[EAI Working Paper] Global Political Economy Order Series After the COVID Crisis ⑤_ COVID-19 and the Digital Economy: Perspectives on Global Value Chains and Developing Country Development

I. Introduction

Since the mid-1990s, with the widespread adoption of information and communication technologies (ICT) such as PCs, mobile phones, and the internet, new companies and business models have emerged, while existing industrial structures and economic activities have undergone transformations. The evolving economic landscape brought about by new ICT devices is referred to by various names, including the network economy, digital economy, and data economy. As the development of ICT and services like 5G, the Internet of Things, and artificial intelligence accelerates, and as these technologies penetrate the economy more rapidly, comprehensively, and deeply, discussions surrounding new economic paradigms such as Industry 4.0 and the Fourth Industrial Revolution are also actively taking place. Whatever the new economic landscape is called, it is closely related to the emergence of new technologies, and current technology and the economy are mutually reinforcing each other's transformations.

The spread of COVID-19 has accelerated the advancement of the digital economy. As direct face-to-face interactions decreased due to COVID-19, online activities based on digital technologies have surged. Characterized by unmanned operations, remote work, and virtualization, the post-COVID-19 era is witnessing a rapid transition to the digital economy in daily life as well as in various production and service sectors. The unprecedented rise in social acceptance of digital technologies to maintain non-contact economic activities has lowered barriers to adoption and spurred the emergence of diverse services to meet market and societal demands. Although the digital transformation and the spread of the new economy were already underway before COVID-19, the pandemic has eased psychological and institutional barriers hindering the full adoption of digital technologies, thereby promoting the digitalization of the global political and economic order.

Countries and corporations in the United States, China, and Europe have been striving to understand the characteristics of the evolving economy and to seize leadership within this new trend. They are seeking to escape the economic recession caused by COVID-19 by leveraging digital transformation and the expansion of the new economy as breakthroughs. Meanwhile, the US and China are engaged in fierce competition in areas crucial to the digital economy, such as 5G, semiconductors, and artificial intelligence. They are also vying for control over platforms and data, which are considered fundamental frameworks of the new economy, and are presenting opposing viewpoints on the norms governing the emerging economy. Middle powers, including South Korea, are also struggling to adapt successfully to these changes and avoid being left behind amidst the emergence of the digital economy and the crisis brought on by COVID-19. Most current discussions related to the development of digital technologies and economic change focus on defining the fundamental characteristics and identity of these ongoing transformations, such as 'platforms' and 'data,' or analyzing the inter-state conflicts that arise from key issues like 'data sovereignty' during the course of these changes.

This paper aims to examine the development of the digital economy and the new economy before and after the spread of COVID-19, and the resulting changes in the global political economy from the perspective of global value chains (GVCs). Specifically, it will explore the changes occurring in the development and status of developing countries within the global economy and the issues that are emerging. The topic of developing country development within the discourse on technological and global political-economic change is crucial for the sustained growth of the world economy. Nevertheless, discussions on the implications of the digital economy's advent for the development of developing countries have not been sufficiently conducted. Currently, with the acceleration of digital transformation and the spread of the new economy due to COVID-19, the widening income and asset gaps in domestic and global economies have become a prominent issue. Amidst the atmosphere of rushing to present new strategies and policies for survival and success in technological innovation and economic change, this paper pauses to reflect on the significance of the digital economy's transformation, accelerated before and after the spread of COVID-19, from the perspective of developing countries, which are home to a large portion of the world's population. Discourse on developing country development has emphasized the importance of sustained growth for developing countries from an economic standpoint, presented various practical strategies while asserting the moral justification for support, but has faced difficulties in implementation. It is expected that a concrete examination of the practical challenges faced by developing countries due to the spread of COVID-19 and the advancement of the digital economy can serve as a starting point for raising awareness and seeking alternatives.

II. Background: Digital Economy, Global Value Chains, and COVID-19

1. COVID-19 and the Digital Economy

Various concepts have been proposed to define the evolving economy due to the spread of ICT and services, including the digital economy, new economy, internet economy, web economy, network economy, and data economy. This study selects the concept of the digital economy. In 1994, Tapscott popularized the term 'digital economy' in his book 'The Digital Economy: Promise and Peril in the Age of Networked Intelligence' (Tapscott 1994). While he discussed how digital technologies, represented by the internet, were transforming the economy, he did not explicitly define the digital economy. Subsequently, international organizations such as the OECD and the World Bank have defined the digital economy in various ways. The OECD defined the core of the digital economy as 'the digital economy enables and executes the trade of goods and services through electronic commerce on the internet'.[1]The EIU (Economist Intelligence Unit) presented the digital economy as 'one that can provide a high quality of ICT infrastructure and harness the power of ICTs to benefit consumers'.[2]Initially, the digital economy was understood in a narrow sense, limited to the provision of various ICTs and services and e-commerce. Over time, the trend has shifted towards a broader understanding that encompasses the use of digital technologies across diverse sectors such as finance, transportation, manufacturing, education, healthcare, and media (Bukht and Heeks 2017).

