Europe, Software and Data Flows: What are the Economics?

This figure shows the accumulated capital stock in software and other computerized information per worker for various European countries for which data is available. In contrast to many other investment figures, the capital stock shows the true amount of an economy’s endowment which, in this case, is dedicated to software. The calculations to get these numbers are complex. First, one needs to have a credible number of the gross fixed capital formation on investment made in software which is hard to obtain. Fortunately, major efforts have now been taken by researchers from Intan-Invest to provide this data. Then, one needs to deflate these investments with a suitable software deflator per country. Finally, since investment formation depreciates over time, one also needs to account for this. Economist usually apply the perpetual inventory method to do so for which an appropriate depreciation rate needs to be used. For our purposes a rate is chosen as described by Corrado et al. (2012). Moreover, the figure below shows the net real capital stock in software per worker since it gives a more accurate picture as otherwise it may reflect just merely the size of a country’s economy.

What do these numbers tell us? Well, for one, some Nordic countries are very well endowed with a stock that is associated with software. Countries such as the UK, France, Finland, Netherlands or Belgium take up a middle range position. Other countries such as Germany or Portugal have much less software capital stock. Second, according to standard trade theory, countries well-endowed with software stock are expected to be the ones that export goods and services that depend much on precisely software and other computerized information such as data. Hence, Denmark and Sweden for instance are likely to have comparative advantage in exporting software and data-intensive goods and services. Finally, in terms of political economy these are the countries that should favour more open borders when it comes to exporting these software-intensive goods and services. And since many services are data-intensive, it seems logical for these countries that open borders for services and data go hand in hand.

So, all in all, these well-endowed countries are also the ones that are expected to be in favour of less demanding regulations concerning the easiness of transferring data across borders as their goods and services much depend on efficient sourcing and storing of data through software. Now Sweden, for instance, is a country that exports many services which are software and data-intensive. Cross-border data for Sweden is therefore utmost essential. Economically speaking at least, it would make little sense for Sweden nor for Denmark or other countries which have a larger stock of software to be in favour of yesterday’s court ruling. We’ll see what the final outcome is going to be in the EU!