by Zoltan J. Acs, Abraham K. Song, László Szerb, David B. Audretsch, and Éva Komlósi
published in Small Business Economics, for full-text visit: https://link.springer.com/article/10.1007/s11187-021-00561-x
Some years, like some poets and politicians, are singled out for fame far beyond the common lot, and 1971 was clearly such a year. One of the events of 1971 was the invention of the microprocessor—essentially a complete computer on a chip—able to receive instruction and act as the brains of a general-purpose computer. This invention led to the creation of the personal computer, the internet, the smart phone, and cloud computing. Digitalization, or in other words, information in bits, reduces the cost of storage, computation, and transmission of data; digital technologies reduce five distinct costs that affect economic activities: search, replication, transportation, tracking, and verification.
In the Industrial Age (1800–2000), economic decisions were made by management. The coordination in the twenty-first century shifts from the visible hand of management to the digital hand of platforms. The platform organization replaces the vertically integrated firm via network effects. This new organization form has a global ecosystem that did not exist under managerial authority. The main form of knowledge is human capital with much less physical capital. In the Digital Age (2000–present), economic decisions are made by software programs. Platforms and platform-based ecosystems create markets where none existed previously because of high costs. While the corporation was able to reduce transaction costs by bringing markets inside the organization, thereby making economies of scale and scope possible, this hierarchical management was achieved at a cost, as there are costs attached to using the organization, albeit less than using the market. By reducing the need for bureaucracy, the platform organization has been able to reduce costs—search and information costs, bargaining, and decision-making costs, and policing and enforcement costs—to almost zero. Moreover, the associated costs of authority and power have also been reduced by substituting networks for bureaucracy. With huge computing power, sophisticated algorithms, and big data, market transactions mediated through multisided platforms have reduced the cost of and the need for hierarchy and hierarchical power.
The DPE has been 50 years in the making, and each decade since the 1970s has seen major advances. The 1970s saw the development of the microprocessor, the 1980s the personal computer (PC), the 1990s the internet, the 2000s the smart phone, and the 2010s cloud computing. Of the 167 publically traded companies that make up the DPE, 86% were startups in their decade, reinforcing Hobijn and Jovanovic (2001) thesis that the incumbents were unable to harness new technologies and the entry of new firms was needed to create the DPE.
We propose a conceptual framework of the DPE that integrates the (1) platform-based organization, (2) their platform-based ecosystem, and (3) the digital technology infrastructure.
Platforms, variously referred to as two-sided markets, multisided markets, or multisided platforms, are seen as special kinds of firms that facilitate exchange by allowing direct transactions between different types of consumers who could not otherwise transact. Network effects or network externalities between the two sides of the market are central in this tradition. One significant insight from the economic view of platforms is that, to understand how platforms create value, we need to change the fundamental unit of analysis of market interactions away from the traditional two-agent dyadic interaction into a three-agent triangular set of transactions. In the traditional model, sellers sell directly to buyers, and buyers are attracted primarily by features of the goods being sold, such as quality and price. In a platform, sellers do not sell directly to buyers; instead, both are different “sides” of the platform, which brings the two market actors together. In addition to the products’ quality and price, having more sellers tends to attract more buyers, and having more buyers tends to attract more sellers. This back and forth is a positive feedback loop that we refer to as platform-mediated network effects.
One of the main institutional differences, if not the main difference, between the managed economy and the platform economy is the role of the platform-based ecosystem. While the regional-based entrepreneurial ecosystem has no governance structure, no revenue, and no network, the platform-based ecosystems, including the role of digital technology, are immediately global in nature, with billions of users and millions of agents. Platform-based ecosystems are developed and nurtured not by regions or governments but by platform organizations. Ecosystem governance, the rules by who gets on a platform, and the rules of good behavior are determined by the owners of the platform firms. Conceptualizing the platform-based ecosystem, Sussan and Acs proposed a novel framework of the digital entrepreneurial ecosystem, which integrates two separate but related pieces of literature on ecosystems—namely, the digital ecosystem literature and the entrepreneurial ecosystem literature. This new framework situates the platform-based ecosystem in the broader context of users, agents, infrastructure, and institutions. Two biotic entities (users and agents) actuate individual agency, and two abiotic components (digital infrastructure and digital platforms) form the external environment. The Digital Entrepreneurship Ecosystem consists of four components, the Digital User Citizenship, the Digital Technology Infrastructure, the Digital Multi-sided Platform, and the Digital Technology Entrepreneurship.
