Digitalization is a truly global phenomenon with the co-evolvement of different digital ecosystems. Which digital ecosystems will eventually prevail?
The battle for global dominance in the digital space
For the first time in the history of digitalization, different powerful digital ecosystems have emerged in parallel and are now battling for dominance across the globe (Economist, 2017). It is FAAAM vs. BAT, that is, Facebook, Amazon, Alphabet, Apple, and Microsoft vs. Baidu, Alibaba, and Tencent (many more players exist in both ecosystems but these companies play major roles and can be considered pars pro toto) or the US vs. the Chinese digital ecosystem.
At the same time, other economic super-powers such as Europe and Japan have not been able to participate successfully in the race for dominance. Rather, they have become part of FAAAM territory and are forced to stand on the sidelines, watching the two ecosystems battling in other parts of the world like India or Southeast Asia.
What has driven the emergence of parallel ecosystems leading to different digitalization paradigms? Why have some digital ecosystems prevailed while others have failed? And, most importantly, what are the implications for the future?
Understanding the nature of digital ecosystems — The individual, institutional, and intra-cultural layers
To fully comprehend the different digital ecosystems and thus the digitalization paradigms that are emerging, it is important to take an integrated perspective and consider the digital space to be a multi-layered ecosystem consisting of individual, institutional, and intra-cultural layers. The layers attempt to bring together three explanations for success in a complementary rather than a competitive manner:
The individual layer refers to how individual talents contribute to the overall success of the digital ecosystem. Is it all about the few visionary entrepreneurs who make the difference? Are there any distinct approaches for allowing talents to flourish?
The institutional layer refers to the regulatory and competitive contexts of emerging ecosystems which can be considered tipping point for successful digitalization (Raskind & Waller, 2016). To what extent does the state influence the emergence of an ecosystem through either active promotion or passive protection? What is the role of the competition in promoting winning players?
Finally, the intra-cultural layer summarizes any deep-rooted values that members of an ecosystem share based on a long history or heritage. How do generally accepted values in a given culture promote or hinder the success of an ecosystem?
Assessing the three layers of the digital ecosystem will help us to fully comprehend the dominant digitalization paradigms and to derive the implications for governance of digitalization in a given context.
Understanding the differences between digital ecosystems
Applying the framework described above to the four leading economic powers, that is, the US, China, Europe, and Japan, we can identify some interesting differences and factors that may help explain the distinctiveness of the four digital ecosystems. The cross-ecosystem analysis also promises to be insightful as we look at two successful (the US and China) and two less successful (Europe and Japan) cases when it comes to harnessing the benefits of digitalization and building a strong, globally competitive digital ecosystem.
The US, the sole and uncontested leader in Digitalization 1.0, has produced the most innovative digital ecosystem whose companies set the direction for product innovation and inspire many digital players in other parts of the world to emulate their business ideas and models. The basis for this success can be found in a highly competitive market with strong IP rights, which hold huge profit potential for the winning player. This also serves as a strong incentive to attract the best talents from all over the world, leading to a highly professional workforce combining the best talents for each single economic activity needed to build world-class digital players.
The Chinese digital ecosystem can be considered the most impactful. China leads the rest of the world, including the US, in many ways when it comes to adopting digitalization. It not only has the biggest number of digital users but also the highest percentage of commerce conducted online versus offline (Robson, 2017). It has built a formidable digital infrastructure for trade, transportation, and transactions that by far surpasses comparable systems in many other parts of the world in terms of efficiency and effectiveness (Thornhill, 2017). The basis for this success can be found in a well-devised industry policy, which provides protection from US players while affording space for internal competition, leading to the emergence of a number of highly successful digital players in China who can draw from a huge pool of talent coming out of the highly selective Chinese education system. A strong degree of the pragmatism and adaptability that marks Chinese entrepreneurship in general has played another key role in making the Chinese players extremely agile (Clark, 2016).
The European case is slightly different. Although Europe has a strong industrial base housing some of the leading industrial technology firms, it has not succeeded in creating any meaningful digital players (the few that came out of Europe, such as Skype, were acquired by US firms). The reasons can be found in a distinct institutional context where economic power and authority over industrial policy is shared between nation states and the European Union, leading to a rather programmatic approach to innovation where the resources needed for innovation are re-allocated to ensure equal treatment of different member states and protect vested interest. This does not help foster the emergence of new digital leaders but leads to a strong digital infrastructure.
Japan, finally, offers another interesting case in point. During the heydays of Digitalization 1.0, Japan was often lauded as the big beneficiary and future leader of digitalization given its strong base in technology and its leading position in mobile business at the time. Japan’s strengths, however, did not prove sufficient for it to play a leading role in Digitalization 2.0. Its closed economy, which accommodates few outside talents and strongly focuses on perfectionism and incrementalism, proved ill-fitted for the requirements of Digitalization 2.0, such as agility. It is not surprising that the few Japanese digital players who were successful, such as SoftBank or Rakuten, concentrated on activities outside of Japan.
Understanding the dynamics of the co-evolution of digital ecosystems
The two dominant digital ecosystems, that is, those in the US and China, have evolved in parallel and co-exist in their respective domestic markets. At the same time, they increasingly compete with each other in other parts of the world (Economist, 2017). The relationship between the other ecosystems is more subtle and complex. While the European and Japanese digital ecosystems complement that of the US, which is shown by the strong position of US digital players in those markets, their relationship with the Chinese ecosystem is currently more one of co-existence, at least for the moment.
Which digital ecosystem will prevail in the future? This is difficult to forecast as many predictions in the past have proved wrong, for example, the belief that Japan would become a dominant digital force. Given their strong bases, both the US and China are well positioned to play a leading role in future battles. There is, at least, a silver lining for Europe and Japan. As the next phase of digitalization is likely to put a stronger emphasis on digitizing industrial platforms than consumer interactions, the industrial leaderships of Europe and Japan will prove to be valuable assets if they are able and committed to leading their digital transformation. At the end, digitalization will not only lead to stronger national ecosystems but will rather play a major role in further driving connectivity between the ecosystems (Baldwin, 2016 and Khanna, 2016).
This article is an excerpt from the publication Governance of Digitalization published in June 2017.
Baldwin, R. (2016). The great convergence: Information technology and the new globalization. Cambridge, MA: The Belknap Press.
Clark, D. (2016). Alibaba: The house that Jack Ma built. New York, NY: HarperCollins.
Economist (2017, April 20). China’s internet giants go global. The Economist. Retrieved from http://www.economist.com/news/business/21721203-tencent-leading-acquisition-spree-alibaba-close-second-chinas-internet-giants-go
Khanna, P. (2016). Connectography: Mapping the future of global civilization. New York, NY: Random House
Raskind, M., & Waller, G. (2015). Digital to the core: Remastering leadership for your industry, your enterprise, and yourself. New York, NY: Bibliomotion.
Robson, D. (2017, March 9). Why China’s internet use has overtaken the West. BBC. Retrieved from http://www.bbc.com/future/story/20170309-why-chinas-internetreveals-where-were-headed-ourselves
Thornhill, J. (2017, March 20). China’s digital economy is a global trailblazer. Financial Times. Retrieved from https://www.ft.com/content/86cbda82-0d55-11e7-b030-768954394623