Digital Platforms as Second-order Lead Firms: Beyond the Industrial/digital Divide in Regulating Value Chain

Abstract

Major parts of global trade in commodities and services are shifting to digital platforms. Yet, current regulatory debates surrounding global value chains and digital platforms in the EU and beyond are mostly siloed from each other. They share however the challenge of adjusting regulation to a novel mode of economic organization that breaks with our established cognitive frames in both law and economics. By consequence, we contend that both debates should be read in an interlinked manner—overcoming the industrial/digital divide. In particular, digital platform operators should be understood as a novel type of ‘second-order lead firm’ to a value chain. To illustrate this, we assess the compatibility of the platform economy with the reigning model of global value chain (GVC) capitalism and its regulatory underpinnings.

In governing massive digital marketplaces for goods, services, labour, and information, digital platform operators have taken on a novel space in value chain governance. Portraying their role as mere facilitators of transactions on proprietary platforms, platform operators claim to avoid direct involvement in dyadic user relationships such as buyer–seller relationships. The imaginary of the platform—seen as mere intermediary, separated from the underlying value chains of its business users—is pervasive in economic and legal thought. Platforms are not targeted by recent regulatory and doctrinal advances towards imposing sustainability requirements in value chain governance, such as the EU’s proposed Corporate Sustainability Due Diligence Directive. In turn, regulatory proposals focused on the interface between limited local users and platforms, such as the EU’s Digital Markets Act and the Digital Services Act, do little to address the radical effects of platforms on deeper tiers of production practices.

To counter the new means of legal arbitrage exerted by digital platforms and drawing on the recent wave of GVC regulation, we contend that platform operators should be required to conduct due diligence vis-à-vis their value chains. We show that foundations exist to broaden conceptualizations of ‘lead firm’ and ‘value chain’ in the current crop of GVC regulation and doctrines to cover ‘second-order lead firms’ and the value chains of their users. At the same-time, extra-territorial platforms pose a unique problem to current regulatory approaches that operate on the precondition that relevant lead firms are situated within the regulating jurisdiction.

Keywords: private law, digital platforms, global value chain theory, sustainability, security of supply