To create a strong and competitive digital economy, countries and municipalities should establish regional digital ecosystems that maximize value creation, minimize dependencies, and promote digital transformation in businesses and administration. Key aspects include the development of digital products, ensuring regional IT competence, and building a robust IT infrastructure. Risks such as dependency on imports and skill shortages must also be addressed.
The digitalization of the economy and administration holds significant importance in the new coalition and is reflected in the creation of a new Ministry of Digital Affairs. However, integrating the various threads of AI, digitalization, cloud, sovereignty, data centers, or startups is complex. Even more complex is realizing the economic value of digitalization in a regional context, such as in countries and municipalities. We have unraveled this aspect in a detailed study for the Federal Ministry for Economic Affairs and Climate Action (BMWK) and backed it with facts. A key insight: Sustainable and economically meaningful implementation of digitalization is only possible with well-planned regional digital ecosystems comprising the digital economy, infrastructure, and know-how.
With this discussion paper, we aim to provide countries and municipalities with impetus and concrete approaches to strategically build regional digital ecosystems. Our goal is to maximize the economic impact of public investments in digitalization, AI, and the digital economy. At the same time, we want to minimize risks and dependencies—especially those arising when foreign providers capture value creation, leaving only minimal benefits for Germany and its regions. We also consider geopolitical risks and show ways to mitigate them through regional, sovereign digital structures.
As an independent think tank, we are value- and public-good-oriented. With our deep understanding of the digital world, we strive to help establish sustainable, regional, sovereign digital ecosystems.
Summary
To create a strong digital ecosystem in the region, governments should take a systemic approach and include the entire value chain of the digital world.
For parts of the value chain that cannot be represented regionally, deliberate import dependencies and trade agreements should be made so there is no invisible outflow of economic performance from the region.
The main areas of action are: Creating digital product development in the region, using it in the digitalization of businesses and administrations, and producing the necessary digital resources regionally.
Equally important is securing competence in the region, e.g., through stimulating regional IT service providers and IT infrastructure providers.
Terms
Digital Economy: The economic sector of companies offering solely digital products and services in the digital space (internet). These are digital companies, which are also referred to as "startups" in their early stages.
The Digital Transformation of the Economy, Digitalized Economy: Using digital products, business processes and business models are digitalized and thus become more efficient. The goal of the digital transformation of the economy is increased efficiency and competitiveness, enabling growth.
Digital Products: These are non-physical products created from digital technologies. Common business models include subscription or licensing models or the sale of advertising. Digital products consume digital resources in operation, produced by digital infrastructure. Digital resources have an equivalent role to energy resources in the industry.
Digital Infrastructure: A term for the infrastructure and resources needed for providing digital resources: data center buildings, ICT equipment, fiber optic networks, cooling, and power.
Digital Transformation of Administration: Similar to the economy, administrative processes should primarily be digitalized with the help of digital products, making them faster and more efficient. This can be seen as an improvement in bureaucracy, enhancing the quality of government services to citizens and businesses.
ICT Economy: The economic field of IT consulting, service providers, and infrastructure providers. These companies offer consulting services, the development of digital products, and services for the digital economy and digitalization. Furthermore, these companies operate IT services and digital products and build IT infrastructure, such as private fiber optic networks or data centers.
Cloud: A marketing term describing digital products and IT infrastructure with flexible billing models.
Cloud Infrastructure: Describes a type of IT infrastructure billed on an hourly basis.
Cloud Services: Are digital products billed on a usage basis and describe a frequently subscription-based business model (as opposed to a licensing model) for digital products. Cloud services are often offered as a package deal with cloud infrastructure, resulting in a frequently discussed "lock-in" effect.
Digital Value Creation
In detail, we have extensively presented the digital value chain in a report for the Federal Ministry for Economic Affairs and Climate Action (Chapters 3 and 5). Understanding the stages of value creation, from the refinement of energy resources to potential productivity or efficiency gains, is crucial for designing successful digital ecosystems. Below is a brief summary of the value creation upon which the digital world is built. The perspective runs from top, from the effects generated by digital products and services, to the bottom level, infrastructure, and power supply.
Productivity and efficiency gains through the application of digital products (digitalization) in non-digital businesses (digital transformation of the economy), administration (administrative digitalization), or society (especially consumer and media industries).
Consulting services for the use of digital products in administration, government, and non-digital businesses.
Sale and manufacturing of digital products and operation of digital marketplaces and media by digital companies (startups).
Manufacturing of digital technologies (e.g., AI models) and the associated intellectual property. However, the market for digital technologies is commercially often unattractive due to the proliferation of free and open-source software (FOSS).
Operation of trading platforms for digital resources necessary for operating digital products (e.g., cloud infrastructure providers).
Manufacturing of ICT equipment necessary for producing digital resources, including computer chips.
Construction and leasing of building spaces (data center buildings) for operating ICT equipment to produce digital resources.
Procurement, generation, and provision of energy, both in the form of grid power, cooling performance, or emergency power.
