The Impact of Digital Transformation on the National and Local Economy

Digital Transformation significantly affects our market economies in the West – on a national and local level. The resulting changes have an impact on the media and communication sectors, the industry and business models.

Digital Technologies, digital devices and digital infrastructure have transformed our lives at the end of the 20th century and at the beginning of the 21st century. High-performance computers, the Internet, numerous apps, intelligent machines, 3D printing and other innovations, in a way, enable us to transcend physical and geographical boundaries. Correspondingly, digital transformation proceeds inexorably. The resulting changes open the door to innovation opportunities.

Alongside the term digital transformation, we (or you ;)) frequently employ the word digitization in English. However, as some sources point out, we may distinguish between (digital transformation,) digitization and the similarly sounding word digitalization, even though they are often used interchangeably.

Digitization basically means the process of converting analog information or signals of any form (i.e. texts, sounds, voices, images etc.) into a digital form or format. Here information is encoded in bits or binary digits. A bit contains only one of two single binary values. Accordingly, it can either have the “binary value 1” or the “binary value 0”. These values, in turn, represent two distinct states (e.g. on / off, right / wrong, yes / no).

Ones and zeroes can be regarded as the ‘native language’ of computers and related devices. Simply put, computers operate or perform calculations on the basis of binary codes, in which information is processed by sequences of the two binary digits 0 and 1.

In contrast to digitizationdigitalization, at least judging from sources like Gartner IT Glossary, refers to “the use of digital technologies to change a business model and provide new revenue and value-producing opportunities; it is the process of moving to a digital business.” Similar to digitalization, according to i-SCOOP and Techopedia, the term digital transformation is predominantly associated with the business world:

“Digital transformation is the profound transformation of business and organizational activities, processes, competencies and models to fully leverage the changes and opportunities of a mix of digital technologies and their accelerating impact across society in a strategic and prioritized way, with present and future shifts in mind.” (This quotation is taken from i-SCOOP.)

Yet, digital transformation additionally entails changes in society as a whole.

Appropriately enough, the aforementioned ‚IT education website‘ Techopedia comes up with this basic definition:

“Digital transformation is the changes associated with digital technology application and integration into all aspects of human life and society.

It is the move from the physical to digital.”

To a certain extent, digital transformation affects every group in society on a national and local level. Likewise, it has, of course, a huge impact on the national and regional economy.  This is due to ‚unique‘ economic properties that are linked to digitization or digital information.

Other Laws Apply to Digitization

While our lives and all physical objects are subject to natural laws, ‘normal’ or ‘classical’ laws do not really apply to digitization. As opposed to everyday commodities or goods, digital information is, so to speak, “not used up” and can be reproduced very cheaply.

The economists Erik Brynjolfsson and Andrew McAfee illustrate these as well as other properties or aspects of “the digitization of just about everything” in their acclaimed book The Second Machine Age (2014). In this context, they rely on Gordon Moore’s Law. With respect to this law, the amount of computing power doubles every two years.

If we follow the two authors, computing power has increased exponentially (or incredibly fast). For the last decades, Computer devices, thus, have been having a higher processing speed, storage capacity, download speed and energy efficiency. Simultaneously, they have become smaller, lighter, denser, cheaper and, ultimately, affordable to the general public.

Considering the prospect that in the future the limits of miniaturization will be reached, experts (including Moore himself) have been expecting the end of Moore’s Law. Moreover, a drying up of computing capacity has been predicted. However, Brynjolfsson and McAfee make us aware of particular “engineering detours.” That is, people in the computer industry have found ways to circumvent possible physical limitations or boundaries.

At any rate, the exponential growth of computing power results in far-reaching consequences for our market economies in the West. Already now the effects are more than evident, when we look especially at the communication, media and service sectors.

New Ways of Economic Transactions – The Effects of Digital Transformation for Our Market Economy

We can infer from the previous part and other statements by scholars that because of digital transformation ‘economic transactions accelerate’, while, at the same time, ‘the transaction costs drop’. Since today’s mobile or digital communication also provides the opportunity to retrieve information at any place within seconds, supply and demand meet each other in digital media with increasing frequency.

