Digital technologies have transformed society on an unprecedented scale over the last two decades. They have changed the ways we live, work, play, commute, and interact. And today, it's digital technology that has the potential to bring in widespread social changes and economic advancement. Accordingly, to prosper in the digital age, it has become crucial for nations to understand and cater to the digitally-based economic construct that's also known as the digital economy. For national governments and policymakers, this digital economy has major implications if they are to achieve their key objectives regarding economic diversification, local value creation, national digital transformation, job creation, and bridging economic inequality. To state it simply, both the public and private sector must transform themselves into digital enterprises to remain relevant and competitive, if they wish to thrive in the digital era.
The digital economy has been defined in different ways, primarily based on scope. Early on in the digital era, the term knowledge economy was used to denote a combination of the Information and Communications Technology (ICT) sector, digital media and e-commerce. However, the digital revolution in the last two decades has made digital business models much more widespread; this new scenario requires a definition based on a much broader scope. According to the latest definition from the Organization for Economic Co-operation and Development (OECD), the digital economy encompasses all economic activities reliant on, or significantly enhanced by, the use of digital inputs, including digital technologies, digital infrastructure, digital services, and data.1 This broader scope refers to all producers and consumers — including governments — that use digital inputs in their economic activities.
The emergence and evolution of the digital economy is characterized by key trends. The primary driver of these trends is technological innovation, namely the advent and widespread use of social media and smartphones, as well as advanced broadband networks and technologies such as the Internet of Things (IoT), Big Data Analytics (BDA), robotics, and Artificial Intelligence (AI) and Machine Learning (ML). There are three overarching trends that help us better understand the new economic construct.
Dominant Digital Business Models
The digital economy is often referred to as a platform economy, where digital business models and the digital platforms that enable them dominate. In some industries, such as transportation and tourism, digital-native players have caused severe disruption to traditional models: think of the likes of Uber and Airbnb. Elsewhere, in sectors such as banking and government, digital is now the primary mode of service delivery, leading to branches and customer service centers closing down.
The Shift from Providing Services to Creating Experiences
In the digital economy, organizations differentiate themselves by creating digital experiences for customers. For example, today's leading retailers inspire customer purchases by using AI-based, personalized marketing messages as well as delivering in-store and online Augmented Reality (AR) and Virtual Reality (VR) experiences. They create seamless digital and physical shopping experiences through automated stores and ecommerce fulfillment centers. The public sector is actively pursuing a whole-of-government approach, breaking institutional silos to provide a similarly seamless digital experience to citizens through initiatives such as customer journeys, national government service portals, national digital identities, and more.
The Rise of Industry Ecosystems
In the digital economy, traditional and linear value chains with limited partner engagement are now giving way to scaled-up, integrated ecosystems that use software platforms to deliver value, create resiliency, and foster innovation through connected products, assets, people, and processes. For example, leading banks engage with Financial Technology (FinTech) players to enhance services and innovate rapidly within the Financial Services Industry (FSI). Such industry ecosystems thrive on data sharing and use digital platforms for intercompany collaboration and multiplied innovation.
The global economy is well on its way to fulfilling its digital destiny — more than 65% of global Gross Domestic Product (GDP) is predicted to be digitalized as soon as 2022.2 Accelerated investment in digital transformation will further spur the creation of digitally-enabled products, services, and experiences across all industries, significantly impacting economic development, particularly as nations across the world move away from resource-based economic models. To facilitate this transition, national authorities and policymakers should focus their efforts and investments on the critical enablers of the digital economy. As such, there are four aspects that are foundational to its evolution: addressing them head on will multiply economic growth in the future.
Digital Strategies and Regulations
The digital economy requires focused attention, tailored strategies and policymaking efforts. China, for example, has put significant emphasis on the digital economy in its national strategy for 2021–25 and expects it to become the core component fueling its commercial transformation.3 The country plans to use data and applications to not only upgrade and transform traditional industries but also foster new business models. Similarly, Singapore has created a Digital Economy Framework for Action that focuses on digitalizing industries, integrating ecosystems, and transforming the ICT sector.4
Such strategies and regulations should address the digital economy's various components and technology enablers. For example, strategies and initiatives focusing on FinTech, ecommerce, Industry 4.0, and emerging technologies such as AI, IoT, the cloud, robotics, and cybersecurity will be essential for fostering the growth of the digital economy. Singapore's National AI Strategy5 is an excellent example in this respect.
The digital economy requires organizations and individuals to connect seamlessly regardless of their location and therefore relies on robust, reliable, responsive, secure, and scalable digital infrastructure. Digital infrastructure, today, is comprised of a myriad of technological elements such as telecommunication networks, compute and storage infrastructure — including data centers and the cloud — sensor and camera networks, applications and platforms. The evolution of infrastructure is characterized by two overarching trends: the move toward the edge and the uptake of cloud platforms. By the end of 2022, 60% of network resources will migrate to the network edge, to deliver adaptable and agile connectivity services to a population who live, work, and play in a heavily distributed way. 6 At the same time, the shift toward the cloud is helping organizations achieve infrastructure transformation and application modernization goals.
For the digital economy to thrive, continued investment must be made to enhance and upgrade digital connectivity, particularly as technology evolves. Technological advancements such as 5G and Wi-Fi 6 will be key enablers of the new economy in coming years. For example, various organizations are now implementing private 5G networks for different use cases, such as remote triaging in connected ambulances in the healthcare sector, remote surveys by mobile robots in hazardous environments in the energy sector, and factory automation in manufacturing.
The digital economy is primarily a data-driven economy. Indeed, in the digital age, data is the most valuable resource and it is a critical enabler of personalized customer experiences, digital business models, industry ecosystems, and automation. The ability of an organization to capture data, synthesize information, learn continuously, and apply the resulting insights at scale is a key differentiator in the digital economy. A combination of IoT platforms, devices, networks, and AI and ML tools spreads intelligence from the edge to the core and turns data into value, creating the data value chain. The industry-leading organizations of today strive to master this data value chain.
However, fully exploiting data remains a significant challenge for organizations. It is estimated that less than 3% of existing data is analyzed with the aim of improving enterprise intelligence.7 National governments and policymakers that focus on developing the digital economy should strive to create an open data economy, where data is shared widely, creating value, albeit supported with strong data privacy and protection laws to counter potential threats.
The increasing role of digital technologies in the workplace requires a range of new digital skills. This falls into two categories: core ICT skills — such as programming, applications, infrastructure, cybersecurity, and data analytics — and generic ICT skills required by all employees to work in a digitalized environment. However, as organizations often point out, it is tough to find core ICT skills. Moreover, with rapid technological evolution, the skills learned at educational institutions often fall short and quickly become outdated. Enhancing the ICT skills of graduating students and the wider workforce will therefore be critical to organizational digitalization efforts and, thus, the long-term evolution of the digital economy. For national governments and policymakers, this also has significance since they will need to adapt a new generation to changing economic scenarios and avoid disruptions to the labor market.
Economic prosperity, wealth creation, and the improvement of citizens' lives are priorities for every nation. As digital technologies are steadily intertwined with the way products and services are created and consumed, the digital economy is becoming a critical component of national transformation. It is crucial for national governments and policymakers to understand this new economic construct and facilitate its evolution by creating an enabling environment. To thrive in the digital age, organizations must also transform into digital enterprises, creating superior customer experiences by embracing digital business models, mastering data, and participating in industry ecosystems.