urgent need to put in adequate national standards and to provide support to the indigenous firms to meet those standards.

Similarly, India's 'digital development trajectory' will need to be guided along by the government through other policy changes too so that emerging business models promote competition and broader developmental benefits. All government policies impacting upon corporate strategies for value appropriation in the digital economy need to change in order to ensure that monopolistic tendencies and practices in the digital space are reined in. None of the cross-sectoral anti-competition impacts of the proprietary ownership of platform and networked data of e-commerce companies seem to have been considered by the Indian competition authority, when it recently allowed the acquisition  of the Indian e-commerce company Flipkart by the US supermarket giant Walmart. Ironically, this happened in India at a time when the Chinese' e-commerce giant Alibaba is reportedly exploring a strategic alliance with the top-ranking supermarket chain in the US, Kroger, as a way to counter Amazon's aggressive expansion into physical stores by acquiring the US retail chain Whole Foods. Reformulating anti-trust policies, trade and investment policies (including in trade and investment negotiations), etc. will all come in the ambit of the regulatory shake-up that is needed to allow sustainable digital transformation and catching up by India. At the same time, given the utmost importance of user interface in digital technology deployment, policy efforts to improve capabilities across the workforce and the society at large must accelerate. The latter is essential to draw society-wide beneficial impact of digital technologies.

(The author is a consultant with Institute for Studies in Industrial Development. The views are personal.)


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