Rethinking Industrial Policy for the Data-Driven Economy

This note reviews industrial policy in theory and historical practice and makes the case for a fundamental reframing based on the centrality of data to the data-driven digital economy, the various roles that data plays in this economy (as medium of digital transactions, as intangible capital, and as infrastructure of a digitized economy), and the heightened scope for market failure in the data-driven economy. It suggests the following five principles to guide the formation of industrial/innovation policy in the knowledge-based and data-driven digital economy: 1) Participation in the data-driven economy requires access to truly big data. Small open economies will need to scale up data in order to scale up companies. 2) The acceleration of the pace of change and the concentration of wealth in the data-driven economy changes the set of investments with risk-return metrics that the private sector will engage. Public policy must support projects that have social merit but which private capital leaves on the table, and which would be screened out by conventional criteria for industrial policy interventions by the public sector. 3) Foreign direct investment policy must take into account the impact of inward M&A investment on the dynamism of innovation systems, in particular where such takeovers would have anti-competitive effects or materially reduce knowledge spillover benefits within a country’s innovation system. 4) The rent-based business model of the data-driven economy makes asset accumulation essential for national wealth creation. Policy must therefore shift from focussing on activity to building a rent-generating stock of technology assets, including by: (a) adopting a retention policy for domestically-developed knowledge capital developed with public funding support; (b) giving appropriate weight to the implications for a country’s stock of technology assets of FDI, including the potential loss of technology through inward MA and (c) ensuring freedom to operate for domestic technology firms through, for example, a state patent fund to address issues related to patent proliferation. (5) International commitments need to preserve policy space to implement a data strategy to secure a foothold in this emerging economy. As part of their data strategies, countries should assess the market value of data generated in the exercise of public sector governance; put in place procedures to capture it; and use procurement to develop new capabilities in the private sector.