What it is.
In simplistic terms, the digitalization of the economy is a shift from physical to digital media, from offline to online. It is a global process that includes all sectors and segments of the population.
Why do we need it?
The digital economy contributes to higher productivity, greater prosperity, booming IT technology and, as a result, economic prosperity.
Prerequisites for the Digital Economy
These days there is a massive change in communications and information dissemination. All spheres of life are in some way related to digital technology. Most countries in their development are faced with the need for digitalization in politics, economics, culture, social processes and others.
At every stage of its development, the economy has been in a sense a digital space: economic terminology is related to numbers, and it is only possible to express the results of doing business by means of numbers. For example, such terms as profit, loss, income, expense, tax base, increase (decrease) in inflation, volume of GDP and many others are used. At the same time we operate with numbers.
Any numerical data is processed and documented. The results are used to develop and approve the country’s socio-economic policy plan. As a consequence of the implementation of this plan, the state’s finances are developed.
At the current stage of development of digital communication systems, a progressive information environment is being formed. Its basis is as follows:
- digital currencies are used;
- economic relations are moving to a virtual basis;
- the need for extensive transportation infrastructure decreases;
- business costs are going down;
- traditional markets are disappearing, etc.
The pioneer of the digital economy theory is Nicholas Negroponte. This computer scientist from the United States wrote the book Being Digital in 1995. The translation of the title is digital existence. The book formulates the concept of the digital economy.
In the last decade of the twentieth century, digital terms began to be used extensively in the legislation of a number of countries. By the beginning of this century, the spread of information and communication technologies led to the emergence of regulations. For example, the Okinawa Charter on Global Information Society and the Plan of Action of the Tunis Commitment were adopted.
These and other documents began to define the principles of development of the economic, socio-political and spiritual spheres of post-industrial society.
What is the Digital Economy Today
The concept of digitalization (or digitalization) refers to the transition to modern models and modes of action that are based on information technology. Examples include communication via video and messengers, the realization of the idea of a smart city, and the transition to electronic document management. Citizens are increasingly using the Internet for online consultations with specialists and shopping.
In simple words, the definition of the digital economy is economic activity based on the creation, dissemination and application of digital technologies, as well as related products and services. The development of the digital economy primarily affects:
- the way companies work;
- The way people live, get an education, and work;
- ways of communication of the state and citizens, including the provision of meaningful services.
The number of innovations is increasing, and fundamentally different business management models and new ways of implementing investment strategies are being launched. The financial industry is a leader in digitalization, which is evident in the emergence and development of
- online banking;
- electronic payments;
- crowdfunding;
- scoring models for assessing credit risks;
- investment robot-advisors;
- cloud storage;
- cryptocurrencies, blockchain;
- P2P lending.
Businesses are using digital technology to manage, monitor and analyze their businesses, as well as sell their services or goods. Most financial products can be accessed online, such as taking out a loan, paying a bill, or investing money.
Society is used to being able to pay taxes and make payments on a utility bill using a smartphone. To get a loan, all you have to do is go to the bank’s website and leave an application. It is possible to buy shares online. The availability of the Internet allows you to manage your finances regardless of place or time.
All economic activities conducted through the internet are an example of the digitalization of the economy. Every company that seeks to conduct its business online (in whole or in part) can be called digital. The digital economy is being shaped by all those businesses that run their businesses digitally, provide services or sell goods online, and apply digital marketing.
Examples of digital companies are Yandex. Cab or Uber . They use innovative technologies to interact with consumers. The organization of service in these companies requires much less cost compared to the traditional system, as a result, for the client a trip by cab becomes cheaper.
Sometimes companies that previously worked in the traditional way turn to the digital economy. An example is the Pyatyorochka chain of stores. Up to 70% of funds were spent on service. Realizing this, the administration switched to new technologies, implementing digital transformation with the help of its partner company IBS. This improved the supermarket chain’s business model.
Pros and Cons of Digitalization Economy
Digitalization is progressive. It has a positive impact on the development of relations in society and increases the convenience of transactions for all participants: individuals, small businesses, medium and large companies, and government agencies.
Through the internet, it is possible to find many goods and services, pay for them online, and get them in a convenient location. This saves time and effort. There are also other benefits of digitalization:
- Focusing on the needs of the buyer, providing a choice of the most appropriate options of goods and services at lower prices.
- Facilitation of access to obtaining services, both for individuals and legal entities. Supplier directly, without the involvement of intermediaries, interacts with the buyer, using electronic and information technology. It is possible to buy products and execute documents via the Internet.
- There is an active creation of new startups. Investments in projects related to the development of digital services and their software are growing. As a result, there are new jobs and productivity is growing.
- For those companies that have gone digital, there is a decrease in costs. This happens because marketing, sales, logistics and transport costs are decreasing, and at the same time, direct sales are increasing.
- Business becomes more transparent because in the digital economy, transactions are conducted online and the tax authorities receive information about purchases and sales. This prevents black accounting and helps fight corruption and dishonest schemes.
- It increases the competitiveness of a country’s production and expands the geographic boundaries of doing business.
