When firms interact with foreign markets, they have to deal with challenges not faced on the domestic market as transport- and interaction costs are higher. This holds for all types of interactions, such as geographical, socio-economic, cultural and institutional distance. When interacting with foreign markets, firms have to overcome this liability of distance and foreignness. An illustration of its importance is the dominance of nearby trade- and investment flows, as shown by the gravity model. We also review the decision of firms to interact via trade flows or multinational activities, where scale economies, transport costs, market size and local production costs all play a crucial role. The proximity versus concentration trade-off explains the choice of exporting versus horizontal FDI. The difference in production costs versus transport costs explains the choice of producing at home versus offshoring (vertical FDI). We conclude with a brief review of the global economic system.

This chapter analyses global value chains. First, we explain how globalisation leads to fragmentation of production and dispersion of activities. Global value chains consist of nodes, where each node represents the value added received from the previous node. Countries can now specialise in activities and functions – nodes of the global value chain – rather than in the whole production of certain goods. Second, we discuss how to measure global value chains, which is challenging. Recent efforts allow us to estimate so-called forward- and backward linkages. Third, we provide a framework to map the governance configuration of global value chains based on the complexity of the knowledge to be exchanged in a transaction, the ease of codifying information about the transaction, and the capability of the supplier with respect to the specificities of the transaction. Fourth, we describe some possible sources of inefficiencies in global value chains (taxation, rent-seeking, contracts and trade costs).

This chapter reviews the origins of the internet and its evolution from a few university labs in the 1970s to a global channel of mass communication and commercialization to the ubiquitous high-speed wireless connectivity by 2020. This overview sets the stage for thinking about future evolution of communication networks and opportunities for innovation therein. While exploring the historical precedents, we will also investigate which design principles have facilitated the growth and impact of the internet. We will argue that the breathtaking dynamism forced the creators of these communication networks to focus on long-term issues rather than concurrent societal problems. They also built the networks to be capable of rapid change and growth, accommodating a very large scale. Constant change and large-scale connectivity also meant that very diverse needs and interests were brought into the online sphere. The network itself thus had to be able to accommodate myriad ideas that generated additional innovations and activities to pursue. The internet was open ended and extremely generative – capable of facilitating follow-on innovation.

Digital platforms are marketplaces where a variety of participants gather to exchange goods, information, or services. This chapter examines what makes digital platforms special kinds of marketplaces. Platforms create value by allowing users to connect with each other and interact or transact in some way. The additional benefits include improved matching, trust, and liquidity, and lower costs of search and transaction. Digital platforms may thus create exceptionally efficient markets. However, the market for platforms themselves is anything but competitive and efficient. The benefits of scale in markets are not surprising, but the ability of digital markets to scale globally is much more recent. After platforms achieve critical mass, there is often no point for a rival to even enter, at least if the entrant offers no radical innovation. As a result, network effects allow platforms to concentrate vast market power.

This chapter argues that it is important to get the numbers right, to know the sources of information on international trade- and financial flows and multinational activity, And to familiarise yourself with the basics of accounting identities as this may lead you to avoid common pitfalls. We discuss the relationships between the current account and the capital and financial account of the balance of payments, as well as the information this provides on multinational activity. We review the funding options for multinational activity and provide information on the developments of the main financial flows in the world. We conclude that there is a pattern in the development of international capital mobility, which was already high at the end of the nineteenth and beginning of the twentieth century, then declined substantially in the interbellum to rise again from approximately 1980 onwards.

We provide an introduction to the world economy. World population levels have risen drastically since 1800, in conjunction with (per capita) income levels. Economic leadership regularly shifts from one country to another. Rich countries are usually well connected in terms of international trade, contacts, investments, migration and capital flows. Historians have identified two big ‘waves’ of economic globalisation: at the end of the nineteenth century and after World War II. These episodes show decreases in international price gaps and increases in relative international trade- and capital flows. The ‘fragmentation’ process, in which different parts of goods are provided in different nations before they are combined in final goods, is a relatively new phenomenon. The most recent wave of globalisation is slowing down at the moment (slowbalisation), but it remains to be seen how much the backlash against globalisation will affect trade- and cross-border investment in the years to come.

