Academic lecture: International technology competition

VIDEO AND AUDIO RECORDINGS

In this session, Bruegel’s Director Guntram Wolff and Senior Fellow J. Scott Marcus were joined by Associate Professor of Economics at LSE Keyu Jin to discuss the need for a common standard for technology competition policy.

summary

by Pauline Weil

Keyu Jin explained that in the technology sector, the main shift from traditional industries is that there might be no natural limit to growth. In the tech sector, firms depend not on production-based cost but on customer acquisition-based costs (data). Returns to scale tend to increase as there are no increasing fixed costs. Indeed, for platforms such as Alibaba, opportunities are not in expanding their 800 million consumer base, but in offering more services (horizontal expansion).

If the market cannot limit firm growth, there is a need to regulate further. She notes that tech firms have distinct features and should be treated differently. Global giants sometimes coexist with strong global players, for instance, Uber and Didi are global leaders in ride hailing but small local actors also fair well. Some services have global externalities (they better as more people use it) and some local ones (ride hailing). Some products are substitutes (search engine, blockchain and 5G equipment) compared to co-existing social medial platforms. Keyu Jin noted that China is probably better placed to produce substitutes, where there is no need for cultural appeal.

When regulating, countries are trying to pursue three distinct, and often times contradictory, objectives: consumer protection, efficiency and international presence. These concerns can lead to trading-off regulating for consumer welfare for letting firms have increasing returns and ensuring international growth.

The optimal policy is not to do nothing. Trade policies are not enough. Policies are necessary to stimulate innovation and compensate for comparative disadvantage in the long run. Production and consumption gains are sacrificed in the short term. Regulation is also necessary to limit the political power of firms that are too big. In practice, governments tend to first let the firms innovate with a lot of autonomy and regulate after, when the issues are becoming clear.

Globally, the technology race sometimes comes at the cost of efficiency gains. Global digitalisation may currently be hampered by Chinese and US intents to decouple in the sector. Observers used to assume China would favour international presence and efficiency rather than consumer privacy and welfare, but she notes that China now shows real concern for privacy and data leakage in addition to national security concerns. Further, countries could benefit from restricting the access to their markets until a national firm has a first mover advantage. For instance, India could have had a local player for social media, and Europe could have had a local ride hailing app.

In the global context, J. Scott Marcus underlined that the discussion for digital regulation at the WTO level points to whether China and the US can find common grounds. The more inclusive the coverage of a global regulation, the less ambitious the regulation will be.

Lastly, J. Scott Marcus disclosed some of the features weighting on EU competitiveness in the sector. In the EU, tech firms suffer from financing problems that prevent them from successfully scaling up whereas in the first place they are relatively more successful than in the US. The EU is also penalised by (diverse) and imperfect insolvency laws – data shows that in the US, it is after the third or fourth attempt that a tech firm becomes successful.