Project

U.S.- China Strategic Competition

Working Paper

[Working Paper] China’s Digital Transformation and Its Implication for the Asia-Pacific

  • 2019-05-03
  • Mingshen Zhang

ISBN  979-11-88772-75-9 95340

Editor's Note

In this paper, Mingshen Zhang analyzes China’s digitalization as spurred by advances in smart digital technologies and discusses the opportunities that this will bring to the regional economy and integration in the Asia-Pacific. China’s digital transformation is taking place across sectors, but not evenly; while China is highly digitized in e-commerce, it falls far behind in the digitalization of the manufacturing and R&D industries. Zhang, however, asserts that China’s digitalization will be further accelerated by domestic factors, such as demographic changes and structural industrial shifts, and predicts that it will generate opportunities for regional economies to cooperate with China on the development of digital infrastructure and government policy frameworks for the Internet and the digital economy.

 


 

Quotes from the paper 

Introduction

At present, digital transformation centered on the use of smart information technology to change the economic and social activities is expected to generate substantial digital economy and digital dividend. As a general purpose technology, smart digital technology has strong properties of platforms, openness, integration, and ecosystem, which will impose broad impacts on the innovation, entrepreneurial activities, investment, trade, and industrial development. Currently, the Asia-Pacific region arrives at a critical point to overcome the structural problems, shape the economic momentum and pursue the quality oriented economic growth. Therefore, all the Asia-Pacific economies have reached a broad consensus in the exploitation of the digital economy and dividend. They seek to give full play to the leading role of digital transformation in improving labor productivity, creating business opportunities and promoting free trade in order to better achieve sustainable development and inclusive and secure growth in the Asia-Pacific. China, one of the most important economies in the Asia-Pacific, is also undergoing an unprecedented digital transformation. Due to the scale and systematic integration effects of digitalization, it can be expected that China’s huge market potential, rich application scenarios, and urgent upgrading needs may bring not only historical opportunities for digital economic cooperation in the Asia-Pacific region but also essential incentives for this region to form a more intimate innovation community.

This paper consists of three parts. The first section attempts to summarize the characteristics of the new round of digitalization induced by smart digital technologies. Moreover, it further develops a digitalization matrix as a framework to capture the feature of digital transformation. In the second section, the paper moves towards the analysis of status-quo and trends of China’s digitalization by using the digitalization matrix. Finally, it identifies possible opportunities for boosting the digital economy to pursue quality-oriented economic growth and regional integration in the Asia-Pacific region by China’s digitalization.

 

A New Round of Digitalization: Characteristics and Elements

Information and Communication Technology (ICT) plays a crucial role in digitalization as the ICT is often used and developed as a part of the process of ongoing adoption of digital technologies to change the economy and society. Since the 1950s, four generations of computers have evolved. Each generation reflected  hardware changes in size and capability enhancements in computer operating systems. Primarily due to the dramatic improvements in computer components and manufacturing, computers today can do more than the largest computers of the mid-1960s at about a thousandth of the cost. Furthermore, the technological progress of ICT in the last several decades is much faster than we expected. The breakthrough in the ICT in the last decade results in the emergence of smart digital technologies such as Artificial Intelligence, the Internet of Things (IoC), Cloud Computing, Cyber-Physical Systems and Big Data, which has launched a new round of digitalization. For example, computer scientists began tinkering with AI in the 1950s, but it is only in the last decade that AI has been realized when new applications were able to be unlocked thanks to hardware developments, including faster processors and more abundant storage, larger data sets, and more capable algorithms. The smarter digital technology blurs the boundary among the physical, digital and biological world, which is one of the most prominent features in the current digitalization as Schwab (2017) called it as the Fourth Industrial Revolution. In this way, digital technology diffuses into every corner of our social and economic life, enhancing the potential of individuals, enterprises, industries, and government within the whole economy.

 

Understanding the Status Quo and Trend of China’s Digitalization

Overall, although China’s digital transformation has been steadily unfolding, the main progress happens on the consumption/application side rather than the production/physical side. For example, due to the emergence of digital giants like BAT (namely Baidu, Alibaba, and Tencent) and the prosperity in e-commerce, it is widely recognized that China represents one of the leading and critical forces in digitalization globally. The vast market demand has stimulated the booming development of China’s digital economy, but it also causes the digital transformation to concentrate on the consumer end and the application end. Zhang (2018) compared the digitalization between China and South Korea, finding that China only gained a prominent advantage over South Korea in terms of digitalization of trade and consumption but lagged far behind South Korea in digitalization in the process of manufacturing. More specifically, China accounts for a more significant portion of export in ICT goods than that of South Korea. Also, almost 23% of total Chinese retail sales are relative to e-commerce in 2017, just seven percentage points higher than that of South Korea. However, the robot density in China is 68, just around one-tenth of it is in South Korea. Concerning the ICT manufacturing and services expenditure on R&D as a percentage of GDP, the level of South Korea is four times higher than that of China.