The socio-economic changes brought about by COVID-19 can be summarized by the phrase 'acceleration of the digital economy' (Oxford Economics 2020), with digital economy activities based on digitalization and online presence, driven by digital technologies, experiencing rapid growth. While sales in sectors such as aviation, cinema, amusement parks, and large supermarkets have plummeted, online shopping and delivery services have continued to grow. According to one statistic, sales in sectors like aviation, cinema, and amusement parks decreased by 60-90%, while online shopping increased by 30% (Oxford Economics 2020).

This study considers the changes in the digital economy's value chain with a broad definition of the digital economy, dividing it into two main areas. The first is the sector where digital devices are utilized in existing manufacturing and service industries, referred to as digital transformation. This includes manufacturing sectors like automobiles, apparel, and footwear, as well as distribution and media industries, all of which have been transformed by the widespread adoption of ICT. This section examines how global value chains are changing in this sector, how the pace of change has accelerated post-COVID-19, and its impact on developing countries. The second area is the newly emerging sector driven by ICT and services. This includes sectors that lead digital technology innovations such as mobile phones, artificial intelligence, the Internet of Things, drones, and virtual reality, and produce related products or create and provide services based on digital devices like e-commerce, search engines, and social networking services. This sector is often referred to as the new economy. This section investigates how global value chains are being formed in this sector, the changes occurring post-COVID-19, and their impact on developing countries.

2. COVID-19 and Global Value Chains

With the acceleration of globalization since the 1990s, the ability to produce goods flexibly and rapidly based on the effective utilization of dispersed production factors worldwide has emerged as a key element of corporate competitiveness. The production or service provision processes, which were previously vertically integrated within firms, became dispersed across various regions globally based on functional specialization, and outsourcing became commonplace. Rather than the economies of scale inherent in mass production, economies of scope—the ability to efficiently combine dispersed production factors as needed to produce diverse goods at low cost and rapidly—became increasingly important. These production processes have been defined by terms such as Transnational Production Networks, Global Value Chains (GVCs), Global Supply Chains, and Global Commodity Chains.

Global value chains possess a hierarchical structure, whether vertical or horizontal. Functions located higher in the hierarchy, such as planning, research and development, and brand marketing, are knowledge-intensive and generate higher added value, while production processes involving repetitive manual labor occupy lower positions in the hierarchy and generate lower added value. It has generally been understood that as economies grow, they transition from structures centered on labor-intensive consumer goods industries like apparel and footwear to capital- and technology-intensive industries like steel and semiconductors, or service industries. From a GVC perspective, the notion that developed countries have exited or play a limited role in labor-intensive consumer goods industries like apparel and footwear is a misconception. To date, developed countries lead in the high-value-added segments of planning, R&D, and brand marketing within labor-intensive consumer goods industries, while developing countries undertake the labor-intensive manufacturing processes, forming a division of labor. From a GVC perspective, the economic growth of developing countries has been understood as entering an industry's value chain and then moving towards segments with higher added value. Major international organizations such as the WTO, UNCTAD, and OECD have adopted this perspective and actively utilize GVC analysis for the development of developing countries.

Global value chains have evolved into various types depending on the industry. [Figure 1] categorizes GVC types based on geographical concentration and the structure of the division of labor (UNCTAD 2020). For instance, agriculture and mining are geographically dispersed but lack a finely segmented division of labor, whereas industries like automobiles and apparel have highly fragmented and specialized divisions of labor and are relatively geographically concentrated. Industries like financial services are both geographically concentrated and have concentrated divisions of labor. From the perspective of developing country growth, the most notable type has been the value chain of manufacturing industries, such as automobiles and apparel, where the division of labor is functionally segmented. Indeed, countries that started as developing countries and have advanced to middle-income status, such as South Korea, Taiwan, and Mexico, have entered the labor-intensive segments outsourced by developed countries within GVCs, undertaking product manufacturing, acquiring technology, and gradually moving towards higher value-added segments to achieve economic development.

[Figure 1] Types of Global Value Chains (Geographical/Labor Division Concentration)

Source: UNCTAD (2020b)

It is not easy to grasp the transformations in global value chains driven by the increased use of digital devices at the individual industry or corporate level. This paper will instead focus on aspects of these changes that have implications for the development of developing countries, based on existing research. This study analyzes the digital economy by dividing it into two aspects. In the digital transformation sector, where existing industries such as steel, automobiles, apparel, and finance are becoming digitized, the focus will be on changes in global value chains due to automation and smart factories utilizing digital technologies in production processes. In the new economy sector, which has newly emerged within the digital economy, the study will examine the evolution of global value chains in the e-commerce sector and consider its implications for the development of developing countries. Due to the spread of COVID-19, discussions have increasingly focused on supply chains rather than value chains, as the stable supply of personal protective equipment, essential goods, and strategic commodities has become a major issue. This paper will also examine how value chains are being readjusted as countries prioritize supply chain security post-COVID-19, and consider its impact on the development of developing countries.