The rising importance of international firms is demonstrated by two main aspects. First, firms are heterogeneous; they differ substantially in the margins of trade and in economic size. The extensive margin indicates if a firm is active in trade flows. The intensive margin indicates the intensity with which firms engage in trading activities. Trading firms tend to be bigger and more productive than non-trading firms. Second, trade flows are dominated by multinational firms operating in two or more countries, including related party trade between firm entities leading to intra-industry trade. Multinationals are concentrated in advanced countries, capital- and R&D intensive, display distance decay in their interactions, are larger and more productive than national firms and have a specific organisational structure. The rise of international firms is related to the changing structure and organisation of trade flows caused by the emergence of global value chains, under the guidance of lead firms.

This chapter explores the factors that influence the profitability of digital innovations. These include the relationships with other parties in the ecosystem and some aspects of the regulatory environment. Generally, the more firms in a market, and the more similar their products, the more intense the competitive rivalry. However, firms also compete for profits in their other relationships such as those with customers and suppliers. Bargaining power in a supply or customer relationship depends on how many alternatives there are on each side, and how unique their products or needs are. In digital systems, innovators also need to work with many providers of complementary products, technologies, or services. This creates an external dependence for a critical resource that needs to be strategically managed. However, developing and offering complementary products in-house may be too difficult and expensive. Innovation strategy often involves managing trade-offs, such as the benefits and costs of sourcing complements and inputs externally versus internally. In considering all such arrangements, the innovator’s ability to differentiate in a way that enhances the customers’ willingness to pay tends to increase its profitability.

Profitability of digital innovations depends on the ability of the innovator to prevent imitation and control a bottleneck in the ecosystem. The main drivers of value in the markets for information and communication include the perceived inherent value of the information product or service itself and the size and structure of the network. This chapter focuses on how to protect and enhance the value of information.

Because information is an experience good, we usually know if we like or value the information only after we have consumed it. This makes information particularly tricky to value and price. Additionally, cognitive biases influence whether people view information as useful, truthful, or valuable, and the value of information also depends on the context of use. The value of many information services depends on how essential they are in the situation, and how much additional value creation they enable. Therefore the pricing of digital information is often focused on estimating the buyers willingness to pay.

Information is valuable and the cost of disseminating information is tending to zero. But realizing the value of information by getting it to the right place at the right time requires sharing and exchanging it. Its societal value is unleashed by networks of communication. Communication networks can be small or large technical systems that connect different types of devices to one another. The power of modern communication networks is amplified by their capacity to expand in a decentralized fashion. In network markets, firms need to decide about the architectural openness of their products and how to design the interfaces that facilitate connections. This chapter is focused on such network strategies.

The increasing penetration of information and communication technologies in the economy enabled the emergence of digital business practices in a wide range of industries. The digitization of information products, service processes, product information, and pricing altered the functioning of the markets. Once products and processes are digital, communication technologies facilitate the instantaneous exchange of the information. This immediate availability of product and service information and pricing enhances competition: digital networks can accelerate and even automate product and price comparison, making consumers more powerful in the marketplace. This chapter focuses on the economics of digital information products and implications for strategy.

The economic impact of innovations depends on their technological characteristics and the market and organizational contexts in which they are adopted. In this chapter we focus on the market impact of innovations in terms of whether they tend to sustain or disrupt existing business models. Disruptive innovations usually cause rather extreme amounts of market uncertainty. Incumbent and entrant firms tend to have different capacities to address disruptive innovation opportunities. In particular, large and established customers of major incumbents tend not to prefer the disruptive value proposition, and, as a result, the return on investment in disruptive innovations appears to be lower than in the case of sustaining innovations.

This case study explores Uber and the sharing economy. Uber characterized itself as a technology platform that used a massive network, operational excellence, and product expertise to power mobility. By 2021, Uber was a multisided platform whose services included rides (Mobility), food delivery (Eats), and freight logistics (Freight). Accordingly, riders, eaters,merchants, delivery people, mobility drivers, shippers, and carriers constituted the sides of the platform. Its distinct capabilities included marketplace, routing, and payment technologies. In particular, the marketplace embedded proprietary demand prediction, matching, dispatching, and pricing technologies. In 2019, before the global pandemic, Uber facilitated almost 7 billion trips for 111 million monthly active platform consumers (riders and eaters), generating $65 billion in gross bookings and $13 billion in company revenue from trip commissions. Despite a healthy 20–30 percent annual revenue growth, the company posted a net loss of $8.5 billion. By 2021, Uber had not yet had a year where its revenue exceeded its cost of operations. The case discusses the reasons for the poor financial performance and the prospects for reaching profitability in the future.