Development strategies for middle-income countries in a digital world – impacts from trade costs, data and innovation policies - Jörg Mayer

The digitalization of economic activities, combined with a secular slowdown in the growth of global output and trade, reduces the potential of traditional export-oriented manufacturing as a development strategy. This paper takes a trade economics perspective to outline a possible response to the changed nature of industrialization. The outlined response currently applies mainly to middle-income countries but deserves attention also in longer-term development strategies of low-income countries.

The paper argues that digital technologies affect trade costs through various mechanisms, which apply differently to manufactures and services and determine decisions of multiproduct firms on what to produce for what market. Emphasizing big data analysis of customer preferences as an input to manufacturing, the paper finds that (i) industrialization and services-oriented development strategies are complements, rather than substitutes; (ii) data on customer preferences are an asset for developing countries; and (iii) data governance, which harnesses the increasing dependence of manufacturing on data, and innovation policies, which give greater importance to indigenous innovation, crucially augment the potential of industrialization as a development strategy in a digital era.

Working Paper