Going Digital: Implications of the COVID-19 crisis on digital transformation

A wide range of digital technologies have emerged nearly simultaneously over the past few years affecting nearly every part of the economy. This raises a number of policy issues as these technologies change how the economy works in different areas. Value creation, formerly a slow process, has been accelerated by the digital economy. An economy that was based around brick-and-mortar assets is moving to intangible assets such as R&D, software and data. Manufacturing companies are being overtaken in importance by companies like Uber. Intangibles have also become more important for some current manufacturing companies like Tesla. Services are another example: an enormous amount of data is being gathered that can then be used to provide services.

All of this is causing policy changes in many areas. A good example is taxation, particularly across countries. On trade policy, there are real questions about digitally trade and data as a source of trade. The distinction between goods and services is becoming more important and more difficult to make. The OECD is working together on a project we call "Going Digital," which is intended to improve understanding of the digital transformation and its impacts, provide policymakers with new tools, look at how we think about these issues and explore ways of improving the policymaking process itself. Without this comprehensive approach, we would not be able to address some of the difficult balancing we need to do. One example is openness versus privacy. Making data more open can help us deal with big problems like health, but how do you balance that with privacy concerns? Important crosscutting issues also exist: security, competition and skills. A more integrated, holistic government approach is needed to deal with these issues.

The COVID-19 crisis has accelerated what we saw happening in many countries. Teleworking is one example. In some industries, up to 50 percent of workers were working from home. Once the lockdowns started easing, a large number of people continued to work from home. The crisis has broken down preexisting resistance and reluctance at many companies to teleworking.

Shopping behavior has also changed. Up to 95% of people surveyed in India reported engaging in new shopping behavior, whereas only about 30% reported the same in Japan. Around 70% or more of those surveyed in many countries reported that they would continue these new behaviors after the COVID crisis is over.

To cope with very high demand on networks, both from companies and from home users, we have seen a very stark increase in the amount of bandwidth that had to be produced: up to 50% increases in some countries during the peak, and almost a 25% increase in Japan. We also asked countries what they were doing at the government level to support the digital shift. They cited a lot of support for connectivity, for the move to online business models and more digital services, remote working, upskilling from home, electronic payments and digital security.

There has, of course, been an enormous increase in the use of video conferencing and remote working platforms. Many more people are also engaging in electronic commerce. The EU saw a very sharp increase in retail trade via mail order or on the internet, whereas normal retail trade actually declined in certain months. Finally, artificial intelligence has also played an important role in things like detection, prevention, response and recovery during this crisis.

This digital transformation process has been ongoing for some time, but COVID-19 seems to have really accelerated it. This raises questions about whether policy may be lagging behind in some areas. First, it is important that connectivity be universal so that everyone in every region and at every company can benefit from the opportunities it affords. Second, some firms, particularly SMEs, risk falling behind even more than before. Third, we have seen a lot of innovation, but investing in further innovation is probably even more important now to generate new opportunities. Fourth, on employment, people will lose jobs in some cases but a lot of new jobs will be generated. The real issue is how to provide people with the new skills they will need in a very different economy. There are also questions about wellbeing and inequality. Is everyone able to cope with these changes? What are some of the social implications of this economy? Do we risk making a small number of large companies even more important, leading to a risk of market concentration?

On connectivity and the so-called "digital divides," I think Japan is doing extremely well overall in terms of its high-speed connections. Japan is near the top in the OECD in terms of the total number of fixed broadband subscriptions. Certain social groups still need greater connectivity, particularly the elderly. The second point I wanted to make on connectivity relates to data, which is becoming more and more important in the discussion about access. Data is really a fundamental asset in the digital economy but we don't share enough of it or use it as well as we could.

OECD data on the use of digital technologies by Japanese enterprises indicates that Japan is doing quite well in a number of areas, like websites and cloud computing, but not quite as well in areas like social media and electronic commerce, where it lags behind some of the leaders in Europe. The question is, what is the issue about the use of some of these advanced technologies within firms in the Japanese context? Japan is also among the leaders in the OECD in its use of cloud computing. However, the smallest enterprises are not doing quite as well. How can we help these smaller firms get on board?

On innovation, data on R&D spending from our Science and Technology Innovation Outlook was released two weeks ago. Many industries saw very large increases in R&D spending during the COVID-19 crisis, particularly in some digital sectors and the pharmaceutical industry. In more traditional industries, particularly automotive and aerospace, R&D has fallen because the markets have suffered during COVID-19. What will this mean for the innovation landscape? Typically, R&D tends to fall during crises. Will this actually increase diversity across industries and across countries in terms of innovation performance? What will this mean in terms of the challenges and opportunities?