III. COVID-19 and Digital Transformation & New Economy Expansion

1. Digital Transformation and Global Value Chains

1) COVID-19 Spread and Global Value Chains

Following the spread of COVID-19, changes in global value chains can be discussed in three aspects through the example of the apparel industry (Castañeda-Navarrete et al. 2021). First, due to the spread of COVID-19 infections, supplies from major apparel manufacturers located in China, as well as Bangladesh, Mexico, and Turkey, significantly decreased. Second, apparel manufacturers in Cambodia and Vietnam were not significantly affected in the initial stages, but their supplies decreased due to the spread of infection as intermediate goods could not be supplied from China. Third, demand sharply declined as lockdowns were implemented in Europe and the United States. However, the short-term decrease in apparel demand and supply due to COVID-19 persisted from February to August 2021, as shown in [Figure 2], and began to recover thereafter. In the long term, the trend of automation and reshoring, which had been ongoing before COVID-19, has been noted as influencing the global value chains of the apparel industry. However, despite the shock of COVID-19, the automation of production in the apparel industry has not progressed rapidly due to capital constraints and technological limitations. Instead of reshoring, where production facilities return to developed countries, nearshoring is occurring, moving production to adjacent regions closer to large markets, such as Mexico and Turkey (Seric et al. 2020).

[Figure 2] Apparel Supply Trends Before and After the Spread of COVID-19

Source: (Castañeda-Navarrete et al. 2021)

Following the spread of COVID-19, many countries introduced policies to secure the supply chain safety of personal protective equipment, essential goods, and strategic commodities, leading to predictions of value chain contraction and readjustment. During 2020-21, the WTO predicted a 13-39% decrease in trade, and UNCTAD projected a 30-40% drop in foreign direct investment (Pinna and Lodi 2021). However, in most countries, supply chain security was addressed by securing the volume of key components or goods. Approximately a year and a half later, excluding the initial six months of disruption, it appears that the changes in global value chains due to COVID-19 have not proceeded as rapidly as anticipated. Reshoring has also not occurred as quickly as expected. Instead of introducing new 3D printing or automated machinery to ensure supply chain security, countries that have already actively adopted automation are showing a trend of accelerating it further (Seric et al. 2020). This is because automation is difficult to implement in isolation for certain components or production processes, and skilled labor is required for the introduction of automated equipment. Thus, while COVID-19 had a short-term impact on global value chains due to a sharp decline in supply and demand, supply and demand have gradually recovered, and the ongoing trends of automation and reshoring have continued to progress rather than change drastically due to COVID-19. This section examines digital transformation, focusing on automation, along with the trends observed before COVID-19, and its implications for the development of developing countries.

2) Automation, Reshoring, and Global Value Chains: A Developing Country Perspective

With the advancement of the Fourth Industrial Revolution, production processes have become increasingly mechanized and automated, transforming labor-intensive manufacturing sectors into capital- and technology-intensive ones (Bae Young-ja 2017). Developed countries such as Germany, the United States, and Japan have pursued 'Industry 4.0' strategies centered on automating production processes using various ICTs, and extensive discussions have taken place regarding the specific content and implications of smart factories. To date, discussions have primarily focused on domestic labor market changes and unemployment issues. In a globalized production structure where goods are produced internationally, and developing countries undertake the labor-intensive parts of production based on low wages, the emergence of Industry 4.0 strategies and smart factories in developed countries inevitably has significant implications for the development of developing countries, necessitating substantial adjustments to their economic development strategies and industrial policies. Despite this, discussions and problem-posing regarding the changes brought by the Fourth Industrial Revolution to developing countries and their responses are not yet actively underway.

While the development of ICT and changes in manufacturing production methods have been discussed for a considerable time, they have gained more attention with the advent of the Industry 4.0 concept. Industry 4.0 is understood as a production paradigm that enables flexible production systems through the interconnection of machines, people, and internet services, allowing for mass customization and mass production. Industry 4.0 involves a wide array of ICT-related technologies, including the Internet of Things, enterprise software, location information, security, cloud computing, big data, 3D printing, and augmented reality. Previous factory automation meant that production facilities operated passively according to pre-programmed instructions, whereas Industry 4.0 focuses on smart factories where production equipment autonomously determines its operational methods. Smart factories are production facilities that integrate ICTs such as smart memory, sensors, and augmented reality. They utilize wireless communication, the Internet of Things, and integrated production processes to enable equipment, materials, and products to exchange information and autonomously manage production, process control, maintenance, and workplace safety. Smart factories not only involve machinery but also attach sensors and memory to materials and semi-finished products, processing them according to orders. In essence, when given a command, they self-diagnose bottlenecks in the production process and operate by flexibly determining the optimal production path. Furthermore, machines read memory to autonomously analyze consumer preferences, process status, and manufacturing progress in real-time, selecting and applying the most efficient path at any given moment. This enables flexible, customized, small-batch production, allows for real-time tracking of logistics and distribution status, and facilitates tracking of product usage and recycling processes.

