The importance of digital infrastructure for the Dutch digital hub role

On Monday 22 January, the Ministry of Economic Affairs and Climate presented its report 'The State of the Digital Infrastructure'. The Ministry had the following to say about it:

The Dutch digital infrastructure is at the absolute top. However, this position also poses a risk. At the moment, there is little priority given to enabling new investments, ensuring sufficient capacity on the energy grid, and providing physical space to continue offering digital services successfully to businesses and consumers in the future. This is evident from the State of the Digital Infrastructure report that Minister Micky Adriaansens (Economic Affairs and Climate) has sent to the House of Representatives.

Dialogic made a significant contribution to this publication. We conducted research on the interaction mechanisms that underlie the digital node role and hub function of the Netherlands. Alongside two other studies, this research formed the basis for the policy routes proposed by the Ministry of Economic Affairs and Climate in its report.

Theoretical interaction mechanisms behind the digital hub

Based on economies of scale, scope, and agglomeration, we investigated the interdependencies between the different components of the digital infrastructure. We found strong interactions between the links. These interactions create a 'flywheel' for the development of a high-quality Dutch digital infrastructure. A brief summary of our findings:

• Economies of Scale - strong scale advantages exist within all components of the digital infrastructure: the phenomenon where production costs per unit decrease as production scale increases. This means that it is profitable for providers to have more connections, routes, networks, or service offerings in-house. Internet nodes are the most concrete and measurable example of an activity with very strong network effects.
• Scope advantages are cost benefits that a company can achieve by operating in different parts of the digital infrastructure. Scope advantages are also prevalent between the components of the digital infrastructure. Companies with their own hyperscale data centres, for example, are increasingly choosing to lay international data cables overland or undersea between their own data centres and to other data centre hubs. Among mobile network providers, it is notable that they have also gained a strong position in the fixed market.
• Agglomeration advantages occur due to the physical proximity of parties and activities. Agglomeration advantages are prominent in the interplay between data cables, data centres, internet nodes, peering, hosting, and cloud services. The local presence of these providers strengthens each other. Cloud providers developing high-quality software services use data centres to offer the necessary computing power and data storage to customers. For large data centres, being located near international data cables and other data centres is advantageous. This enables them to serve a larger area. In turn, it is beneficial for sea cables to connect to internet nodes, where various globally operating networks converge.

Impact of the digital infrastructure on the rest of the economy

As expected, the dependence on the digital infrastructure is greatest in the digital economy. There, businesses offer their economic activities entirely through digital technology, such as e-commerce, IT companies, or online platforms. However, sectors outside the digital economy have also become highly reliant on the digital infrastructure. For certain economic activities, we see that very specific, high-quality digital infrastructure is a decisive factor in location choice. These include companies providing services related to cloud computing, data centres, hosting, and internet nodes, or companies heavily reliant on these services, such as 'cloud gaming'. For most sectors, the digital infrastructure is primarily an important factor in combination with other key location factors.

Want to learn more?

To discover our findings and explanations, please take a look at the report or contact Menno.