Digital Sovereignty. Thumbs Up/Down. Unlocked Essays.

European Straits #236

The Agenda 👇

  • An essay about digital sovereignty

  • Thumbs up/down for last week

  • A list of recently unlocked essays from the archive

Some time ago I participated in a workshop focused on digital sovereignty. People expected me to echo what political leaders have to say about this concept: enacting laws that make it harder for foreign companies to sell technology to the government and the public, imposing strict regulations as to how business is conducted across borders in the digital world. But I took a different approach, embracing the perspective of entrepreneurs and explaining that digital sovereignty is now a thing because it’s a business opportunity! Below is a slightly expanded version of my notes.


1/ I remember the early days of the Internet, when it was described as the “network of networks”, one that would make it easier to connect everyone on the planet and advance the common good. This was what ARPANET, the Internet’s predecessor, was all about: an infrastructure to improve collaboration between scientists. What if the same thing could be replicated at the scale of the entire world?

The first generation of big tech companies reinforced the idea of the Internet as a global phenomenon. We had the impression that products like Google’s search engine and Yahoo’s web portal were used all around the world, and that the most successful among these companies had outgrown nation states. Even in the Fordist Age (that of mass production), most large corporations were constrained by national borders; tech companies, on the other hand, appeared unbound by most sovereign states.

2/ This was unprecedented in many respects. Even the most powerful corporation in the history of the world, the East India Company, wasn’t operating beyond the limits of the British Empire. More recently, the big corporations born in the 19th century were mostly focused on their (large) domestic market: Andrew Carnegie’s US Steel was essentially focused on the US; likewise for John D. Rockefeller’s Standard Oil and, before it, Cornelius Vanderbilt’s railroad empire.

There was such a thing as a big corporation then, but there was always a corresponding nation state imposing some sort of a balance, as I explained in Capitalism and the Future of Nation States (December 2019):

This two-stage process is why every state has an interest in supporting local capitalists with access to a supportive domestic market and various forms of industrial policy. The goal is to have capitalists create and capture even more value that will then be realized locally. In exchange for this support and “protection”, capitalists have to contribute to local development through consumption, investment, and redistribution. The state contributes to capitalists succeeding; capitalists, in turn, contribute to lifting up the local economy, thus strengthening the state.

3/ The idea that the “new economy” would give birth to global, stateless corporations was reinforced by other factors. One was the fact that operating a corporation across borders was getting more sophisticated by the day with the emergence of so-called “global value chains”. A whole new set of mechanisms, such as the US 1994 tax rule known as “check the box”, made it easier for corporations to spread their assets, functions and risks across borders, thus making it harder for most nation states to enforce their sovereign power over the new breed of tech companies.

Another factor was America’s worldview. Many Americans, including those building tech companies in Silicon Valley, see the world as a homogeneous entity. Sure, not everyone speaks English, but it is assumed most of the world is still modelled after the US—or aspires to become more like it. Therefore, it should be easy for US companies to get a foothold on foreign markets without tweaking their product too much. Technology should be to Silicon Valley as movies are to Hollywood! 

4/ I think 2014 was the tipping point for invalidating this idea of the digital economy being dominated by a handful of global corporations. That particular year was when Alibaba went public and the world discovered the potency of Chinese tech giants. It was also when some US tech companies, Uber being a prime example, started to experience difficulties with their expansion on foreign markets. The world, it turned out, wasn’t as homogeneous as expected. This marked the beginning of a new era that I call The Great Fragmentation (June 2020).

5/ The jury is still out as to the name, by the way. Global investor Chris Schroeder calls it “The Great Technology Shift”; David Halpert, of Prince Street Capital, prefers the term “Digital Decolonization”, or #DigDec. I’m not especially pushing my own term (which was inspired by Karl Polanyi's The Great Transformation) but the fact that we don’t have a single term that everyone uses to describe this particular phenomenon is a sign of how misunderstood the new state of things is.

6/ To me, the Great Fragmentation is the result of an alignment of interests, in every country, between the government and users. As proven by many industries, starting with Hollywood, user demand for customized products was long not enough to make the industry change its approach to serving national markets: the attraction of economies of scale was just too difficult to resist, and every corporation that could afford it tended to impose the same product on everyone on the global market.

Likewise, the fact that governments enforced a set of (stupid) local rules was never enough to make tech companies comply if users were perfectly happy with the product. In the end, the Shift/Fragmentation/Decolonization could happen if users and the government agreed: together, we want a customized approach to serve our market, and we’ll force those big (US) tech companies to comply.

7/ It’s more than an alignment of interests: it’s a positive feedback loop. If consumers demand customization so that the product is adapted to the local context, then it delineates a perimeter in which the government has an easier time enforcing local regulations. On the other hand, the government imposes a tweak for regulatory reasons forces the company to reflect on how it should customize the product so as to maximize value and compensate for the cost of the tweaking. More often than not, it results in the product falling more in line with the expectations of local users.

8/ In a way, this was revealed by what happened to Google in China in 2009—effectively a prequel to the current Great Fragmentation. When Google announced it would renounce offering its search service in China, most observers wrote that it was because of the CCP demanding that Google spy on their users on the government’s behalf, a demand that Google claimed it refused to satisfy.