Although discussions on smart factories are active, data on the status of smart factories at the corporate level is limited. In the absence of abundant data on smart factory implementation, statistics on industrial robots, a key element of smart factories, are used to understand the specific status of smart factories. Strictly speaking, the utilization of industrial robots is not synonymous with smart factories themselves. However, the introduction of robots into production processes is a major component of overall smart factory operations. Data indicates that industrial robots began to be introduced in earnest in the 1990s and have surged since the late 2010s. Examining the status of multipurpose industrial robots by country and sector, China, Japan, the United States, Germany, and South Korea are among the most active users of industrial robots. Notably, as shown in [Figure 3], the automotive sector exhibits the most active adoption. The textile manufacturing process is predicted to have the highest potential for replacement by machinery due to robot utilization (World Robotics 2020).

[Figure 3] Status of Industrial Robots by Sector

Source: World Robotics (2020)

It was anticipated that the rise of smart factories in developed countries due to the ongoing Industry 4.0 would accelerate reshoring, where production is directly undertaken in the home countries, leading to the return of sectors previously outsourced to developing countries. Recent research suggests that, given the current export-import structures between developed and developing countries and the structure of global value chains, the spread of smart factories in developed countries is expected to significantly impact middle-income developing countries, particularly those with a high proportion of exports to developed countries that can be replaced by robots, such as Mexico, Turkey, and Tunisia (World Bank 2020). Considering that the least developed countries are not even integrated into global value chains, the prediction that middle-income developing countries, which are engaged in the production of standardized goods with relatively low technological or capital intensity based on low wages within GVCs, will be negatively affected by the spread of smart factories is persuasive.

Interestingly, within developing countries, the group most sensitively affected by automation appears to be the workforce with a high school education. For example, as shown in [Figure 4], a comparison of employment changes among different groups of regular and irregular workers in Mexico's automotive industry, where automation rapidly advanced between 2011 and 2016, reveals that the employment of regular workers with a high school education decreased the most.

[Figure 4] Automation and Employment Changes in Mexico

Source: UNCTAD (2020b)

However, on the other hand, some argue that the impact of smart factories is not as significant as expected. For instance, Adidas, a sportswear company, installed Speedfactories in Germany and the United States, utilizing robots and 3D printers. However, the annual production capacity was one million pairs, a very small fraction of the 403 million pairs Adidas produces, and this operation has since been discontinued. The shoes produced in smart factories are differentiated from the standardized products manufactured in countries like Vietnam and China, making the effects of reshoring or replacing jobs in developing countries minimal.

Other research argues that the spread of smart factories utilizing robots and 3D printing in developed countries increases productivity and imports, which in turn boosts demand for final products. This leads to increased demand for components and intermediate goods, thereby stimulating trade with developing countries that supply them (UNCTAD 2020b). The argument is that smart factories do not decrease North-South trade but rather increase it, which can lead to economic growth in developing countries. While there are industry-specific differences, it is true that increased automation has led to increased imports from developing countries, a phenomenon particularly evident in industries such as automobiles, plastic products, and electronics.

For example, automation began to spread in US automotive engine manufacturing plants in Detroit after 2010. Some engine components are supplied by plants in Chihuahua, Mexico, within the global value chain, placing workers in this region at risk of unemployment due to automation. However, in reality, as US engine manufacturers increased productivity through robot adoption, their demand for intermediate goods and components grew, leading them to import more parts from Mexico. Consequently, employment in Mexican parts suppliers actually increased. Furthermore, 70% of electrical wiring harnesses for US automobiles are sourced from Mexico, and these components are difficult to automate, necessitating continued imports from Mexico, thus increasing imports (UNCTAD 2020).

Furthermore, it is argued that the demand for specialized labor in areas that cannot be automated due to automation is increasing, potentially leading to a higher valuation of the labor sector. That is, in both developed and developing countries, human labor, which holds a comparative advantage over machines, is gaining prominence. New tasks and product manufacturing based on this are emerging, leading to the overall proper valuation of labor, which is referred to as the reinstatement effect (Acemoglu 2019). Indeed, in the US automotive industry, despite rapid automation and the spread of smart factories between 2010 and 2016, employment increased by 260,000 during the same period. This phenomenon can also be understood in terms of the reinstatement effect.

In summary, industries such as automobiles and electronics have evolved into global value chains since the 1990s, with globalization facilitating the dispersion of functions—planning, R&D, component production, manufacturing, sales—to optimal regions and countries for production. Within these GVCs, developed countries handle high value-added activities like R&D, advanced core component production, and brand marketing, while developing countries form a division of labor, undertaking component or intermediate goods production and manufacturing based on low wages. Developing countries have sought economic growth by integrating into GVCs, providing labor, acquiring technology, and moving towards higher value-added segments. With the advancement of ICT, the expansion of automation and smart factories in production processes has raised concerns about how this will evolve GVCs and impact developing countries. Current discussions reveal both negative and positive aspects. The expansion of smart factories carries the risk of economic difficulties for developing countries that supply components or goods replaceable by machines to developed countries, posing a significant threat particularly to middle-income developing countries like Mexico, Turkey, and Tunisia. Within developing countries, mid-level labor segments, especially those performed by high school graduates, are most sensitively affected by automation, leading to decreased employment, rather than low-wage, non-regular jobs. On the other hand, some argue that the spread of smart factories in developed countries has not led to large-scale reshoring, and the nature of products manufactured in smart factories differs from mass-produced goods in developing countries, thus having a minimal impact on economic changes in developing countries. Furthermore, some argue that the expansion of smart factories leads to increased productivity and imports in developed countries, boosting demand for goods and consequently increasing exports to developed countries for components or intermediate goods, thereby contributing to economic growth in developing countries. Optimistic predictions also suggest that increased automation could lead to a re-evaluation of the unique value and characteristics of human labor that cannot be mechanized.

