Joe Weinman, Advisor, Syntropy Networks, ; EDJX, BitTrap, RampRate, and ; Seton Hall University ; Stillman School of Business, NJ; Founder and Principal, XFORMA LLC; Former Senior VP, Telx
Over the past decades, as with many other countries, China has evolved from an agricultural economy to an industrial economy to a digital economy. This has been driven by numerous forces: the exponential improvements in the price-performance of digital technologies; the value that enterprises, governments, and individuals can appreciate through these technologies; a variety of digital business strategies; tech firms’ global competition and innovation; and deliberate planning by central, provincial, and local governments to pursue global leadership in specific technologies such as mobile communications, robotics, artificial intelligence, and big data.
Price-performance improvements. Digital technologies continue to exponentially improve thanks to new technologies, new manufacturing processes, new algorithms, and the cross-fertilization of ideas. Disruptive new technologies offer promise for continuing improvements: for example, quantum computing may be able to solve certain classes of problems formerly considered too computationally complex to be solved in meaningful timeframes; quantum communications may be able to provide “unbreakable” communications channels; 5G and 6G offer previously unimaginable bandwidth for mobile communications at improved latency, density, energy usage, and other performance characteristics; and neuromorphic chips offer the promise of faster learning and computation for certain tasks by mirroring human thought processes.
Distributed computing architectures are combining the best of centralized “cloud” facilities with distributed; tying these together with highly interconnected networks with previously unimaginable bandwidth; running complex technologies such as artificial intelligence, machine learning, speech recognition and synthesis, and natural language understanding; and fostering platforms and applications including social media, gaming, messaging and communications, e-commerce, e-books, streaming media including video and music, collaboration tools, payments, virtual/digital currencies, e-government, telehealth, connected autonomous vehicles, drones, robots, sensors, actuators, 3D printers, and more.
Business value. Meanwhile, stakeholders from different segments are realizing the value that these technologies bring. For example, consumers appreciate the convenience and functionality that mobile phones offer and the ability to shop, learn, or focus on health and wellness from home; enterprises can use digital technologies to reduce cost, grow revenues, build more durable customer relationships, enhance sustainability, e.g., by optimizing processes and resource utilization to reduce carbon emissions from operations, and more.
Digital business strategies. The trends driving digitalization are the same the world over, however individual responses to those trends vary. Digital technologies can create value in many ways. For example, they can improve processes and resource utilization, by substituting virtual resources for physical ones, or by optimizing and reimagining processes, or by reducing resource requirements. They can improve products and services by making them smart, digital, and connected. These products and services can become platforms for additional functionality, as when a smart phone or smart speaker has additional apps downloaded into it; they also can become parts of extended ecosystems of similar products, other products in the portfolio, partner products, or even competitor products. Value can also be created through the use of recommendation engines that customize and tailor products and services to the exact needs of the customer at that time and in that context of use.
Global innovation. Technology firms continue to innovate, exploiting exponential technology improvements to create value for stakeholders. They introduce and trial new features and functions at a dizzying pace, aiming for competitive advantage and increased market share—or at least the preservation of existing market share. The nature of digital services and information goods makes experimentation and evolution of services faster by orders of magnitude. A digital company can introduce, trial, and discontinue a new feature in an hour or two. Compare that to the years required for, say, an auto manufacturer to bring a new model to market and evaluate whether sales figures met targets.
Deliberate planning and execution. What makes China unique in this global maelstrom of innovation, competition, and technology evolution is the degree of planning, collaboration, support, funding, and sometimes control, between its governments at all levels and technology enterprises. For example, the 13th Five-Year Plan called for “innovation in next generation information technology industries,” including “integrated circuit industrial systems…artificial intelligence, intelligent hardware, new display technologies, smart mobile terminals, 5G mobile communications, advanced sensors, and wearable devices,” as well as biotech, spatial navigation systems, energy, materials, and new-energy vehicles.
The recently released 14th Five-Year Plan has the acceleration of “digitalization-based development” and the construction of a “digital China” as major elements. This includes the creation of a “cyber powerhouse,” a digital economy, society, and government, and digital transformation in all facets of society. In China, such plans are not mere documents, but then drive projects, mega-scale initiatives, funding, and metrics across the country and beyond its borders. For example, an objective of gaining leadership in 5G mobile technologies manifested itself in China being widely viewed as the global leader in 5G, whether measured in terms of patents issued, global standards influence, or the number and coverage of 5G base stations and wireless devices deployed and operational. This was achieved through a variety of successful efforts ranging across government entities, funding programs, private enterprises, standards bodies, educational institutions, etc.
Enabling these successes are innumerable components. For example, a fund of funds directs government capital through venture capitalists with insights into market trends and eventually into entrepreneurial firms creating emerging capabilities. Thus, may the best mix of deep capital reserves, market and technology insights, and entrepreneurial agility be achieved. In short, the Chinese model of today provides a centrally driven alignment for major initiatives of national importance while also supporting serendipitous entrepreneurship of smaller firms that are largely free to pursue new technologies, business models, and marketable ideas.
