Industrial policy for development in the age of platform capitalism

Industrialization has always been a challenge for developing countries, but the obstacles have become even greater with the rise of platform capitalism. This column argues that industrial policy for development should be concerned not only with the nature and implications of new digital technologies, but also with the business models that underpin digital platforms. What’s more, it is imperative for late industrializing countries to have a say in establishing and policing the market rules for platform capitalism.

The growing dominance of digital platform firms, such as Amazon, Alibaba, Google, Uber, and Facebook, has given rise to platform capitalism. Platform capitalism is a major global transition with far-reaching implications for development. In particular, it complicates late industrialization in several ways, as I explain in a recent report.

Complications for late industrialization

The first is that digital platforms are deadly competitors when they face off against traditional pipeline brick-and-mortar businesses. The most valuable assets of digital platforms are intangible data and algorithms. These allow them to provide superior products and services, give them a first-mover advantage, and enable them to shape-shift.

Shape-shifting is when platforms enter markets that are not related to their original core business. For example, Apple competing against the watch industry with its Apple Watch and Google disrupting the newspaper industry.

The second way that ‘platform capitalism complicates industrialization is that even if late industrializing countries establish digital platforms, the platforms will have to engage in platform-to-platform competition. Here, they lack experience. In advanced economies and China, digital platforms competing against one another has become the norm – described as ‘Goliath versus Goliath’ competition.

The third way that platform capitalism complicates industrialization is the competition that digital platforms create between third-party entrepreneurs, such as app developers or online retailers using the platform’s digital infrastructure. For example, the platforms set the terms of that competition, as Facebook does on its buy-and-sell groups or Amazon does on the Amazon marketplace. This dilutes the possible advantages that developing country entrepreneurs can obtain from doing business on these platforms.

The fourth way that platform capitalism complicates industrialization is that local business dynamism tends to taper off when large digital platforms are present. This is due mainly to the lack of competitiveness of local firms against the more effective and customer-oriented platform model with its strong network economies. Fewer start-ups are created in ‘kill zones‘ around digital platforms. These are zones where firms are taken over by digital platforms or their intellectual property is appropriated.

The fifth way that platform capitalism complicates industrialization is that digital platforms have become lobbying firms par excellence. Google and Amazon’s close relationship with the U. S. Department of Defense has been noted. Although not government-owned, China’s BATs (Baidu, Alibaba, and Tencent) have a close relationship with the Chinese communist party. One of the practices that digital platforms want to protect through lobbying and legal measures is digital enclosure – the creative use of software licenses to obtain control and access users’ data.

Finally, platform capitalism complicates industrialization through the downsides to an economy in which data is becoming increasingly valuable. These downsides include data privacy violations, data harvesting, clickbait, misinformation and disinformation, the rise of the surveillance state, surveillance capitalism, awful AI (artificial intelligence), and cybercrime.

Implications for industrial policy

Considering the complications that arise for late industrialization from the rise of platform capitalism, developing countries’ industrial policy should be concerned not only with the nature and implications of new digital technologies. Perhaps more importantly, it should consider the business models that underpin platform capitalism.  Care needs to be taken in three particular areas. They should:

Avoid being marginalized or captured by other countries’ digital platform strategies

The United States is developing smart manufacturing to reshore jobs outsourced to China and other Asian countries; Germany aims to digitize its manufacturing sector to reshore jobs and shorten value chains. China’s new digital industrialization ambitions are explicitly global in scope – see, for example, the Digital Silk Road, the Internet Plus initiative, and the China Standards 2035 plan. Increasingly, all are resorting to ‘technology wars’ that refer to trade restrictions on digital services.

Regulate digital platforms appropriately

Industrial policy in the age of digital platforms will ultimately consist of rules and standards about data – its ownership, sharing, exchange, and privacy. Developing countries would do well to build their own legislative and supervisory capabilities in this regard. The upside of this challenge is that there is policy space for digital industrial policies based on data regulation and governance.

Create a supportive environment for homegrown digital platforms

Homegrown digital platforms in late industrializing regions are emerging slowly but steadily. But they are still largely fragmented and dominated by foreign-based platforms. This suggests that industrial support policies can help to improve the efficiency and sustainability of homegrown digital platforms, bearing in mind the two conditionalities above.

 

Conclusion

 

Platform capitalism can lead to social and political upheaval. This warning has been sounded by Martin Kenny and John Zysman, who point out that ‘the winners and losers in markets depend on who can participate and on what terms. There are no markets, and no market platforms, without rules, but what happens to the politics if important market rules are made unchallenged by the platform owners? Many political struggles will be waged over these rules, and those fights will be part of defining the market and society in a platform era.’

It is imperative that late industrializing countries have a say in establishing and policing the market rules for platform capitalism. Achieving this is the next frontier in industrial policy in developing countries.

 

Author:

Wim Naudé is Professor of Economics at Cork University Business School, University College Cork, Ireland. He is also a Visiting Professor in Technology, Innovation, Marketing and Entrepreneurship at RWTH Aachen University, Germany, and a Research Fellow at the IZA Institute of Labor Economics in Bonn, Germany.