The IPL newsletter: Volume 20, Issue 401

Disrupt or Be Disrupted: Findings from the Creating Digital Opportunities Project

Evolving digital technologies are critical to the global economy and to Canada’s future economic growth and prosperity. The rapid pace of innovation, along with shifting global leadership in digital technology, are creating major challenges for Canada’s digital industries, but also new opportunities. This dynamism creates new opportunities for entry into the field, but also new threats to Canada’s existing strengths. For Canada to benefit from this shift, we must take appropriate action. Canada’s future competitiveness and our prospects for economic growth are inextricably linked to our ability to seize the ‘digital opportunity’ being created. The CDO project focused on three key questions.

• How can Canada best respond to the challenges posed by a rapidly changing digital landscape, while benefiting from emerging opportunities to promote our economic prosperity?
• How can we situate Canada’s digital opportunity in a global context in order to frame policy that strengthens our international competitiveness and contributes to a broader public debate?
• How can we identify where the greatest opportunities and risks lie and propose the most effective policies to secure the future prosperity of Canadians?

The project was organized around four thematic areas. Key findings in each are summarized below:

Canada’s Position in Global Production Networks
Canada enjoys a tremendous opportunity to grow its digital economy both at home and globally. Domestic upgrading and global integration, to be sure, are two sides of the same coin. Growth and development in firms’ productive capacity and upstream R&D in the digital economy in Canada should create opportunities for Canadian firms and organizations to “plug into” the global scene. Despite opportunities for Canadian global firms to create digital opportunities, several challenges continue to mitigate success in the sector:  governments and firms constrain entry into supply, production and innovation networks; Canadian digital firms lack the scale and patience to penetrate international markets; and they  must localize their products and services to meet the demands (and tastes) of varied international markets.

The Local Context for Global Networks
As Canada and its cities face the emergence and evolution of new and potentially disruptive technologies, it is important to understand how firms in Canadian cities benefit from their location in particular local and regional innovation and entrepreneurial ecosystems. While the pursuit of talent, capital and markets for firms in the digital space may be global in scope, the received wisdom is that these activities are best supported when firms themselves are deeply embedded in local and regional innovation and entrepreneurial ecosystems. Firms benefit from close proximity to suppliers, customers and competitors, as well as the activities of universities and colleges, other research institutions and think tanks, industry associations, innovation intermediaries (including accelerators and business incubators), the presence of investor and mentor networks, and various government policies and programs. They can also exploit other unique place-based advantages, including access to deep labour markets and specialized skills. Overall, this collective body of in-depth research is unequivocal about the importance of local agents, such as flagship firms, business and civic leaders, entrepreneurs, and associative actors that play key roles in anchoring digital industries. Furthermore, local assets, including universities and colleges, private and public research institutions, pools of highly skilled and talented workers, unique place characteristics, and the quality of the built environment provide the foundational social and knowledge infrastructure that support the development of digital opportunities.

Diffusion of Digital Technologies Across the Economy
Understanding the full implications of the digital technologies for Canada’s growth prospects requires an analysis of the resource, manufacturing and service industries that are being transformed through the application of information technologies and digital media. One major theme was that there is more than one pathway of value migration driven by digital innovations. Understanding environments that encourage innovation are just as important as understanding the flows of value migration. In some sectors, digital technologies are not only being adopted and deployed within the sector but are transforming the nature of the sector by challenging the traditional boundaries of firms. Technology allows activities that used to be inside the firm to be performed externally and previously external processes can now be performed internally. The impact of digital technologies in traditional manufacturing has changed the production model from macrostructural to microstructural manufacturing and extended supply chains in ways that now challenge the established models of value creation and the boundaries of the firm.

Digital Inclusion and Intelligent Communities
Projects in this theme aim to advance our understanding of the equity implications of the digital economy in Canada. This includes work on Smart Cities, rural and remote communities, ride-hailing and the platform economy and economic restructuring in mid-sized manufacturing cities. Asking whether and how digital opportunity is being created and for whom, each researcher explores the challenges, opportunities, and policy prospects for expanding digital opportunity to more people and places. Projects found that post-industrial economic advantage in knowledge-intensive sectors requires the capacity to develop and apply digital technologies, and tends to concentrate in large, economically secure urban regions with abundant employment opportunities. In other words, economic advantage in the 21st century tends to go to those who are already advantaged.