     

      Figure 4  Colored digitalization matrix using data from China and South Korea

               

 Source: Zhang (2018).
Note: The element in red represents China has more advantage in that area, and the blue ones indicate the opposite situation. The darker the color implies the more sizeable relative gap of digitalization exists between China and South Korea.

 

The Implication of China’s Digital Transformation for the Asia-Pacific

[D]igital economy may provide incentives and opportunities to strengthen economic cooperation. It is no doubt that profiting from innovation is the ultimate incentive for any entities regardless of what the type of innovation is and what the tool we utilize. In the era of the digital economy, the value-capture problem for innovators in the digital economy involves some different challenges from those in the industrial economy, with the dynamics of platforms and ecosystems being important (Teece 2018). Thus, we should create an open, inclusive, diverse, and fully interactive ecosystem based on the platform in order to take advantage of the network effect, scale effect, and the economy of scope. Furthermore, smart digital technology enables us to realize the instant interaction and self-adaption to eliminate the uncertainty, which lowers the threshold of regional cooperation for SMEs and underdeveloped economies. The incentive and opportunities brought by the digitalization will have prominent influences on regional integration through digital trade and logistic facilitation. Considering the limited scale of market and lack of access to the international market for some economies in the Asia-Pacific, it is somewhat difficult for them to exploit the opportunities of economic cooperation.
The unique advantage that China possesses may suggest that China’s digitalization can be an opportunity for the Asia-Pacific to cope with the impact of the digital economy mentioned above. As the second largest economy and the growing mid-class, China owns one of the most huge and promising markets with increasing potential all over the world. Also, China regards the digitalization as one of the top priorities to achieve the quality-oriented economic development. Especially in recent years, the new round of digitalization stepped into a new stage, aiming to speed up digitalization towards production/physical side. The significant improvement in digitalization in the dimensions including factor, industry and governance demonstrate China can help the other economies to overcome the sustained challenges in digital transformation and leverage the opportunities regarding economic cooperation. For example, China has established various funding mechanisms like AIIB, Silk Road Funds, and other long-term cheap loans, all of which can support the construction and interconnection of digital infrastructure. The Chinese digital giants like BATJ (namely Baidu, Alibaba, Tencent, and JD) can also play a more significant role in facilitating cross-border e-commerce in many ASEAN countries. Even in the clouding service, Alibaba is competent to build an ecosystem including more than 8,000 companies and meet their demands in time with its leading technologies. Among over a thousand smart city pilots have been launched across the world, China is home to half of these cities, amounting to a staggering 500 pilots. It provides significant opportunities for the Asia-Pacific economies with leading capabilities in this aspect to profit from their leading technologies and abundant experiences through a mechanism such as PPP contract.

Considering China’s digitalization can be regarded as an opportunity for the Asia-Pacific, I strongly recommend the economies in the Asia-Pacific should enhance cooperation on digital economy by leveraging China’s digitalization. I refer to the APEC Internet and Digital Economy Roadmap which is released in 2017 and select the promising areas including (1) Development of digital infrastructure; (2) Development of holistic government policy frameworks for the Internet and Digital Economy; (3) Promoting coherence and cooperation of regulatory approaches affecting the Internet and digital economy; (4) Promoting innovation and adoption of enabling technologies and services; (5) Enhancing inclusiveness of Internet and digital economy; and (6) Facilitation of e-commerce and advancing cooperation on digital trade.

 

 

Author’s Biography

Mingshen Zhang received his doctoral degree from Renmin University of China in 2014 and has served as the assistant research fellow in Institute of Economic Research, National Development and Reform Commission since 2015. His research interests concentrate on innovation and entrepreneurship such as technology transfer and commercialization. His work has been published in multiple journals, including Research Policy and Macroeconomic Research. He is also the author of the book, entitled Open Innovation of China’s Firms and Performance Implication within the Context of Structural Reform (2017).