Turning to skills, Japan has some real strengths here, particularly in hard skills like science, mathematics, reading and ICT skills. Japanese students are among the top performers in the OECD in science, mathematics and reading. However, we also need other skills to complement these hard skills. Problem solving is a more non-technological skill where Japan ranks around the middle among OECD countries. Finally, on readiness to learn and creative thinking, Japan is at the bottom in the OECD. Does Japan have all the skills needed to really participate in this skills transformation?

The fifth issue is the impact of the digital economy on well-being, societal issues and mental health, among others. Japanese people spend less time on the internet than people in many European and Latin American countries, which may be a good thing in terms of the well-being concerns. The sixth issue is trust. This has national and international implications in terms of digital security, privacy and consumer protection and we need to ensure that we have digital security in place, that privacy is being protected, and also that there is some international harmonization or at least cooperation and interoperability between some of the regimes.

On markets, there is the issue of concentration. In some countries, new firm creation dropped significantly during parts of the crisis. It seems to be picking up now in some countries. Japan seems to be doing reasonably well here. Fewer new firms and new innovation opportunities during this period could add to what is already happening in a number of countries where business dynamism has gone down in many sectors of the economy. Fewer new firms is not a good thing because you need what we call creative destruction: a lot of change in the economy to keep it working well overall.

My final policy point is about new approaches to policymaking. Japan has been showing a lot of interest in the work we are doing on governance innovation. Because of the digital transformation, policies should be reviewed to ensure that the concepts and ideas they are based on are still relevant. On the regulatory side, there is a lot of discussion currently about "agile regulation": avoiding making regulations too narrow and specific or too rigid so that they don't become obsolete as technology changes. There has also been a lot of discussion about more experimental "iterative policies." Some countries have begun to experiment with new policies in specific policy areas to facilitate risk taking and innovation. I think this is important. It's also important to ensure that there is sufficient understanding of the digital transformation within the government. Several countries have introduced chief technology officers and other technical people within government to help policymakers understand what is going on.

MATSUMOTO Rie:
My takeaways regarding digital transformation are that Japan has good internet access and a high level of mathematics education among the youth, but on the other hand, Japanese society is not ready for the digital transformation because of a lack of a readiness to learn and adoption of mobile internet. To change this, governments must take new approaches to policymaking.

I'd like to introduce some of our digital transformation-related policies. In 2014, METI's study group produced a report stating that many business owners seem to understand the importance of this digital transformation as a means of creating new business models or improving existing ones by taking advantage of new technologies to enhance their competitiveness, but they face difficulties in data utilization and data sharing between departments resulting from excessive customization and a lack of interoperability of systems even within the same company. Staff are also often reluctant to adapt to new systems despite managerial interest in implementing DX. If companies cannot overcome these challenges, there could be economic losses of up to 12 trillion yen per year after 2025; three times the current losses. We call this the "2025 Digital Cliff."

METI recognizes the problem and has developed various policies to promote digital transformation. One is the Digital Governance Code: guidelines for management teams to follow as they seek to strategically take advantage of IT systems. Another is the DX Promotion Indices, which is a tool to help companies diagnose current situations and challenges in their DX promotion efforts. Next is DX Certification, where METI formally recognizes DX-ready businesses in accordance with the guidelines. There is the DX Stock Selection, where METI and the Tokyo Stock Exchange jointly select companies that are models of DX excellence. In addition to these policies, some financial support is also being provided. There are IT/Digitalization subsidies to increase SME productivity by installing new systems and Digitalization Supporters that provide matching and financial support so that SMEs can can benefit from access to consulting services from IT experts.

Last year, METI analyzed the present status of the Digital Transformation in Japan and found that more than 90% of Japanese companies are either not DX-ready or only partially digitalized. This may mean that the message of the 2018 report has not been understood. COVID-19 has divided companies into two groups: companies that could easily adapt to the changing environment and ones that could not. To convey the correct message to Japanese companies, METI released a second report on this transformation last month. The second report stated that to ensure competitiveness, it is important to have the ability to change rapidly and to reform corporate culture. The key phrase in the DX report is that, "Japanese companies must break away from their legacy corporate cultures."