When opportunities increase, so does risk. The main problem of digitalization of business is the leakage of information and legal restrictions in some industries. If we talk about the disadvantages of the digitalization of the global economy, they are as follows:
- New opportunities for fraud. It is necessary to ensure information security, protecting data from the legal, technical, physical and cryptographic sides.
- Increased unemployment rates. Despite the emergence of new professions and jobs, a number of professions and entire industries find themselves unclaimed and are gradually disappearing.
- The technological gap. Sometimes it is impossible to ensure a complete digital transition due to a lack of necessary developments.
- Digital divide. Not everyone has permanent access to the Internet yet, and even creating an account for public services is becoming a problem. It is too early to talk about universal digitalization.
- Digital slavery. Active use of the Internet limits a person’s freedom. His personal data becomes accessible, his online activities and interests are tracked. A person becomes an object of business, his slightest attention to anything is used, abuses are not uncommon.
7 Main Tools of Digitalization Economy
Modern information and communication technologies all have more or less to do with the digital economy. The most important of these are listed below.
Cloud Computing.
Cloud computing is one of the information and technology concepts. This model provides access to a pool of configurable computing resources. After signing a contract with a provider, the user gets access to a personal account and can access remote resources and servers. You pay only for the capacity you actually use.
These resources may be data networks, storage devices, servers, applications, services and their combinations. That is, cloud computing provides the user with computer resources as an online service.
Compared with the classical IT architecture, cloud technologies win in the following ways:
- save on computing power;
- they are fault-tolerant;
- provide high speed of data processing;
- save on licenses and software;
- cheap server space;
- available (limited only by Internet availability);
- are resistant to DDOS-attacks.
It is impossible not to note that the contribution of cloud technology to the foundation of the digital economy is enormous, one could even consider it decisive. This contribution contains both technological, economic and ideological components.
As a result of the development of the concept of cloud technology, new concepts (e.g., production on-demand, or production on demand), new types of services (software as a service, software as a service) have emerged. This has become the idea of many new business models and the principle of interaction in the digital economy.
Big Data.
Big Data is a system of approaches, mechanisms and methods for processing arrays of structured and unstructured data and obtaining results acceptable for human perception. The sheer volume, variety and constant updating of data requires the use of special automated tools for its processing. Standard ways of working with information are ineffective here.
In other words, Big Data technology is a mechanism for statistics, analysis, forecasting and decision-making based on large volumes of material.
This concept of information technology began to develop intensively in 2010. Now there is a wide variety of methods and software products for Big Data processing developed by IBM, Oracle, Microsoft, Hewlett-Packard, EMC, Apache Software Foundation (HADOOP) and other companies.
Big Data methods are needed, for example, for sources of information such as:
- User activity logs on the Internet;
- GPS-signals from vehicles for a trucking company;
- information on all transactions of customers using bank services;
- information on all purchases at a large retail chain;
- records from the entire set of city IP video cameras;
- information from sensors of a large enterprise equipped with Industrial Internet technology, etc.
Data sources are constantly increasing, so the demand for data processing technologies is growing.
Internet of Things
This concept combines a large number of technologies. It is based on equipping all appliances and things with sensors and connecting them to the Internet for remote tracking, monitoring and control in real time, including in automatic mode.
By now there are two big trends:
- IoT- Internet of Things, which sounds like the Internet of Things in Russian;
- IIoT – Industrial Internet of Things.
- These areas use similar tools, the difference is in their purpose. The Internet of Things is used to collect a variety of data, which will later be used for forecasting and creating models. The Industrial Internet of Things is designed to automate production through remote control using sensor readings.
Analysts at Ovum, Machina Research and Nokia predict that by 2025 the number of industrial connected devices will range from 20 to 200 billion units.
Many countries are developing control technologies, including interests in their virtual use, in line with government development programs and applications of the digital economy. These are Industrie in Germany, Advanced Manufacturing Technology in the U.S., the strategic concept of manufacturing development in China, which emphasizes quality, innovation and implementation of advanced technologies, Innovate UK in the UK, National Digital Economy in Australia.
In Russia, there are also projects to form and implement Internet of Things platforms and develop applied services to use this concept. The Internet Initiatives Development Fund (IIDF) has developed a roadmap for IoT development and established the Internet of Things Association. The Technical Committee for Standardization on Cyber-Physical Systems was created as part of Rosstandart. The development and adoption of IoT standards has begun.
Cognitive Technology
This name is related to the Latin word cognitio, to know. Thus, cognitive technologies work with our cognition: they evaluate and analyze attention, brain activity, and state, i.e. they seek to understand the person.
The promising directions for the development of these technologies are as follows:
- Development of cognotropic drugs that increase human capabilities, such as stimulating memory and intelligence;
- Creation of cognitive assistants – systems of adaptive assistance in various situations (for example, access control, autopilot);
- virtual brain-computer interfaces – creating intuitive ways to control computer systems.