Provision of internet access and private digital networks for exchanging information, trading digital resources, and internet market access for digital products.
Digital Transformation of the Economy: Enhancing Efficiency and Competitiveness
Across industries, the greatest opportunity for companies lies in process automation through digital products. It does not matter whether technologies like the Internet of Things (IoT) or Artificial Intelligence (AI) are used.
A second opportunity is improving digital marketing, both the sale of products and services over the internet and the marketing of the company's products in digital media. Digital products also serve as tools in this area.
Example: Implementing Process Automation
This requires three components: process and change competence, digital products capable of automating industry-specific processes, and application competence.
To realize these opportunities, companies must:
Be capable of identifying and describing opportunities for digitizing business processes
Possess the necessary capital to invest in process change, skill development, or acquisition
Retrain employees to apply and utilize the digital processes productively
For a regional digital economy, opportunities arise to develop new digital products when close cooperation with companies is enabled to transfer process know-how into a digital product. Simultaneously, investment costs can be shared with the digital company if it already has capital from investors.
Opportunities also arise for the regional ICT industry to assist companies in analyzing business processes, identifying digitalization opportunities, and quantifying potential productivity gains.
Both can be financially supported, but the ICT economy or digital economy must also be brought together with the companies, and collaboration should be encouraged and empowered.
The regional value creation is higher when companies obtain the necessary consulting services and digital products from the region.
For the regional labor market, opportunities arise for retraining to become digitalization experts who accompany process changes, identify opportunities, and manage and execute projects. Simultaneously, highly qualified jobs in the digital and ICT economy are created for manufacturing digital products and services.
In the context of de-industrialization, there is additionally the chance to retrain employees with industry know-how into digitalization experts, combining existing knowledge with new methods for process automation and an understanding of digital products.
Risks:
If the digital products are not developed by the companies themselves, imported, or implemented with the help of non-regional IT service providers, the chance is missed to build up competencies with regional service providers and digital companies, thus creating value.
Moreover, a large part of the digital economic output is lost as the products are manufactured abroad and offered bundled with digital resources. If these digital resources are produced abroad, an even greater loss of economic effects in the supply chain occurs.
Loss of competence: The digitalization of the economy offers opportunities to build up competences in the region. The industry-specific know-how, which could lead to the creation and success of new digital companies, and the implementation competency are not used to strengthen digital companies and service providers in the region.
Dependency: An invisible import dependency arises, both for digital products and services, as well as for the digital resources needed for product operation or implementation.
Due to the shortage of skilled workers in Germany, there is a risk that even IT service providers and digital companies in other federal states may not have the capacity to assist in the regional digitalization of companies with their offerings. This creates a risk that companies will not be able to realize the opportunities of digitalization as the necessary support cannot be obtained either locally or from other parts of Germany.
In this case, it may happen that the company purchases off-the-shelf digital products that do not match the specific requirements of the company and cannot be successfully applied for digitalization.
This results in capital investments that do not lead to productivity gains in the company but rather reduce profitability. Foreign manufacturers of digital products benefit here, and a portion of the region's value creation flows away.
Building an Own Digital Economy: New Value Creation for the Region
Every region aims to attract or promote startups and digital companies to establish a new, attractive economic sector in the region.
Four components are needed for this:
Demand: Digital companies can develop new products that quickly find a market by clearly defined, solvable problems from non-digital companies and administrations.
Free digital resources: As most digital technologies are free and license-free, the largest cost position besides personnel costs is the purchase of digital resources. These must be available free of charge in the pilot or trial phase to reduce the capital requirement.
Early-stage capital: Entrepreneurs need access to financial resources, particularly to finance the trial and early phase of the company before there are customers, turnover, or similar factors.
Personnel: Various competencies are needed for the development of digital products: software and product development, marketing and sales, and design of user interfaces.
Non-digital companies and administrations can self-serving help stimulate demand. They can make potential opportunities for digitalization or solvable problems transparent and public and quantify the value of the solution. This gives digital entrepreneurs a map of opportunities in the region and market potential. This should be the highest priority as it motivates and creates opportunities for entrepreneurship.
The same applies to the end-customer market for digital marketplaces and media, but here the public must be involved and empowered to express which digital platforms provide the greatest value from their perspective. In the short term, the focus should rather be on the digitalization of companies and administrations as the economic value is greater.
Digital resources are in almost all cases provided free of charge by the providers of large marketplaces, for example, by Google, Microsoft, and AWS. They take on the role of the state and promote the development of more digital products. However, this support comes with a "lock-in" to these marketplaces, making it difficult for digital companies to later source digital resources from other providers.
In many successful digital regions, early-stage capital comes from private individuals ("angel investors"). If sufficient private individuals cannot be mobilized, the government should specifically support companies developing digital products for the mapped challenges and opportunities of the region.
Alternatively, the government can also facilitate pilot contracts, giving digital companies the opportunity to develop digital products for administrations or non-digital companies in the region and be compensated for them. It is crucial in this case that the rights to the results remain with the digital company so that it can subsequently offer the product to other customers.