It is evident that the digital transformation led by developed countries will increase the uncertainty of economic growth for developing countries. Developing countries, in particular, have lower levels of digital infrastructure and technological innovation compared to developed countries, possess relatively weaker capacities for digital transformation, and have limited resources beyond labor. In this context, digital transformation is highly likely to widen the gap between developing and developed countries. Furthermore, the relatively simple and repetitive labor that developing countries have performed within global value chains is easily replaceable by machines, making it probable that their status will diminish rather than strengthen. On the other hand, there are aspects where the digital transformation in developed countries can present opportunities for growth in developing countries. However, this is only possible if these opportunities arising from digital transformation are specifically recognized and supported by industrial policies and workforce training programs. It is confirmed that there is a need for international organizations, along with the self-efforts of developing countries, to provide more effective support for digital transformation in developing countries and their responses.

2. Digital New Economy and Global Value Chains

1) COVID-19 Spread and E-commerce

While IT hardware, software, telecommunications services, and media sectors represent expansions of pre-existing industries or services, the internet service sector, encompassing search engines, social networking services (SNS), and e-commerce, has emerged as a notable area and is recognized as representative of the so-called digital new economy. The spread of COVID-19 has led to explosive growth in e-commerce. As shown in [Figure 5] below, while sectors like entertainment and education are expected to gradually return to pre-COVID-19 levels with reduced non-contact activities and recovery of face-to-face services, e-commerce is projected to continue expanding even after the COVID-19 recovery. This section briefly examines the growth and status of the e-commerce sector before and after the spread of COVID-19, focusing on e-commerce, and its implications for the development of developing countries.

[Figure 5] Comparison of Post-COVID-19 Outlook by Sector

Source: McKinsey (2021)

Currently, out of the world's population of 7.8 billion, an estimated 4.8 billion have internet access.[3]These users are distributed as follows: 2.5 billion in Asia, 700 million in Europe, 550 million in Africa, 450 million in Latin America, and 330 million in North America. While the number of internet users is increasing in various regions worldwide, the surge in internet users in Africa and China is particularly noteworthy. With the spread of digital devices and the internet, the e-commerce market has grown explosively, forming diverse online marketplaces at global and national levels. Amazon dominates in the Americas, Western Europe, and parts of the Middle East; Alibaba is prominent in China and parts of Southeast Asia; Mercado Libre leads in Latin America. Additionally, in countries like Russia, Vietnam, Finland, and South Africa, domestic e-commerce platforms other than Amazon or Alibaba are dominant. Post-COVID-19, e-commerce has grown explosively, accounting for 22% of total retail sales (Keenan 2021). Argentina leads with the fastest growth at 79%, followed by Singapore at 71%. Regionally, Latin America shows the highest growth rate at 37%. Currently, China accounts for one-third of the global e-commerce market, and e-commerce represents 52% of China's total retail sales, surpassing offline retail.

According to UN data, Latin America, the Middle East, and Africa account for only about 3% of the global e-commerce market (Keenan 2021). It is crucial for the expansion of domestic e-commerce markets in developing countries to progress, and concurrently, for the increased participation of developing countries in existing e-commerce platforms like Amazon and Alibaba. Online marketplaces can reduce transaction and logistics costs, and importantly, allow small and medium-sized enterprises (SMEs) in developing countries to participate in global e-commerce, thereby benefiting their economic development. This section examines issues related to the expansion of e-commerce before and after the spread of COVID-19 and considers its implications for the development of developing countries.

2) E-commerce, Platforms, and Developing Country Development

E-commerce has grown around platforms that connect and facilitate interaction among numerous producers and consumers. As platforms are based on network effects, they inherently favor companies in countries leading technological innovation, such as the United States, or those with large markets, like China. Platform companies have increasingly attracted more producers and consumers by implementing supplier verification based on reputation and providing convenient payment systems, thereby rapidly reducing information and transaction costs and building trust. Consequently, e-commerce platforms have shown a tendency towards greater concentration. Research indicates that distance has become 65% less influential in trade due to e-commerce. Despite the various advantages offered by national e-commerce platforms, e-commerce has expanded globally, offering a wider variety of goods, higher quality products, and more convenient and faster payment and delivery systems, leading to increased concentration.