Anchored in digital technologies, digital infrastructure (DI) is a socially embedded mechanical system that includes technological and human components, networks, systems, and processes that generate self-reinforcing feedback loops. Thus, DI links systems and networks at the global, national, regional, industry, and/or corporate levels. It is constantly changing because of its diverse base of installed digital technologies and users who are designers or operators of these systems. It is difficult to govern as control of the digital infrastructure is distributed across multiple actors, such as designers, developers, and users. The open access and open standards of the internet allow anyone to develop and share applications. DI is constantly evolving and is, therefore, a system that is never fully complete. While there are standards among its members, it is impossible to attain a static set of standards. Furthermore, the bottom-up nature of DI and the top-down reality of most organizational structure make the governance of DI a particular challenge.
In managerial capitalism, the giant corporation is the central organization of interest. Factor markets are internalized, and the market mechanism is replaced by the modern business enterprise in allocating resources and guiding the economy. A much more diverse set of organizations exists in the platform economy, and technology plays a more fundamental and varied role than it did in the managed economy. The platform economy externalizes at least some of the factor markets to the ecosystem—a group of autonomous actors bound together by complementarities and distributed governance. Two sets of actors, agents, and users, populate the platform-based ecosystem that multisided platforms rely on for innovation (agents) and revenue (users). The platform-based ecosystem plays a role in both value creation and value capture.
There are four types of firms populate the platform economy. Platform owners occupy the digital platform section. There are hybrid, innovation, and transaction platform organizations. Out of the top twenty platform organizations, 55% are in the USA, 25% in China, and none in the EU. The US platform companies—Facebook, Amazon, Apple, Netflix, and Google—enjoyed first mover advantages in the European Union, which is now a fully saturated market. Telecommunications service and equipment firms occupy the digital infrastructure territory. They provide services to users, who in turn provide revenue to platform firms that carry out the matching between supply- and demand-side users. Out of the 79 DI companies, the US has 34%, The EU 16%, and China (including Hong Kong) 9%. The third set of firms of the DPE is digital entrepreneurs that develop the software and Apps that populate the multisided platforms. According to Evans Data Corporation, there were 26.4 million software developers in the world in 2019. The USA leads the list with 45% of the top 88 global software developers, followed by India with 23%. The European Union lags far behind with three (3.5%) and China with no software developer firms. The final set of firms of the DPE is the supply and demand side users on multisided platforms. The number of users on both the demand and supply sides is large, with 3.8 billion people worldwide having smartphones. With the largest number of firms in the platform economy, supply-side users are non-technology organizations that include merchants of all kinds—including restaurants, Uber drivers, and the self-employed. New technology-based firms, which number in the millions, carry out most of the innovation in the platform economy. They include IoT firms (hardware and software), including app developers.
The size distribution of firms in the platform economy is highly skewed, with a small number of very large firms, thousands of medium-size firms, and millions of small firms. Looking at the regional distribution of platform economy firms, the US dominates, Asia follows, and Europe lags. A likely explanation of this ranking can be attributed to the new firms. Under the Reagan government, the emphasis on government policy in the US shifted from the giant corporation to entrepreneurs and startups. In the UK, Thatcher shifted government policy from promoting full employment to fighting inflation, shifted the balance of power from trade unions to employers, abandoned the industrial policy in favor of privatization vs. state ownership, and cut taxes on the highest income earners to encourage investment. Many Asian countries, including China, opened in the 1980s, followed the US with liberalizing their economy and freeing market forces. At the same time, Europe still focused on supporting established mainly large corporations. According to Hobijn and Jovanovic, technology breakthroughs favored new firms. Managers of an old firm may not know what new technology offers or may be unable to implement it. Moreover, an old firm’s human and physical capital is tied to its current practices, and it may not be converted easily to new technologies. Third, workers and management in an older firm, especially if they belong to a union, may resist new technologies because it devalues their skills. It seems that current Europe has a fairly less productive ‘ecosystem’ for high-impact entrepreneurship than the US., or even relative to China and East Asia. As global technology takes shape on a battleground between China and the USA, Beijing and Washington are in the driver’s seat, while Europe is finding it harder to set the rules of the road.