# Introduction

Don Tapscott coined the term _digital economy_ in his 1995 best-seller _The Digital Economy: Promise and Peril in the Age of Networked Intelligence_ .<sup>1</sup> In the more than two decades since then, a dynamic global business landscape has emerged, filled with new types of firms and new ways of doing business by leveraging digital technologies. For example, of the top 10 most valuable firms by market capitalization in 2018, Apple, Alphabet, Amazon, Facebook, Tencent, and Alibaba share a common feature: each has established a digital platform to create value through facilitating exchanges between two or more interdependent groups. Meanwhile, more businesses are now providing goods or services online. Indeed, e-commerce has revolutionized the ways in which 1.79 billion people trade around the globe.<sup>2</sup> To respond to the new market players and business models, governments need to develop clear, coherent rules to facilitate digital economic activities. This is especially important for developing countries that have not yet fully reaped the benefits of the digital evolution for economic growth and job creation. However, the research on appropriate regulatory and policy approaches is limited.<sup>3</sup> Data sets that can serve as a reference point to assess a country’s regulatory environment for a digital economy are simply not available.

To support World Bank client countries in their efforts to better harness the benefits of digital technologies and address the potential risks associated with digital economic activities, several World Bank teams, including the Global Indicators Group of the Development Economics Vice Presidency, the Digital Development Global Practice, and the Macroeconomics, Trade, and Investment Global Practice, launched the Digital Business Indicators initiative in 2017. The initiative seeks to develop a benchmarking tool to measure the regulatory environment for the digital economy. The objective is to encourage competition among countries as they move toward more efficient, more transparent, and easier-to-implement regulations for the thriving digital economy. In 2018 the Digital Business Indicators project collected information on the existence and quality of the regulatory environment in broadband connectivity, digital payment, data privacy and security, as well as logistics, in 21 pilot countries (see list of countries in annex A). Data were collected through standard questionnaires sent to experts in the private sector, public sector ministries, and authorities, as well as law firms in each country.

This study presents findings from the Digital Business Indicators initiative, and it extends the discussion to a wider range of regulatory issues associated with digital businesses. It first probes the characteristics of digital platform firms, as well as their impacts on traditional firms. It then zeroes in on a few key regulatory and policy areas, including competition, taxation, data privacy, and infrastructure. Data from the World Bank’s Digital Business Indicators project are used to analyze data privacy and infrastructure issues. When empirical data are missing in areas such as competition and taxation, this study takes stock of the ongoing policy discussions. It aims to advocate a research agenda that will develop the best regulatory and policy practices for governments seeking to promote the digital economy.

# The changing business landscape

In 1937 Ronald Coase established a clear boundary between firms and markets in his influential article “The Nature of the Firm.” According to Coase, firms exist because of inefficiencies in the marketplace.<sup>4</sup> Where the costs of transaction and coordination between market players are high, large hierarchies in the form of firms predominate, and they manage to achieve economies of scale in production and distribution internally. The emergence of large industrial corporations that conduct the full range of production activities in-house demonstrates the validity of Coase’s theory. For example, in early 1900s U.S. Steel Corporation controlled all stages of production and distribution through its ownership of coal and iron mines, coke plants, railroads, ports, and large ship fleets.

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