This type of approach is different than in other regions. For example, in the United States, direct government funding exists, and programs such as the Defense Advanced Research Projects Agency, which created the Internet, or major government programs such as the Space Program and the recently passed Infrastructure Investment and Jobs Act, have transferred national government money to a variety of initiatives including academia and public-private partnerships. However, the prototypical funding for entrepreneurial activity in the U.S. over the years has come from angel investors, venture capitalists, and private equity in centers such as Silicon Valley. Such centers are communities with strong cultures that attract, foster, and are centered around research universities and young talent with skills in leading-edge technologies. In Europe, major funding has come from programs focused on innovation such as Horizon 2020, which distributed almost €80 billion, and its successor, Horizon Europe, which promises €100 billion.
In any country, governments may have objectives that are each individually rational and well-intended but can come into conflict with each other. For example, governments typically are desirous of strong national defense, economic growth and prosperity, protecting citizens from criminal activity or other dangers, and the like. However, is taming inflation but causing a recession or stagflation worth it? What about the impact on jobs and unemployment? Is serving targeted ads on social media a contributor to economic growth, by linking potential purchasers with solutions that can create value? Or is it an intrusive invasion of privacy? Economic growth typically benefits from free trade, but can such free trade open up potentially fatal gaps in national defense? Resolving these dilemmas requires a balance of top-down direction, bottom-up creativity, and continuous agility and flexibility as conditions change and new information becomes available.
These dilemmas sometimes materialize as disagreements between the public and private sectors; between governments, representing national interests or protecting the individual citizen, and companies, eager to grow profits and market share. Perhaps one defining characteristic of truly disruptive technologies is that technological progress typically outstrips regulatory capabilities because technology can be advanced by a single company or individual, whereas regulation often requires consensus. Moreover, regulatory issues often don’t arise until after a technology has emerged and scaled.
For example, creating a ridesharing firm takes a handful of software developers and a few drivers and riders. However, untangling the web of issues that then arise as the new technology impacts the status quo can take time. Should ridesharing companies have the same regulation as taxis? Do drivers need to be certified and undergo background checks? How should the services be taxed? Are drivers employees or contractors? Issues such as these are not restricted to China or the U.S. or Europe or anywhere else. They represent the complex interactions between new technologies, their embodiments in products and services, how they are used by customers, and how they relate to competitive products, complements, and substitutes, local customs and culture, and governmental and societal objectives. These issues may not have perfect answers nor stable ones. An imperfect solution—the best available at the time under the circumstances—may be destabilized by world events, emerging technologies, or a single local issue that becomes a viral call for change.
Cryptocurrency is another example of the dance between technology and regulation. Although digital cash had been invented, the first meaningful cryptocurrency, Bitcoin, began as a conceptual white paper, a URL, and some open-source software in 2008. A decade and a half later, El Salvador has made it legal tender; the United States has issued an executive order to study and define regulations for cryptocurrency, while clearly stating that crypto transactions can be taxable events; and other countries’ central banks have begun to issue digital equivalents of their currency: in China, the People’s Bank of China has created a digital yuan which is being integrated into WeChat Pay and Alipay, while the nation has also banned crypto transactions, crypto mining, and cryptocurrencies. Ultimately, a mix of consumers, businesses, regulators, technologies, cultures, and events—such as thefts from exchanges—will determine which mechanisms gain traction in which countries.
Countries and blocs today recognize the importance of development and growth to maintaining and improving their economies and standards of living. A cornerstone of that development and growth is the interplay between technology, economics, and regulation. New technologies can benefit domestic consumption and the standard of living and create value for international consumers and businesses while driving up export income. The percentage of the global economy that is directly or indirectly digital has continued to grow—by some analyses it grows by 0.5% per year. Some estimates suggest that over 50% of the global economy is now digital.
Regardless of the exact percentage or exact rate of growth, it is clear that for nations to successfully compete on the world stage, they must embrace emerging technologies and must master the complex constellation of critical success factors: digital skills, education and training; academia, research, development, entrepreneurship, investment and innovation; national, provincial, and local policies and regulations; technology architectures, standards, and models; and structured programs that focus resources while also fostering creativity, allowing for serendipity, and accentuating agility to respond to challenges and opportunities.
Moreover, digital infrastructure and platforms—whether they be cloud computing, digital currencies, mobile handsets, and networks, or software stacks—have a multiplier effect on the economy, the same way that good highways, ports, and airports do. One dollar or RMB spent on asphalt can enable hundreds or thousands of dollars or RMB worth of products to get to its destination; similarly, a dollar spent on a data network can enable hundreds or thousands of dollars or RMB worth of financial transactions to flow, or of intellectual property to be created, or of collaborative brainstorming to occur. Studies have shown that these create a virtuous cycle: data networks enable collaboration and flows of ideas, so more bandwidth in more places with greater interconnections drives greater digital and virtual, or “knowledge-intensive” flows. These flows have been growing faster than other flows such as commodities trading or labor, e.g., offshore manufacturing or offshore outsourcing, in turn driving continued investment in network infrastructure.
Therefore, in a world of global trade and competition, which may already be a majority digital, there is arguably nothing more important for nations to pursue than digital capabilities, digital infrastructure, and digital advantage. Thus, there is nothing more important for nations than to find the right balance of top-down and bottom-up; of planned direction and serendipity; of technology and regulation; of scale and innovation. The future depends on it.