Digital Innovation Reshaping Industry Chains

Digital technologies have had profound and far-reaching impacts on the global economy in the past three decades. They have facilitated the digitalization of trade, and the optimization and restructuring of global industry chains. With data and information as the core factors of production, the digital revolution driven by technological innovation has given rise to new industries, and fostered the restructuring of global industry chains via the improvement of information communication and logistics infrastructure. Digital technologies have reshaped existing resource endowments and comparative advantages. First, data has become a new core factor of production and an essential means of production (i.e., the “new oil”). Data is characterized by its near-zero marginal cost, replicability, and non-rivalrous nature. Unlike traditional factors of production, the transmission of data is no longer restricted by time or space. Second, emerging technologies such as automation, artificial intelligence (AI), and the internet, as well as the rise of digital platforms, have transformed factors of production, and physical distance has become less important in the organization of industry chains. Digitization has therefore fostered more decentralized production and a more complex industry chain structure. In addition, the economies of scale and economies of scope for large economies are crucial for the development of the digital economy and industry chains. The US and China have leveraged their economies of scale to become giants in the digital economy, enabling digital platforms to increase user traffic and harness the full potential of their network effects. Comparative advantages and resource endowments remain important for the distribution of global industry chains in the digital era. However, digital technologies are reshaping the traditional comparative advantages among major economies. The emergence of new markets, demand, and technologies are driving the development of new products and new industries. Technologies such as AI, blockchain, cloud computing, and new forms of organization for production and trade such as digital platforms are changing trade patterns while reducing logistics costs and improving production efficiency at the same time. The global industry chains are also undergoing profound changes in the process of digitalization. Geopolitical tensions and COVID-19 conditions have brought disruptions and uncertainties to global industry chains. Economic restructuring in the digital era brings new challenges and opportunities to upgrade and restructure industry chains. Amid intensifying digital competition, major economies are introducing new policies and measures to facilitate economic digitalization, and build or consolidate advantages in digital industries and trade. Under complex international trade conditions, we think China can fully leverage the economies of scale for a large country, encourage technological innovation, foster new markets, strengthen the digital industry chain, and facilitate the digitalization of China's industry chains. In our view, China can enhance its digital and data security while also encouraging data flows and the growth of digital markets and economies. By improving the management of data and digital platforms and deepening digitalization, China is poised to boost the efficiency and optimize the structure of its industry chains.