As exemplified by Amazon and Alibaba, these companies are evolving beyond e-commerce into platform enterprises expanding into various sectors. Amazon, which began as an online bookstore, grew rapidly through its e-commerce platform, Amazon.com, and has expanded its business areas into logistics, gaming, and streaming services for movies and music, creating what is known as the 'Amazon Effect.' This phenomenon is not limited to Amazon; most major IT companies, including Google, Apple, and Microsoft, are following a similar path. According to the World Economic Forum, digital platforms are projected to generate $60 trillion in revenue by around 2025, accounting for 30% of total global corporate revenue. Furthermore, the World Economic Forum predicts that 60-70% of new value created in the digital economy over the next decade will originate from data-driven digital networks and platforms (Lee Hyo-jeong et al. 2019).

Major platform companies worldwide, such as Amazon, Google, Facebook, Apple, Alibaba, Tencent, SAP, and Napster, are primarily located in North America and Asia. While it is true that the spread of digital devices and the internet has increased opportunities for companies in developing countries to participate in the global e-commerce value chain as suppliers and producers through online B2B or B2C markets, the concentration of these platforms in North America and Asia remains significant. For example, from late 2014 to mid-2016, 16,500 villages across 333 counties in 27 provinces in China entered the internet commerce market (World Bank 2020). In reality, there is an increasing number of instances where small and medium-sized producers in developing countries utilize digital technologies to participate in global value chains, and transactions between producers in developing countries and consumers in developed countries are growing through major e-commerce sites like Alibaba, Amazon, eBay, Taobao, and Mercado Libre.

While it is easy for developing country producers to enter through online e-commerce platforms, it is difficult to secure competitiveness within them. Even after gaining internet access for entry, producers must become familiar with the transaction methods, delivery systems, payment systems, and refund/exchange policies required by the platforms, which is not easy for producers in developing countries. The e-commerce practices that are routine for large corporations can become implicit barriers to entry for companies in developing countries. As a result, the benefits derived from e-commerce in developing countries are concentrated among firms with capital advantages in establishing logistics systems.

Furthermore, a more significant issue relates to the data monopoly held by e-commerce platforms. These platforms accumulate data on commerce and utilize information on product pricing and consumer purchasing behavior. The data monopoly of e-commerce platforms leads to anti-competitive practices such as predatory pricing and demands for high commissions, exploiting their market position and exacerbating the difficulties faced by small-scale producers in developing countries. Recently, as nations have begun to recognize the importance of data and the discourse on 'data sovereignty' has emerged, conflicts between countries over the data accumulation and utilization by giant online platform companies have become a prominent issue, although this is largely confined to some European and Asian countries.

Another issue arising from the rise of online service platform companies, when viewed from the perspective of global value chains and economic growth in developing countries, concerns their corporate structure and employment effects. The global value chains of online platform companies like Amazon, Google, and Facebook can be seen as similar to the financial services sector among the classifications introduced in Figure 1 above. That is, they are geographically concentrated and exhibit an integrated, functionally specialized division of labor. In contrast, in sectors like automobiles or apparel, developing countries often undertake labor-intensive segments of the value chain while developed country firms handle planning, R&D, and brand marketing, creating significant employment opportunities in developing countries. However, most online platform companies are concentrated in developed countries, employ relatively few people compared to their scale, and the segments undertaken by developing countries within their value chains are minimal. For example, according to data, as of 2018, the US automaker Ford had assets of $150 billion and net profits of $47 million, employing approximately 200,000 people in the US, in addition to over 200,000 employees in overseas production and sales subsidiaries in dozens of locations across Europe and Asia. Alphabet (Google) had assets of $160 billion, net profits of $34 billion, and a total workforce of about 100,000. While it had 8 subsidiaries in Latin America, 41 in Europe, 28 in Asia, and 8 in Africa and the Middle East, the total overseas workforce did not exceed tens of thousands. This means that while Alphabet's assets were slightly larger than Ford's, its net profits were hundreds of times higher, and its total employment was significantly lower, with a particularly minimal impact on job creation in developing countries. As of 2020, the largest retailer Walmart had assets exceeding $500 billion, net profits of $15 billion, and employed 2.2 million people, whereas Amazon had assets of $280 billion, net profits of $11.5 billion, and employed 800,000 people.

A key difference between the global value chains of emerging online service companies in the digital economy and traditional value chains is that they form distinct ecosystems through platforms, with limited direct linkages or interdependence among companies in the same industry. In the automotive industry, for instance, companies compete but share parts, intermediate goods, and labor within an interdependent network. Platform companies, conversely, create mutually exclusive ecosystems within specific domains, resulting in relatively low direct linkages or interdependence between sectors.