But what Kai-Fu Lee, the former head of Google China, describes in his (excellent) AI Superpowers, is a company that had been struggling for years because executives in Mountain View were always refusing to let them tweak the product for the (huge) local market. We certainly don’t know the whole story, but we can guess that both the CCP and Chinese users were pushing for tweaks in the product, and that Google had no choice but to comply...or to exit (which they did in order to save face).

9/ The same trend (complying with local demands or exiting) is accelerating these days because there’s an ever better alignment between governments and users in many countries:

  • The shift to the Entrepreneurial Age is happening in industries that are more tangible (think: food delivery) and/or more regulated (think: financial services), thus the general context is more favorable to building companies that are “default local” as opposed to “default global” (using categories introduced by Anish Acharya of a16z).

  • Entrepreneurs are taking notes and spotting the demand for local customization as an opportunity to build a business in their own country—as opposed to having to emigrate to Silicon Valley. It only helps that they have access to more technology than ever, as do their potential users on the local market (this is Chris Schroeder’s “Great Technology Shift”).

  • In turn, investors realize what’s happening. They’ll go on to surf the wave and deploy more capital locally, which in turn helps entrepreneurs build faster, which in turn helps open a dialogue with the government so as to adapt local regulations to the new state of things.

10/ The pandemic seems to have intensified the Great Fragmentation, but it was a trend that was already at work. Then there’s an additional layer of geopolitical fragmentation that can be explained by techno-economic progress in certain developing countries. Those end up being bolstered by unprecedented prosperity and go on to turn that prosperity into power on the global stage. China is the most obvious example in this category, but it’s only one example among many. The same is happening, albeit at a smaller scale, elsewhere in Asia as well as in the Middle East, Africa, and Latin America.


In conclusion, the phenomenon known as “digital sovereignty” seems to be emerging right now because political leaders in France, Germany, Russia, India, Nigeria, Brazil and elsewhere are voicing (more or less legitimate) concerns regarding the unprecedented power of big US tech companies. But correlation is not causation, and my view is that the voicing of these concerns is only one outcome, among many, of a techno-economic shift that’s been at work for more than a decade—and which presents investors with many opportunities to generate returns. 👉 What do you think?

😀 I’m delighted to have discovered the newsletter Neckar’s New Money by a NYC-based German guy named Frederik (I couldn’t find his last name). The most recent edition is a fantastic telling of Michael Milken’s story: you should read The Milken Way right away if you’re interested in creating new markets in the financial services industry. Also see this one for more context about Frederik and his journey. (I have Byrne Hobart of The Diff to thank for the discovery 🙏)

🙂 If you’re based in Paris and are interested in both tech and policy (and payments), you can join one of the great companies of our time to work with my friend Sandro:

😏 Also by Byrne, in a recent edition of The Diff, is a discussion of the luxury industry in the context of The Great Fragmentation: De-Globalizing Luxury. Highly recommended—and to be coupled with another edition of Neckar’s New Money which is entirely dedicated to Bernard Arnault as a dealmaker and a financier: it’s a great read, and a welcome substitute to the “11 Notes on LVMH” that I have yet to write.

😐 Are governments doing everything in their power to foster productivity growth in the post-pandemic recovery? I highly doubt it, and yet it’s the most critical part of economic policy at the moment because only higher productivity can compensate for the huge amount of debt that’s been piling up over the course of the past 18 months. About that, read Megan Greene’s Productivity growth is almost everything in the post-Covid recovery as well as my How Governments Can Deal With the ‘K-Shaped’ Recovery (published in February)

😒Remember the hedge fund Elliott Management mounting an activist campaign against Twitter back in 2020, an episode I wrote about in Paul Singer vs. Twitter? The campaign ended in a compromise between Twitter’s management and the hedge fund, but now Twitter shareholders are suing because they find the compromise has been to their disadvantage. Interesting development: Mystique of Elliott Management at issue in challenge from Twitter shareholder.

😖 You might remember my essay on Why Software Has a Hard Time Eating Construction and the challenge that many people are trying to tackle at the moment, namely bringing productivity gains into the construction industry. Well, Noah Smith started reflecting on it and ended up realizing it’s more complicated than expected. Check out part 1 of his ongoing series: What happened to construction productivity? Part 1: Measurement

📚 I unlocked a few more essays from the European Straits archive recently. Here’s the list:

⚔️ Paul Singer vs. Twitter (March 2020)

🐼 Thoughts on Value Chains, and Why You Really Need To Get a 'Grip' (June 2020) 

📝 A Memo About Writing Investment Memos (September 2020) 

What Determines VC Returns (September 2020) 

😓 Why Is It Still So Hard to Raise in a Time of Cheap Capital? (October 2020)

🌪 Every Successful Business Has Two Financial Loops (December 2020) 

📈 How Governments Can Deal With the ‘K-Shaped’ Recovery (February 2021)

🌐 Where's Europe's Delaware? (March 2021)

And here’s the whole Twitter thread including all unlocked essays since last June:


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From Munich, Germany 🇩🇪 

Nicolas