Question

increased costs to individual firms due to data localisation

Answer 1

data localization seems like an easy answer to questions about a wide range of public policy problems: how can governments ensure that they have access to data for law enforcement? How can they invigorate growth in domestic tech sectors? How should they best protect their citizens’ privacy? What policies can ensure information on the internet stays secure? All of these are good questions to ask about data and the internet in general, but in reality data localization is not the answer. We will address the above questions and others in this blog series, but this blog will focus on the negative economic consequences of data localization.

Data is the life-blood of today’s global economy: The McKinsey Institute found that in 2014 data flows generated $2.8 trillion in value and that the amount of data flowing over the internet grew 44 times over in the nine years between 2005 and 2014. Indeed, firms in every economic sector (e.g. agriculture, health, education, energy, consumer goods, and financial services) rely on data flows for their most basic, daily operations: communication, file management, HR records transfer, remote contracting, electronic payments, supply chain coordination, research and development, data processing, and so much more. Many new businesses only exist online and are able to reach global markets from one location. Interrupting the operation of the underlying enabling technology, the internet, will always have a direct impact on business.

Data localization’s costs to an economy can be massive. The European Center for International Political Economy found that enacted or proposed data localization policies in China, for example, would cost as much as 1.1% of its GDP: reducing domestic investment by 1.8%, exports by 1.7%, and welfare by the equivalent of 13% of each citizen’s salary. In the European Union, the costs would add up to .4% of its GDP, reduce investment by 3.9%, and result in welfare costs up to $193 billion.

At the firm level, a report from the Leviathan Security Group shows that data localization measures raise the cost of hosting data by 30-60%. This is because the internet enables centralized data storage and processing, taking advantage of economies of scale in cloud computing and a seamless, global internet. When governments break apart these efficiencies they exponentially raise the cost of doing business.

Compounding this, increased costs raise barriers to market entry for would-be startups, repressing innovation and reducing an economy’s competitiveness in the long term. The global nature of the internet enables small and medium sized enterprises (SME) to have an instant sales presence in foreign markets, allowing them to quickly scale popular products and expand their customer base.

A study by eBay found that 95% of U.S. SMEs selling products on its platform export to foreign markets—compared to less than 5% of offline businesses. Breaking down this capability through data localization hurts both foreign and domestic SMEs alike. It restricts local companies from receiving state-of-the-art digital products and from easily expanding beyond the borders of their own country.

Data localization is a costly response to questions about the digital economy. Beyond the economic costs, data localization also impacts free speech, social mobility, and civic engagement by restricting what information is available to whom. As governments increasingly control where data can be stored and who can access it, the internet will splinter into increasingly separate networks by restricting what information is available to each person depending on where they are; reducing the benefits of the network for all of its users.

Given these costs, we advocate that governments consider alternative policies to data localization. The following blogs will debunk several myths associated with data localization and explore how governments should respond without mandating where data can be stored, processed, or handled