As the dominant position of platform companies strengthens in e-commerce, search engines, social media, and other areas, domestic and international controversies have arisen. Since June 2019, the US government has been investigating whether the 'Big Four' IT companies—Google, Apple, Amazon, and Facebook—have violated antitrust laws, examining how these market-leading IT firms acquired their current market dominance and whether they have engaged in practices that harm fair competition and consumers. The EU has already imposed a total of $9.4 billion in fines on Google for antitrust violations in the European market. Amidst these antitrust investigations, the spread of COVID-19 prompted Google and Apple to jointly develop an application for tracking COVID-19 infection routes, while Facebook released a 'real-time map of suspected patient distribution' to aid scattered health organizations in tracking COVID-19 status. Amazon announced plans to hire an additional 175,000 employees. These actions suggest efforts to mitigate antitrust issues by improving government relations. In early October 2020, the Antitrust Subcommittee of the US House Judiciary Committee released the results of its investigation into the antitrust violations of the four companies.[4]There were divided opinions regarding stronger regulations for these companies, leading the Democratic members to submit a report first. The report criticized the four companies, stating that although they started as small startups, they have become monopolistic entities similar to the oil and railroad tycoons of the past. It alleged that they have engaged in mergers and acquisitions to eliminate competitors, imposed high commissions, and entered into unfair contracts with small and medium-sized businesses. Facebook, for instance, further expanded its market dominance by acquiring Instagram, a strong competitor in online advertising and social networking, in 2012. Amazon wields immense power over product suppliers and third-party sellers (individuals who sell goods directly on Amazon's platform) and has been involved in widespread monopolistic practices. Apple, through its control over its operating system and App Store, has discriminated against and excluded competitors, monopolized sensitive information, and imposed substantial fees. Google monopolizes the online search and advertising markets, provides content from third parties to users, and has further solidified its monopoly by blurring the lines between paid advertisements and organic search results. The report proposes regulations that require proof that mergers do not harm competition and prohibit the abuse of bargaining power based on market dominance. It also recommends structural separation, such as splitting YouTube from Google and Instagram and WhatsApp from Facebook. Given that stronger regulations on their monopolies have now been decided, it remains to be seen whether the regulations and separations recommended in the report will actually be implemented. While some argue that their monopolistic positions are natural due to industry characteristics, network effects, and barriers to entry, and that these positions will not last forever, others strongly advocate for robust government regulation of their monopolistic status, making future developments a subject of keen interest.

International issues related to the dominant position of online platform companies include taxation, data sovereignty, and digital imperialism. The discussion on digital imperialism points out that the global expansion of Western online platform companies like Google, Facebook, and Amazon not only threatens the industrial development of individual countries but also risks eroding the unique cultures and identities of developing nations through the dissemination of uniform information. Notably, 21st-century digital imperialism is characterized by new forms of imperialistic control through platforms and big data, offering the potential for deeper and more pervasive control.

Online service companies such as Microsoft, Google, and Facebook have pointed out the need for accessible internet in developing countries to enable them to leverage the new opportunities presented by the digital economy, and have supported this through various programs. However, they have also faced criticism for using such support to expand their corporate influence and market reach. For example, Facebook, arguing that internet access is a basic human right in the 21st century, introduced the Free Basics program to provide free internet, particularly in Africa, to connect the world. This program allowed 635 million mobile users in Africa, half of the continent's population, to access sites like Facebook and health information sites without data charges. However, this initiative was criticized as a strategy to preempt the African market, one of the fastest-growing mobile data markets globally, and that the developing country support program was effectively a means to expand their domestic market.

The emergence of online platform companies presents a significant challenge to the sustained growth of developing countries. Data monopolies of online service platforms, the geographically concentrated and integrated division of labor structures of online service companies, low employment effects, and platform monopolization severely threaten the opportunities for companies in developing countries to participate in and grow through the digital new economy. They even endanger the unique cultural identities of developing nations. While the expansion of e-commerce can potentially be a window of opportunity for developing countries, only those that adapt to the logistics and protocols for e-commerce can adequately seize these opportunities. Furthermore, a significant portion of the population in developing countries still lacks internet access and familiarity with e-commerce practices, leading to predictions of widening disparities. International organizations promoting development in developing countries, such as UNCTAD, consistently recommend expanding internet infrastructure, strengthening vocational training, and nurturing knowledge workers, advocating for increased support for developing countries.

IV. Conclusion

The spread of COVID-19 has accelerated digitalization across various sectors, including the economy, education, and culture. By easily overcoming structural resistance to online adoption, COVID-19 has brought the Fourth Industrial Revolution closer to reality. This paper has divided the digital economy into digital transformation and the new economy sectors, examined how global value chains are evolving in each sector, and discussed issues related to economic development in developing countries.

Following the outbreak of COVID-19 in February 2020, global value chains experienced disruptions due to rapid declines in supply and demand caused by infections and lockdowns. However, stability gradually began to return from August 2020 onwards. This paper has focused on the medium- to long-term impacts of COVID-19, such as the expansion of automation and smart factories and the growth of the e-commerce market, rather than its short-term effects. While many countries were expected to strengthen trends toward automation and reshoring to ensure the security of supply chains for personal protective equipment, essential goods, and strategic commodities due to COVID-19, rapid automation did not materialize due to capital or technical constraints. Nevertheless, the trend of automation has continued to influence global value chains.

