Development strategies for middle‐income countries in a digital world—Insights from modern trade economics

Abstract The digitalisation of economic activities, combined with a secular slowdown in the growth of global output and trade, reduces the potential of traditional export‐oriented manufacturing as a development strategy. This paper takes a trade economics perspective to outline a possible response to the changed nature of industrialisation. The outlined response currently applies mainly to middle‐income countries but deserves attention also in longer‐term development strategies of low‐income countries. The paper argues that digital technologies affect trade costs through various mechanisms, which apply differently to manufactures and services and determine decisions of multi‐product firms on what to produce for what market. Emphasising big data analysis of customer preferences as an input to manufacturing, the paper finds that (i) industrialisation and service‐oriented development strategies are complements, rather than substitutes; (ii) access to data on customer preferences is an asset for developing countries; and (iii) data governance, which harnesses the increasing dependence of manufacturing on data, and innovation policies, which give greater importance to indigenous innovation, crucially augment the potential of industrialisation as a development strategy in a digital era.