Platform governance not sole responsibility of government

Render unto Caesar what is Caesar's and unto God what is God's. Here is my thought on the crucial governance role played by platform enterprises during China's economic development.

God, represented by public governance or government authorities, is expected to leverage power to regulate platform enterprises, merchants, consumers and other participants through public laws and rights. Caesar, on the other hand, refers to platform enterprises, which should take on a certain level of governance themselves over the platform economy and ecosystem.

Before 2022, China's platform economy underwent a period of stringent governance and rectification. Starting from 2022, it transitioned to normalized regulation. In January 2022, the National Development and Reform Commission released a guideline to promote the standardized, healthy and sustainable development of the platform economy. In December 2022, the Central Economic Work Conference said that the country would support platform enterprises in leading development, creating jobs and competing internationally.

All these efforts set the tone and opened a new chapter for the development of the country's platform economy. But we should note that the country still put focuses on the "standardized, healthy and sustainable development" of the platform economy.

From an international perspective, the United States has enacted several laws particularly targeting some platforms with extensive user bases. The European Union introduced the Digital Markets Act and said that large platforms are digital gatekeepers.

The reason why various countries emphasize large platforms is that these platforms cannot be evaluated solely from a post-antitrust regulatory perspective anymore. Instead, they are required to take certain governance responsibilities in advance.

This shift also marked an evolution in platform governance, which moves from the early "safe harbor and red flag", which stipulates limited responsibility for platforms, to a focus on the "primary responsibility" of platforms.

Currently, regulation can be divided into three stages: pre-regulation, which is primarily focused on qualifications and licensing; mid-regulation (or regulation during the process), which is mainly concerned with behavior; and post-regulation, which is primarily about accountability and remediation.

Against the backdrop of this evolving role, we recognize that platform governance is not the responsibility of a single entity and cannot rely solely on public regulatory measures by the government.

Government regulation often lags behind, though there are instances where proactive regulation is necessary, such as issuing licenses and business permits. Therefore, while the government has strengths in both proactive and reactive regulation, platform enterprises have certain regulatory advantages in mid-regulation.

Platform regulation, as a form of private governance, is relatively flexible, whereas government regulation relies on public authority and entails higher public administrative costs.

Thus, there are two regulatory entities on platforms: government regulatory bodies, such as China's industrial and commercial authorities, and the platform enterprises themselves.

To conclude, government regulation and platform regulation work together to form a collaborative regulatory framework for the platform economy in the country.

Effective regulation

Between these two regulatory entities, I believe that the regulation of the platform economy should leverage more the private regulatory role of platform enterprises, as they are more flexible and their regulation occurs during the process itself.

If regulation is effective, the government can relax its proactive public regulation, such as licensing regulation. In China, many regulations have relied on licensing regulation, where improper behavior could result in the revocation of licenses. But considering that when faced with post-incident penalties, platform enterprises use private means for private remedies, public penalties can be relaxed too, unless there are particularly severe consequences.

Therefore, compared to the specialized and stringent government regulation in previous years, providing strong theoretical support for normalized regulation can better recognize the role of private regulation by platform enterprises. Once this role is effectively utilized, the government can reduce the intensity of its regulation.

The government now has strong regulatory capabilities in both pre- and post-regulation, whereas platform enterprises, with their capabilities, digital advantages and the flexibility of private regulatory methods, are better suited to play a regulatory role during the mid-regulation stage.

As far as I am concerned, platform regulation should also be open to more societal entities to form a truly collaborative system that includes media, industry associations and capital markets.

Overall, these forces are relatively weak in China at present. Before the strict regulation of internet platforms, public opinion was almost unanimously positive toward these platforms. After governance measures were introduced, public opinion collectively turned negative, even to the point of personal attacks on some very outstanding entrepreneurs.

The capital market has two very effective mechanisms: short-selling and class action lawsuits, but these are not yet well-established in China. Thus, the path to more participation from societal entities remains a long process.

Building ecosystems

In addition to the above, here are more thoughts. As the platform economy shifts from the consumer internet to the industrial internet, and from digital platforms to digital ecosystems, how should we collaboratively govern digital ecosystems, especially innovative ones?

First, for a digital ecosystem, it's essential to offer commercial value services to member companies, including openness and more business opportunities for these companies. Additionally, some governance tools are necessary, like digital rules and standards within the ecosystem. Standards are crucial for building a digital ecosystem.

The UK's chip firm ARM, for instance, used an open ecosystem to establish a series of mature standards and helped ecosystem partner companies to grow. This led to the successful creation of an excellent digital ecosystem in the semiconductor sector, especially in mobile chips.

Second, should platform enterprises participate in the broader governance of the digital economy and society?

In some prepaid industries, such as early education, fitness clubs, beauty salons and hairdressing, businesses strongly encourage consumers to purchase membership cards and prepay for services. These businesses are highly proactive in promoting user payments.

However, once the number of users reaches a certain level, some businesses choose to run away. It has become quite common in cities like Hangzhou, Shanghai and Beijing, posing a significant challenge to local governance. Although these cities have enacted management measures for the prepaid industry, the actual results have been less than ideal.

In fact, we can leverage internal payment mechanisms of platforms to address this issue. For example, platforms like Ant Financial and JD have introduced payment methods such as pay after enjoying.

The writer is a tenured professor at Tsinghua University and an associate director of the Institute of Economics at the university. This article is a translation of his op-ed first published on the official WeChat account of the China Macroeconomy Forum, a think tank.

The views don't necessarily reflect those of China Daily.