The design of a new digital business model is typically based on shaky assumptions and rough estimates. As the innovator further develops the proposed product or service, they need to carefully collect user feedback and market data to refine the assumptions and generate more precise estimates. Some of the trickiest challenges in launching a digital innovation include customer acquisition, business model validation, and gaining network momentum. This chapter first discusses how to address the challenges of customer acquisition in digital markets, and then describes an experimental method for validating the features of the business model. The chapter finishes with tools for kindling network effects and fomenting the growth of the platform ecosystem.

Our analysis in this chapter focuses on comparative advantages, perhaps the most fundamental insight of international economics. If countries either completely or partially specialise production according to their comparative advantages, they can reap the benefits of the gains from specialisation in terms of achieving higher total production and welfare levels. The underlying causes of comparative advantage can vary. It can be technology-driven (Ricardo) or it can derive from the relative cost differences resulting from different relative factor abundance (Heckscher–Ohlin). As was to be expected, empirical research indicates that both elements (technology and factor abundance) are important for explaining the composition of international trade flows. Throughout the chapter, we emphasise the fact that the comparative advantages for nations should not be confused with the competitiveness of individual firms.

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.