Structural change and digitalization in developing countries: Conceptually linking the two transformations

In the wake of digitalization it is increasingly debated whether developing countries can achieve economic prosperity through industrialization in the same manner as developed countries did. At the same time, developing countries have high hopes for digital technologies to drive the transformation of the economy towards prosperity. Literature on structural change views technology as one driver of employment shifts between economic sectors, but underlying mechanisms are often overlooked. Similarly, evidence on digitalization highlights its impacts on employment, but the causes and effects require further investigation. As a consequence, both strands of literature benefit from an integrated perspective on structural change and digitalization, which has largely been lacking. Hence, we pose the following research question: What are potential linkages between structural change and digitalization? Based on a review of the existing literature we identify the drivers of structural change as well as the economic impacts of digitalization on these drivers. We then elaborate on linkages between both strands of literature, showing that digitalization impacts the drivers of structural change in various ways. Evidence suggests that digitalization is likely to affect relative sectoral productivity, but it is questionable whether destinations of subsequent labor movements (e.g. towards traditional services) will equally benefit from technological progress. Moreover, the skill bias of digital technologies may be a risk not only for equitable income gains, but also for inter-firm linkages. Our review further implies that digitalization fosters the servicification of manufacturing and presents opportunities for developing countries to diversify in traded goods and services. However, it is contested if digitalization facilitates better positioning of developing countries in global markets, or if it narrows the scope for their participation and upgrading opportunities in global value chains due to relatively larger benefits for developed countries. We thus highlight various differences between developed and developing countries in the ability to benefit from digitalization. Future studies can empirically test the proposed linkages to reveal technology-, country- and industry-specific interactions between processes of structural change and digitalization.