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Going Global with a Click of the Button: What Local Presence Requirements Get Wrong About the 21st Century Economy

The internet has enabled companies to go global before they go national by leveraging e-commerce platforms, social media, and websites to find suppliers, customers, and partners anywhere in the world. Companies can develop and provide professional services, software, apps, games, and support from anywhere to anyone, collaborating with partners around the world with just the click of a button. This has opened the door to a thriving global marketplace of opportunity for entrepreneurs to go beyond the limitations of a traditional brick-and-mortar operation because online businesses do not have to have a local presence in order to serve a local market with their goods and services.

Unfortunately, instead of capitalizing on an opportunity to tap new markets beyond their borders, many governments have established damaging rules that require businesses to establish a local presence as a condition for providing services within their economy. These requirements affect the ability of businesses of all sizes, especially for small and medium sized enterprises (SMEs), to realize these benefits. ITI urges policymakers to consider how requirements concerning new technologies impact evolving business models – and avoid requirements that hinder the uptake of these technologies and the development of innovation.

A recent example is the government of Indonesia’s proposed regulation on “Over-the-Top” services, which not only contains a local presence requirement, but also a data localization requirement. These types of rules threaten to undo the benefits that the internet and technology provide to companies.

Information and communications technology products and services act as both the catalyst and platform for small business growth and enhanced participation in international trade. The global reach of the internet gives way to easy communication and access to business partners, customers, information, and collaborators in a way that was never possible before. Policies that require companies to open a physical office in any country in which they seek to do business impose unnecessary, expensive, and inappropriate requirements on companies providing goods or services digitally—hurting SMEs most of all.

Local presence requirements artificially restrict SMEs’ market and growth prospects by limiting potential partners and resources. SMEs rarely have the resources to invest in local offices in every market to which they seek to expand digitally. These requirements also deny economies cutting-edge services, limit the innovative potential of economies, and deprive local companies and consumers of a wider array of less expensive choices. That does not sound like a path towards economic growth and innovation.

Global leaders are already beginning to grapple with these policies, through venues like the Asia Pacific Economic Cooperation (APEC) forum, where recent meetings of the SME working group have featured robust conversations on defeating the policies that inhibit the abilities of small businesses to grow. The Trans-Pacific Partnership (TPP) agreement also addresses these harmful measures by restricting local presence requirements for the delivery of services (Article 10.6), a necessary development in today’s current trade environment.

Still, more work remains to be done. The World Trade Organization Agreement on Trade-Related Investment Measures (TRIMs) does not address 21st century internet-enabled services (let alone services at all), and some governments are exploiting this legal gap to provide protection to their incumbent competitors—often to the detriment of growth, innovation, and employment in their economies. We encourage leaders to reinforce their commitments to small business growth, innovation, and global economic integration by avoiding and rolling back local presence requirements and other types of forced localization measures.

What makes the digital revolution so powerful is the ability of businesses and consumers to provide and access services and information anywhere in the world at low cost. ITI looks forward to being part of the global dialogue on ensuring that businesses of all sizes and in all countries can access the technology and resources necessary to succeed.

Forced Localization Blog Series Table of Contents:

Public Policy Tags: Forced Localization