I have two questions for Dr. PILAT. First, how can governments get private companies to change their behavior? In Japan, the government cannot force them to do so. All we can do is recommend that they prepare. This approach works well for some companies, but not for most. Is there any better approach? Second, is there any successful country or promising public policy that Japan can learn from? This transformation has been a common issue for many countries. Each government is trying to promote the transformation of its private sector but their power and influence over private companies vary.

Dirk PILAT:
It isn't easy for governments to cause behavioral changes. Governments have a few levers they can use. The first is to have a competitive economy, because if you have new firms coming in, digital transformation will enable them to do better in the long run. You should see changes within the Japanese economy because of that. Governments can also foster cooperation between companies because they can learn a lot from each other. There's a lot of room for collaboration on ideas and services within clusters and supply chains. Universities can probably play a role in that as well.

Management also plays an important role. The CEOs of companies are often the people who can make change happen. They need to be convinced that it that can be done. Governments can work with managers and CEOs to increase awareness and also help them think through some of the difficult problems and challenges that they will need to face. Government can also play a role by having agile regulation that makes it easier for firms that do want to change things, while also helping companies offset some of the costs and difficulties of doing so.

Japan has an opportunity to leverage COVID-19 and the crisis to show that digital transformation can work and that this is an opportunity for change. Many countries are now thinking about recovery packages, and digital technology, digitalization, and digital transformation should be a very important part of that as well.

As for whether there is a country Japan can learn from, there is no single model. I don't think we should be looking for models. Countries and institutions are too different. I do think there are experiences, programs and policies that can be learned from. Some countries are really good at certain things. Estonia is very good in digital government and has moved very quickly on that. Some European countries, like Finland, are leading in the uptake of cloud computing.

MATSUMOTO Rie:
You mentioned that part of the acceleration of DX implementation from COVID-19 is likely to be permanent, but a lot of Japanese businesspersons and Japanese businesses would like to return to normal, not the "new normal." Taking the example of teleworking, during the emergency period, more than half of SMEs in Japan did teleworking but ceased doing so immediately afterwards. What makes these changes more permanent and what is the situation in other OECD countries?

Dirk PILAT:
Firms that were already heavily engaged in the use of digital technologies have accelerated, at least in the UK. More advanced companies see this as an opportunity to go further. There are also definitely firms that are struggling with this. We don't have a lot of good data yet to really understand what's been happening in different countries. I think we will probably see differences once we get that data.

There are possibly cultural differences as well. Firms in the UK seem to have gone to teleworking to a much higher degree than they have in France. There are also differences in business culture and between industries. It's harder for a manufacturing firm than for a bank or a digital service. Part of it is whether a firm can realize productivity gains or other benefits. Companies also need to think about what needs to be done to make this work. We've heard quite a number of large companies say that some of these changes will be permanent.

I think that raises a question for Japan. If other countries, other industries are doing it, can Japan afford not to if other countries are realizing productivity benefits from it? Will it change the way business is being done in other countries? What does that mean for the international competitiveness of Japanese businesses? I don't think we know the answer to that yet.

WATANABE Tetsuya:
Do you have any advice on how governments can change their own internal working methods?

Dirk PILAT:
This is not something that my part of the OECD does that much work on, but I do think digital transformation of government is really important. There are typically difficulties with skills within government. Government processes are sometimes a difficulty. Experimentation can be difficult for governments because it's not part of their institutional culture to try new things. That's why we now see these chief technology officers in some countries and some governments that are really trying to change things within governments. The OECD has a group called The E-Leaders that are bringing together some of these people to discuss how to make change happen within governments.

YANO Makoto (RIETI Chairman):
My question is how to make this thing permanent after this COVID-19 crisis goes away; I would like your advice about that. I also feel that it's a little problematic to digitalize every worker's home. I would like to know how other societies may or may not be compensating for this digital transformation within their homes and what the OECD thinks about this.

Dirk PILAT:
I think we probably need to think about what we will be doing at home and at the office if we go to more permanent teleworking. The office will probably become a place for exchange and collaboration rather than a place where people concentrate on more individual tasks like writing. As for using the home as a workplace, that's a fundamental question as well. Some people have adequate space for it while others are working from very small apartments, which can be very difficult. Some countries have joint teleworking spaces where people can come to a space and work from there without going to the office.

YANO Makoto (RIETI Chairman):
Do people do this at the OECD?

Dirk PILAT:
I frankly don't know whether any of my colleagues work from such spaces, but I know it exists in some countries.