The Data-driven Economy: Implications for Canada’s Economic Strategy
Dan Ciuriak, CIGI
FEATURES OF THE DATA-DRIVEN ECONOMY
The digital transformation is enabling the emergence of a ‘data-driven economy’ which is premised on different logics than the previous knowledge-based and industrial eras. The report highlights several features of the data-driven economy that have a significant impact on existing economic policy frameworks:
Machine Knowledge Capital
AI introduces a new factor of production into the economy — machine knowledge capital, which in the first instance will be narrowly intelligent but hyper-competent AI programs. This enables a significant expansion of income-generating knowledge-based assets, often performing functions that currently are the province of “white collar” work. The competition to capture the rents these assets will generate could redefine the global map of prosperity.
Market Failures and Incentives for Strategic Trade and Investment Behaviour
The data-driven economy features three powerful sources of potential market failure: economies of scale, economies of scope and information asymmetry. The same factors also give rise to powerful incentives for strategic trade and investment policy as countries compete to capture international rents. Government interventions will thus assuredly play an important role in determining which companies dominate.
Rising Income Share of Knowledge Capital Rents
In the knowledge-based economy, the basis for market share capture shifts to ownership of rent-generating IP. Knowledge capital rents are gained through: being the source of information asymmetry; enabling industrialization of learning and creation of IP; underpinning the creation of machine knowledge capital; powering business and industrial process optimization (the Internet of Things [IoT]); and enabling extraction of consumer surplus through price discrimination.
In the knowledge-based economy, trade agreements shifted emphasis from opening markets to protection of IP assets — they became more aptly called “asset value protection agreements.”
CONSIDERATIONS FOR CANADA’S ECONOMIC STRATEGY
The second half of the report outlines policy recommendations to position Canada for success in capturing rents from data assets and IP in the data-driven economy:
Public Sector Co-investment
Canada’s low net-debt-to-GDP ratio presents an opportunity to capitalize on innovation assets by substantially expanding public sector investment. Borrowing at scale to invest in technology assets or acquire outputs generated by Canada’s innovation ecosystem (for example, in the rollout of fifth-generation [5G] networks to power the IoT or as launch customer for new technologies) would mean deploying serious money to address the country’s inability to scale up innovative opportunities.
Data Retention, Scaling and Mobilization
Prosperity in the knowledge-based and data-driven economy will be based on ownership of rent generating assets. Canada should create of intermediary data trusts with fiduciary responsibilities to their data “depositors” in order to facilitate responsible data use. Data collected through public sector activities should be harnessed for better industrial policy and to build IP portfolios surrounding data that resides in Canada. Data and data-driven intellectual property (IP) retention policies are needed, such as state patent funds.
Foreign Direct Investment
Inward technology-seeking foreign direct investment (FDI) should be viewed through a different policy lens than traditional inward investment in the industrial sectors. In the knowledge-based and data-driven economy, inward investment is more typically associated with knowledge extraction and the shift of the IP assets generated by R&D abroad. Policy intervention would be warranted where the appropriable private returns to an individual start-up firm from selling to a foreign firm do not reflect the (positive) externalities that the start-up firm’s presence in a given innovation location generates for the location. In cases where there is a net, uncompensated outflow of wealth from a country, there is public interest in the transaction that goes beyond the private interest.
FTA Strategies for a Post-Free Trade Agreement World
A data governance regime is required to create competitive market conditions under technological conditions that drive the emergence of superstar firms and “winner-take-most” economics. Canada will need to develop its regime in the context of free trade agreement commitments to the free flow of data and data localization prohibitions.