COVID-19 has changed the way we live and work almost overnight. Analysts are struggling to keep pace with the impact on economies, sectors and firms. One thing that we already know, however, is that this crisis is accelerating an already growing trend towards digitalization.
From virtual meetings to automated factories, online orders to drone delivery, digital services are growing in importance, permeating an increasing number of sectors and activities. Digitally agile firms are adapting to the ongoing crisis more successfully, and others are rapidly skilling up in response to challenges to their business models.
For governments looking to drive economic recovery after the pandemic, supporting such digital competitiveness will be key. One way is through foreign direct investment (FDI) in the digital economy, in other words, “Digital FDI.”
The power of investing in the digital economy
There is significant evidence that FDI can bring technology, know-how, jobs and growth. FDI is also often the largest source of finance for developing economies. Just like traditional firms, digital firms invest abroad to be close to customers, access local knowledge, open new markets and more.
Yet attracting FDI in the digital economy requires different policies and regulations, because digital firms have business models that vary from traditional brick-and-mortar businesses. Digital firms rely heavily on data and technology, often involve platform economies and leverage non-traditional assets.
The World Economic Forum’s new Digital FDI initiative seeks to identify policies, regulations and measures that governments can adopt to attract such investment. We’re working with technology firms, governments and experts to answer the question: What is the ‘secret sauce’ to creating a digital-friendly investment climate? The answer will become even more important in the looming economic downturn where there may be fewer resources for investment and therefore more competition to attract scarce capital.
Building on a conceptual framework laid out by the United Nations Conference on Trade and Development (UNCTAD) in its 2017 World Investment Report, enabling policies, regulations and measures fall into three pillars.
Enabling investment in digital firms
The digital economy has generated a host of new business models. From social media and the platform economy to cloud computing and data centers, without the internet, such businesses would not have come into existence. Governments that embrace such new business models, create a facilitating environment for digital firms to thrive, and actively promote their digital economy are likely to have greater success in attracting investments.
Southeast Asia is a notable example where policies and measures have encouraged investment, such as the billions being invested in Gojek and Grab, ridesharing and delivery firms competing for market share in this region.
Enabling digital adoption by traditionally non-digital firms
Beyond new business models, the digital revolution has the potential to change traditional ways of conducting business. Local enterprises may adopt various digital services to reduce obstacles caused by physical barriers, simplify supply and value chains, and provide speedy delivery of goods and services. A precursor to achieving such investment are policies and measures, including telemedicine, mobile banking and online sales, that encourage adoption of digital features to conduct business.
For instance, Polish telemedicine firm MedApp invested in the Baltic states, allowing cardiovascular diagnostics to be provided via telemedicine.
Enabling investment in digital infrastructure
Robust underlying digital infrastructure is key for the development and growth of the digital economy. Attracting investment in digital infrastructure requires a conducive regulatory framework, for instance, policies and measures that encourage investment in payment processors. Success in attracting foreign investment in digital infrastructure can significantly benefit local companies, especially small and medium enterprises.
For example, Visa invested in Nigeria’s Interswitch, a payment switch and processing company, making Interswitch a unicorn overnight.
Questions investors must ask
Within each of these three scenarios, there are specific policies, regulations and measures that impact a potential investor’s decision to commit capital and other resources. Investors ask three main questions.
Do data localization requirements impact investment in digital firms and activities?
Data localization provisions mandate firms to store and process data locally through data centers. While this requires establishing a physical presence in a country to a certain degree, whether this serves as an impediment for digital FDI remains largely unexplored.
Do taxes on digital goods and services impact digital adoption in traditionally non-digital sectors?
In recent years, several countries have either imposed or are contemplating imposing taxes on mobile and internet usage, electronic goods, digital services such as e-books, and online streaming. However, aside from issues to do with the cost of collection, it is unclear to what degree such taxes affect digital adoption.
Does the use of international standards impact investment in digital infrastructure?
Technical standards for telecommunications, data, electronics and other infrastructure in the digital economy facilitate harmonization. Several international, regional, sectorial and professional organizations are active in standard-setting. However, these standards are rarely universally adopted. In such a context, the impact of using international standards for attracting investment needs to be better understood.
To answer these and other questions, the Forum has launched a new confidential survey asking firms to rank options on a 10-point scale. Findings from the survey will help formulate recommendations to governments, both at the national and multilateral levels, highlighting the most important policies, regulations and measures to consider adopting in each area.
With these advancements, enabling the growth of digital goods and services through attracting inward investment, while simultaneously facilitating the outward investment of firms into digital goods and services in other markets can play an important part in the world’s recovery from the current crisis.
Matthew Stephenson is Policy and Community Lead, International Trade and Investment, World Economic Forum. Nivedita Sen is Trade and Investment Analyst, World Economic Forum.