Broadly speaking, many of us nowadays not only read the news on the Internet but also carry out banking and purchase transactions online. As a result, at present, new markets emerge that, in a sense, transcend traditional geographical boundaries. These emerging markets lead to a continuous ‘displacement’ of work. Apart from these markets, modern forms of work develop besides new business models and ways of transactions.

Through file-sharing sites, services via app, a variety of online offers and, for example, the possibility to produce an item with the help of a 3D printer, certain social and economic boundaries are currently blurring. Among them are the boundaries between consumers and producers, dependent work and self-employment as well as between public and private goods. All these issues emphasize the ongoing changes in the economic world, which, needless to say, also encompasses manufacturing or the industry.

Another Industrial Revolution?

The manufacturing sector is now adapting to a combination of production methods with highly modern information and communication technologies. Precisely this fusion of production with state-of-the-art technologies and the computerization of manufacturing take centre stage, for example, in connection to the project and platform Industrie 4.0, which is part of the high-tech strategy of the German government.

With reference to the name Industrie (or, in English, Industry) 4.0, what is forecast is nothing less than a fourth Industrial Revolution. But is another revolution in the industry imaginable in the very near future? Answers to this question may give promising ideas concerning modern industrial manufacturing and concepts of a smart factory, as it is called.

Such concepts particularly play a significant role for the traditional industrial locations in the West. According to IFS – a multinational provider of enterprise software -, main features of a digitalized factory of the future will include a changed culture of manufacturers, a more flexible adaptation to shifts in the market and growing collaborations with universities.

Interestingly enough, future factories will distinguish themselves by increasing localization. Hence, they will divide into more and smaller facilities, so that local resources can be accessed faster.

The Chances of Regional or Local Areas in a Digitalized World

Despite a continuous displacement of work and a shift of economic activities into digital networks and digital media, regional areas including municipalities remain important in a digitalized world. A few studies, for instance, indicate the still existing significance of the distance between places and the importance of local or regional locations in online trade.

Furthermore, some economists and reports suggest that, as far as economic activities are concerned, there are opposite trends to an ever-growing globalization – regionalization and urbanization. These processes pose great logistical challenges.

To increase their attractiveness, regional or local areas require flexible, future-oriented framework conditions for the development of new job opportunities, services, and business models as well as for the founding of startups. Other determining factors are the willingness to new collaborations of companies and cooperations between economic organizations and specific social groups.

Means to foster such cooperations are digital platforms. Such digital platforms – in addition to network activities on and offline – allow for exchanges of ideas, further education and self-improvement.

In general, regional or local companies should lay the foundations of good working conditions for employees. At this point, it is worth mentioning, for example, possibilities to reconcile work and family responsibilities and to work from home. Regional or local companies should also aim to create a productive working atmosphere / environment (e.g. coworking spaces). Prerequisites are creative strategies, digital literacy, an adequate physical / technical infrastructure and an easy access to high-speed internet.

Sources and Further Reading

Bell, David R. Location Is (Still) Everything: The Surprising Influence of the Real World on How We Search, Shop, and Sell in the Virtual One. Boston, New York: New Harvest, 2014.

Brynjolfsson, Erik, and Andrew McAfee. The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies. New York, London: W. W. Norton & Company, 2014. 

Cole, Tim. Digitale Transformation: Warum die deutsche Wirtschaft gerade die digitale Zukunft verschläft und was jetzt getan werden muss!. Munich: Verlag Franz Vahlen, 2015.

Kaczorowski, Willi. Die smarte Stadt: Den digitalen Wandel intelligent gestalten. Stuttgart (et al.): Richard Boorberg Verlag, 2014. 

Oermann, Nils Ole. Wirtschaftsethik: Vom freien Markt bis zur Share Economy. Munich: Verlag C.H. Beck, 2015.

Ritter, Helge. “Möglichkeitenräume der Oberflächenwelt.” Interview. Wachstum im Wandel: Chancen und Risiken für die Zukunft der Sozialen Marktwirtschaft. Ed. Bertelsmann Stiftung. Gütersloh: Verlag Bertelsmann Stiftung, 2016. 116-127.