According to the analytical company IDC, the growth of the world market of cognitive technologies will average 55% per year. More than 40% of the market will be occupied by software tools, such as applications that perform material analysis, machine learning, hypothesis generation, navigation, etc., as well as cognitive platforms that will develop intelligent programs.
The banking industry will account for about 20% of the global volume of cognitive systems purchases. In this sphere, they are used to detect fraudulent schemes, eliminate threats, automatically analyze and develop recommendations. The next largest sectors in terms of purchases are trade, where cognitive systems are used by automated customer service agents and merchandising, as well as healthcare, where these systems are used for diagnostics and treatment.
ood artificial intelligence is not currently available and is the subject of speculation as to whether it is possible in principle and what dangers might arise if it were to be created.
Intelligent systems already exist today. One example is IBM’s Watson supercomputer. The cloud cognitive system Watson is used in the USA, for example, it conducts dialogues with users in automatic mode at the USAA (financial services to the military) website, it makes decisions at the medical insurance company WellPoint.
Virtual Currency
Virtual, or digital, currency is money that has no tangible embodiment but is used as a full-fledged monetary sign.
Cryptocurrency
This is a type of virtual currency. Its issuance (called mining) is based on the use of cryptographic algorithms (ciphers) in a specific way.
Blockchain
BlockChain is a distributed (i.e., centerless) database that contains information about all transactions made by system participants. The information is stored as a chain of blocks. This system makes it difficult to falsify information that is stored in this way.
Blockchain is used in virtual currency systems to issue monetary units, transfer them, and store the history of these transactions.
Soon the companies and states where there is a high level of digitalization will have competition in the global market. The world’s leading companies are already digitizing many areas of the economy, investing in data centers, and implementing systems to store customer and financial transaction data.
The use of digital tools increases the customization of production, reduces the time from the development of an advanced idea to the marketing of the finished product, and makes it possible to efficiently adapt products to consumer needs.
Conceptual Directions Of Digitalization Economy
Platform Concept
A new business model, inherent only in the digital economy, is the digital platform. Its content is to provide the public and companies with a service to regulate the activities of the various market participants.
The platform provides participants with a number of conveniences, automatically generates trust ratings between them and, most importantly, helps the seller and the buyer of a good/service quickly find each other, complete a transaction and make settlements.
The work of digital platforms makes production and exchange processes faster and cheaper, eliminates intermediaries, and greatly increases the efficiency of markets and labor productivity.
In addition, most platforms are not geographically restricted, and it is possible to use their services almost anywhere in the world. Examples of such platforms are Uber, Airbnb, Amazon, Alibaba, and many others.
Industry 4.0 and the Smart Factory
The platform concept is adapted mainly for the needs of trade and logistics. The Industry 4.0 concept and its technological core, the Smart Factory, have become a conduit into the digital realm for industry.
Features of the Smart Factory:
- All segments are automated as much as possible.
- The contribution and importance of R&D (research and development) for serial production is almost the same as the importance of R&D for complex technical products on individual orders.
- Production is easily transformed, its lines are adapted to rapid renewal and restructuring. Each link and subsystem is autonomously controlled by the Industrial Internet of Things.
- All links of the smart factory work cohesively at all stages of the product cycle and are regulated by online feedback streams.
- PLM management. All stages of the product lifecycle are managed, including interaction with logistics, service centers and feedback.
Cyber Physical System Concept
This technological concept approaches the meaning of a smart factory. It represents a unified system of computing resources and physical processes.
Cyber-physical systems include sensors, equipment and information systems, which can cover both individual enterprises and their complexes, when the units included in the complex implement successive redistributions in value chains.
Risks of the Digitalization Economy
The digitalization of the economy and the accompanying economic currents create risks of negative shifts in the structure of the economy. This is mainly reflected in the fact that automation and robotics will result in the loss of a large number of actual jobs.
Examples have already emerged of how the development of large agglomerations and the increase in the share of the IT industry have led to a reduction in the number of jobs and, as a result, to a deterioration in the quality of life of a significant number of citizens.
In the U.S. in particular, data suggest that one job in the digital economy is responsible for up to eight jobs in the service sector. As a result of these dynamics, social problems are on the rise, even in advanced economies.
So what can mitigate the risks of a digital economy? Apparently, it must be a change in the relationship between business and government. This applies to both developed and developing countries. If, as a result of development, the profits of large technological companies will increase, but the quality of employment will decrease, the solution is to raise corporate taxes and increase social support for the population of the country.
This should reach the level of global trends. Today’s arguments about a shorter workweek or an unconditional basic income paint a utopian picture of an ideal world in which all citizens’ needs are met. But in reality, there is one basic problem: To arrive at a complete digital restructuring of the economy requires a huge investment that cannot come “out of nowhere.
Conclusion Article Review on the Digital Economy State
In conclusion, the state’s digital economy is growing and expanding rapidly. While there are many positive aspects to this growth, it is important to be aware of the potential drawbacks as well. But overall, the positives outweigh the negatives and businesses should continue to invest in the state’s digital infrastructure. We will continue to monitor the situation and provide updates on our website. If you have any questions or comments, please feel free to contact us. Thank you for reading!