The digital transformation underway in traditional manufacturing sectors like automobiles, particularly the spread of automation and smart factories, has continued post-COVID-19, with its positive and negative impacts on the economic growth of developing countries beginning to emerge. Developing countries, in particular, have lower levels of digital infrastructure and technological innovation compared to developed countries, possess relatively weaker capacities for digital transformation, and have limited resources beyond labor. In this context, digital transformation is highly likely to widen the gap between developing and developed countries. Furthermore, the relatively simple and repetitive labor that developing countries have performed within global value chains is easily replaceable by machinery, making it probable that their position will shrink rather than strengthen. On the other hand, there are aspects of digital transformation in developed countries that can serve as growth opportunities for developing countries; indeed, some regions in developing countries are benefiting from increased trade with developed nations by participating more actively in global value chains.

Although e-commerce has experienced explosive growth since COVID-19, regions like Latin America, Africa, and the Middle East account for only about 3% of global e-commerce, a very small share. Post-COVID-19, it is crucial to expand domestic e-commerce markets within developing countries while simultaneously increasing their participation in major existing e-commerce platforms such as Amazon and Alibaba. It is true that the spread of digital devices and the internet has increased opportunities for companies in developing countries to participate in global value chains as suppliers and producers through online markets. The number of transactions between producers in developing countries and consumers in developed countries has grown through major e-commerce sites like Alibaba, Amazon, eBay, Taobao, and MercadoLibre, utilizing digital technologies by small-scale producers in developing countries. However, the transaction methods, delivery systems, payment processes, and refund/exchange policies required by these platforms act as barriers to entry for companies from developing countries. Additionally, the data monopoly of e-commerce platform companies and their anti-competitive policies, such as predatory pricing and demands for high commissions, exacerbate the difficulties for small-scale producers in developing countries. Thus, while the new economy sector also holds potential as a window of opportunity for development in developing countries, there are significant negative aspects impacting their development, including platformization, data monopolies, changes in value chains, and reduced employment effects from online commerce companies.

Viewing the rise of digital transformation and the new economy through the lens of global value chains, the negative aspects impacting the development of developing countries are more pronounced than the positive ones, and this trend is expected to continue post-COVID-19. In this context, arguments are being made that developing countries should pursue development through domestic integration, which stimulates their internal markets, as international integration through participation in global value chains may be difficult for economic growth (Rodrick 2018). Another perspective emphasizes the importance of South-South cooperation among developing countries over North-South cooperation with developed countries (UNCTAD 2020a). The distributional effects of digital transformation and the new economy post-COVID-19 are not simply divided between developed and developing countries but are manifesting in more complex ways, making it challenging to propose general solutions for the economic development of developing countries. Within the group of developed countries driving the digital economy, the gap between the US and China, leading with platform companies, and European countries and other middle-income nations is likely to widen. Among developing countries, there may be a division between regions that are relatively advanced in adopting the digital economy and those that are further marginalized. Within all countries, including both developed and developing nations, the distributional effects of the new economy and digital transformation are expected to bifurcate, significantly widening internal disparities. The distributional effects of the digital economy are anticipated to be highly multi-layered and complex. While overall productivity and income may increase due to advancements in the digital economy within each country, the gap between the leading sectors and those falling behind will become pronounced. In developed countries, efforts will be made to mitigate these issues through welfare systems such as basic income. However, most developing countries lack the necessary institutions and resources to effectively address internal disparities, leading to a widening gap. The problems of lagging groups may then extend beyond national borders.

Amidst the increasing difficulties in economic development for developing countries post-COVID-19, connecting the spread of the new economy and digital transformation to their development requires not only expanding universal internet access but also providing support for digital hardware and software, operational training, understanding global value chain entry and e-commerce logistics and transaction methods, and access to information on consumer preferences. Various educational and support policies for revitalizing e-commerce are needed. Promoting diverse channels for participation in global value chains, providing necessary technical support, disseminating information essential for e-commerce, and fostering improvements in domestic logistics and transaction methods through cooperation among governments, businesses, and international organizations are crucial. The international community must provide diverse forms of support to enable developing countries to specifically recognize the opportunities and challenges arising from digital transformation and the emergence of the new economy, and to actively leverage these opportunities.

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[2] http://graphics.eiu.com/upload/eiu_digital_economy_rankings_2010_final_web.pdf (accessed August 2021)

[3] https://www.internetworldstats.com/stats.htm (accessed August 2021)

[4] The full report is available at https://judiciary.house.gov/uploadedfiles/competition_in_digital_markets.pdf (accessed August 2021)

■ Author: Bae Young-ja_Professor, Department of Political Science and International Relations, Konkuk University. She graduated from Seoul National University with a degree in Diplomacy and earned a Ph.D. in Political Science from the University of North Carolina. Her main research areas include international political economy, political economy of foreign investment, science and technology and international politics, the internet and international politics, and science and technology diplomacy. Her major publications include "International Political Hegemony and Technological Innovation: A Case Study of U.S. Semiconductor Technology" (2020), "The Rise of Chinese Internet Companies and Internet Sovereignty" (2018), "U.S.-China Hegemonic Competition and Science and Technology Innovation" (2016), and "Science and Technology and Public Diplomacy" (2013).

■ Responsible Editor: Yoon Ha-eun_EAI Research Fellow

    Inquiries: 02 2277 1683 (ext. 208) | hyoon@eai.or.kr