Broad findings

• There is a growing gap between ICT enabled firms & the rest:
  – 100 global frontier firms are more productive, more capital & patent-intensive (intangible) & have larger sales & profits
• Challenges for small open trading economy are the same as identified in 1980s:
  – Need to export & trade in high technology products to grow
  – Lack of large oligopolistic domestic firms
  – Inability to scale
  – Plus capital markets not geared to financing technology firms
• Greater challenges greater for digital underdogs, rural & remote

Innovation Policies in the Digital Age

Dominique Guellec and Caroline Paunov, OECD
This paper looks at how digitalisation is transforming innovation, and the consequent need for innovation policies to adapt. The paper shows that the digital transformation affects the economics of information and knowledge, in particular pricing and allocation. The reduced costs of producing and handling information and knowledge and the increased fluidity change innovation dynamics. Data have become a core input for innovation. Other changes include more opportunities for versioning; an acceleration in innovation, more experimentation and collaboration; servitisation; and higher risk associated with these general purpose technologies. The digital transformation also has economy-wide effects in terms of business dynamics, market structures and distribution. In view of this transformation, changes to innovation policy are required in the digital age. Innovation policies need to address data access issues; become more agile; promote open science, data sharing and co-operation among innovators; and review competition for innovation and intellectual property policy frameworks.

The impact of digital technologies
Digital technologies have drastically reduced the costs of searching, sharing and analysing data. They have also increased the fluidity of knowledge and data. Once available, digitised knowledge (knowledge put in the form of digital data) and digitised data can be shared instantaneously among any number of actors, no matter the geographic distance or other barriers, and each of those actors have full access to the whole package. These changes have affected innovation processes and outcomes in the following ways:

1. New possibilities for handling data have made them core inputs for innovation in all sectors of the economy. The ways data feed into innovations range from using information on consumer behaviour to enabling entirely new services (such as transportation services as illustrated by Uber that relies on instantaneous information about demand and supply for transportation services).

2. Innovation has become more collaborative, due to the reduced costs of collaborating and the greater need for interdisciplinary research.

3. Opportunities for launching new products and processes at lower cost using the Internet and relevant platforms facilitate versioning and experimentation of products for differentiated customers. Innovation can also be more frequent: in the automotive industry, while new car models are launched once a year, software updates (which are innovations and modify the models concerned) are issued at a high frequency, e.g. by Tesla Motors. These shorter cycles, however, do not necessarily imply progress at greater speed, as these innovations are also more incremental than before. Frequent, sometimes even daily, software updates are an example.

4. The digital transformation creates opportunities for innovation in services, as digital technologies allow for reduced costs and greater fluidity in reaching and interacting with consumers and in tracking their behaviour. It also moves manufacturing towards mixed models for providing goods and services.

5. Digital technologies are also relatively young, general purpose technologies (GPTs) that offer new opportunities for innovation. They are both far ranging and fast evolving, hence generating much uncertainty as regards their current and future development. This is particularly true of artificial intelligence (AI), a set of technologies that can emulate functions normally accomplished by human intelligence based on pattern recognition and prediction. Not only is AI expected to transform economic activity, but it also raises complex societal and ethical issues.

Digital innovation policy

The effective development of digital innovation requires government to adopt a policy mix, which includes introducing an entirely new policy domain – access to data – to the existing policy domains subject to the transformations outlined above. The mix would comprise the following priorities:

– having a strong public research system (science policy);

– having large, competitive firms and vibrant entrepreneurship (entrepreneurship and competition policies);

– providing sufficient support and incentives to innovation (innovation and intellectual property policies)

– having a skilled labour force (education and training policies)

– ensuring the broadest access to data and knowledge while respecting constraints in relation to data diversity, trust (privacy, ethics, etc.), economics (firm competitiveness and competition, intellectual property rights) and national policy considerations (access to data policies).

The OECD–wide horizontal Going Digital Project presents an integrated policy framework for making the transformation work toward growth and well being. This framework explicitly considers “innovation” as an area in which multiple policy domains need to be considered, including science and technology, digital government, entrepreneurship and SMEs, competition, and sectoral policies such as energy, finance, education, transport, health and education. It aims to provide a guide to cutting across policy silos to ensure a coherent and cohesive whole of government approach, to fully realise the potential of digital transformation and address its challenges