Originally published in Arab News.
In the 1930s, Nobel Prize-winning economist Ronald Coase wrote a seminal essay on the nature of the firm, explaining the reason for the emergence and growth of companies.
He argued that firms are what they are because of transaction costs. It is not cost-effective to go to the market to transact each time one needs a particular task, such as an accounting activity. So, we create organizations where these functions are in-house.
While this principle has remained true, transaction costs of different activities have changed over time. As a result, the shape and nature of the firm have also evolved. For example, in the 1920s, Ford operated their rubber plantations because it was not practical to go to the market for sourcing the materials every time it was needed. But now, with increased information and access to global markets, it is far more cost-effective to procure rubber from wholesalers.
Just as the global supply chain changed the nature of automotive firms, technological changes are transforming the shape and nature of firms and how they operate.
The standard trajectory of a firm was to open an office in the founders’ home country, hire staff, acquire some clients and then progressively expand city by city, country by country. However, this approach is no longer the default.
Increasingly, we are seeing global firms by default hiring people anywhere in the world to work remotely based on where there is talent. COVID-19 was a forcing function for this shift. Still, it has and will continue to accelerate due to the global talent shortage, a shortage that the World Economic Forum estimated to represent a gap of $11.5 trillion in the gross domestic product.
Firms that widen the aperture on hiring and look in locations where their competitors are not present will have a comparative advantage over firms that restrict their talent search to their city or country.
This shift implies that countries and cities will compete to provide talent and the increasingly needed infrastructure, such as legal services, banking and payments and real estate. With excellent connectivity to the world, digital infrastructure, domestic talent pools and a government focused on the digital economy and next-generation skills, the Kingdom is particularly well positioned to capture the opportunity.
As the physical location of talent becomes less of a constraint, we can start to see the exciting potential of the metaverse. In the future, we will work, do business and socialize in it. We will use digital currencies for payment. We will hold digital assets, such as non-fungible tokens representing artwork or tokens representing our ownership of some physical asset, such as a share in some real estate or a commercial enterprise.
We will engage and transact using digital avatars and identities that will allow us to solve one of the intractable problems of the digital age; how to manage identity and privacy between our professional and personal lives.
The ability to create photo-realistic avatars that abstracts our physical appearance may prove, in the future, to be one of the most powerful solutions to the systemic challenges of workplace or hiring discrimination.
We can see how the convergence of real-time machine translation with metaverse-based interactions could transform how we bring together global workforces and markets across language barriers.
As we move to the metaverse, so will much of the physical world. Digital twins are digital representations of a physical object, such as a factory, building, human or vehicle, such that someone can interact with it in a digital context. The digital twin is continually updated to reflect the condition of the physical object. For example, one can check the health of a physical patient via its digital twin or diagnose an issue with factory equipment.
The economic value of all this will be immense, with some economists estimating it to reach $13 trillion of opportunity by 2030 and bring together over 5 billion users.
Technology is lowering transaction costs and allowing us to reimagine the nature of the firm and work. While there were incremental changes, such as the emergence of enterprise resource planning systems, we are now at the cusp of a much larger systemic evolution. New technologies such as blockchain make it possible to reimagine firms in new ways, such as decentralized autonomous organizations.
These new forms of organization are fully decentralized and internet-native. Members typically do not necessarily interact with each other physically and sometimes may not even know each other’s identity. The rules and objectives of the organization are encoded in smart contracts that run on blockchain technology, ensuring a permanent, trusted record of the activities.
Corporate governance structures are defined programmatically such that members or stakeholders can direct the economic activities of the institution. Participants will contribute funds, such as buying shares in the organization through digital tokens or donating money. These funds will be pooled, and shareholders can vote on how these funds are allocated and used.
These DAOs can engage people to perform work for them, own intellectual property rights, generate revenue and enter into contracts, with some jurisdictions already recognizing these decentralized organizations as valid forms of institution.
Some of these institutions could have a singular purpose, such as ConstitutionDAO, which raised $40 million from 17,000 people to buy an early copy of the US Constitution. Like some of the DAOs emerging in biotech, they could be focused on broad funding of pharmaceutical or biotech innovations, such as VitaDAO’s focus on life-extension research.
In a world in which more and more economic activity will be decentralized and in the metaverse, the availability of talent, the depth of skills, and the ability to operate in this emerging digital world will increasingly become a source of comparative advantage for countries and cities.
With a digitally native and youthful population, a top-down focus on human capital development and vast investments in technology-driven transformation, Saudi Arabia stands uniquely positioned to capture this opportunity.
The Kingdom can provide the talent and skills for this new digital economy by embracing the emerging institutional and organizational forms and providing digital infrastructure, including regulatory frameworks supporting the emergent metaverse economy.
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