The personnel for the digital economy should be specifically created through university degree programs or encouraged through retraining programs. The attractiveness lies here in that the digital company can provide shares to employees, offering high incentives for students and other workers.
This process can be accelerated by attracting workers from other regions or creating short-term educational programs ("boot camps").
If these components are created, a regional digital economy can be stimulated in the short term. However, it is essential to create a clear map of market opportunities, ensure access to digital resources, and enable early-stage capital or pilot projects.
Risks:
Digital resources are sourced from outside the region, especially from large marketplaces:
Import dependency: The region's digital economy depends on digital resources produced abroad; a significant portion of the value creation (up to 60%) of digital companies is thus lost.
Lock-in: The digital economy can only separate from marketplaces with substantial capital investments, e.g., to source digital resources from within the region.
Value creation: Up to 60% of digital companies' sales are spent on purchasing digital resources. If these are produced in the region, a greater portion of value creation can be retained in the region.
Digital companies cannot find the necessary skilled workers.
Remote work: Digital companies can have skilled workers working for them worldwide, as the typical corporate culture is hybrid or remote work. However, it is crucial that the marketing and contact with the companies and administrations from the region take place on site.
Value creation: If a company consists of skilled workers working remotely, a portion of value creation for the region is lost again, which may be acceptable in the short run but should be improved through education and retraining in the midterm.
Digital companies cannot find markets or buyers for their digital products:
It is particularly important here to create a platform for collaboration between companies and administration to provide a marketplace for digitalization solutions.
Regional development funds can be used to finance pilot projects between digital companies and other industries.
The Basis for Success: A Strong ICT Economy in the Region
Both a successful digital economy and a productivity-enhancing digital transformation of the economy and administration require strong IT infrastructure and services in the region.
The less components must be imported into the region, the higher the economic value added through digitalization and the digital economy.
If digital products are manufactured in the region by digital companies, it creates highly qualified jobs, tax revenues, success stories, and a new strong economic sector for the region.
Likewise, these digital products can be tailored to the challenges of businesses and administrations in the region, which further increases and improves potential productivity gains.
If the digital resources necessary for the digital economy and digitalization are produced in the region, additional tax revenues, jobs, and digital infrastructure arise for the region. In addition, the infrastructural dependency decreases, which positively affects the resilience and sovereignty of the region.
If IT services, like the implementation of digital products in companies and administration, come from the region, competence is built and anchored in the region. This also ensures knowledge sovereignty – the know-how for the creation, implementation, and operation of a digital economy stays in the region.
Creating IT Infrastructure and Marketplaces in the Region
The operation of a regional trading platform for digital resources creates opportunities for IT infrastructure providers and simplifies the procurement of resources for the digital economy and digitalization.
Simultaneously, demand and supply can be observed, along with the growth and success of the digital economy and digitalization, through such a trading platform.
With the help of governments, the provision of free digital resources, supporting new digital companies, can be implemented without preferring individual IT infrastructure providers.
Excess capacities can be provided for other regions through this trading platform, creating opportunities for national or international export trade.
The possibly lacking capacities in the region become visible through price transparency in the trading platform and can be temporarily compensated by imports from abroad.
Regional IT infrastructure providers can also be stimulated to invest in capacities, reducing the price for digital resources. The highest capital costs arise from acquiring necessary ICT equipment.
Here, the government can strengthen providers in the region with financial instruments like loans or guarantees, enabling them to build competitive capacities for the region.
Similarly, the government can stimulate regional IT infrastructure by making grant funds, investments, or orders in the area of digitalization and the digital economy, mandatorily realized with digital resources from the region, purchased through the regional trading platform.
The production of ICT equipment in a region is due to high resource costs and poor working conditions only partially desirable and not competitive in the long run. Instead, deliberate, strategic dependencies with other countries and regions should be built to ensure the procurement of equipment.
For providing building spaces (data center buildings) for the production of digital resources, municipal utilities should be considered. Here, strong synergies arise at the necessary energy procurement and competitive advantages. Municipal utilities can integrate the buildings into the energy system through waste heat usage, centralized cooling, or power storage and recovery. This integration reduces energy costs, impacting the price of digital resources, and thereby enabling the generation of cost-efficient, regional digital resources.
Investments by municipal utilities also strengthen the regional infrastructure and ensure sovereignty and resilience on the physical side of the digital economy and digitalization.
Providing fiber optic networks for IT infrastructure is not about connecting households but providing connectivity and high bandwidth, especially to major internet nodes in the region. This market access and connectivity within the region significantly contribute to success. Connectivity can be created by IT infrastructure companies themselves, requiring subsidies and loans, or can be centrally implemented by the municipal utilities.
Strengthening IT Service Providers and Consultations in the Region
Both digital companies and digitalizing enterprises and administrations in a region require access to IT expertise, both for the production of software and digital products and for integratio...