How digital protectionism can harm companies

India’s push for data localization has attracted widespread debate. More and more countries have proposed such steps with rising cross-border data exchange. A new study from Japan says protecting data is important, but “digital protectionism” can harm the productivity of companies.

The study, by economist Eiichi Tomiura and others, covers 4,227 Japanese companies in the manufacturing, wholesale and information service sectors. In a VoxEU article, the researchers say only 11% of these companies engage in cross-border data flows, but they are more productive than those who do not.

The comparison is with firms that collect data only in Japan and those that do not collect any data at all. The productivity of firms that engage in cross-border data exchange is 14% to 18% higher than those which do not collect any data, the study finds.

Companies that collect data overseas also tend to be large in terms of sales and employees, and are more globalized. These firms mostly include exporters and multinational enterprises, and are able to cover the entry costs involved in cross-border data transactions.

Due to large amounts of cross-border data transfer and the greater reliance on digital infrastructure, such firms also bear the brunt of restrictions and regulations on data storage.

These firms may be fewer in number, but most of them are active in different markets and have trade partners across sectors. As a result, data regulation can have widespread spillover effects in the economy, the researchers say.

The authors find that large and globalized firms are also the ones that usually adopt advanced technologies like artificial intelligence and 3D printing. Such innovations improve productivity, but also lead to increased data flows, the paper says. The authors say their findings show the need to seriously evaluate the impact of regulations on cross-border data flows.

Also read: Regulating cross-border data flows: Firm-level analysis from Japan

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