Why Are Companies Focusing on Data Localization?

Since emergence of technology, the value of data has increased enormously which leads to growing threat of misuse of the data or theft. Due to these threats, there are numerous regulations being implemented with an aim of securing the data and with that safeguarding the industrial sector. Data localization of one such regulation that is now being adopted by various industries across the globe.

What is Data Localization?

Data localization is a law that restricts the data to be kept and stored “locally” i.e. within the boundaries of that country. Countries that adopt this law require the storage or processing of data on servers that are physically located within their borders. Data localization act needs the data of the country’s citizens or residents be collected, processed, and stored inside the country, often before being transferred internationally. The data can usually be transferred only after complying with local privacy or data protection laws, such as giving the user a formal notice about how the information will be used and obtaining their consent to do so. Free flow and sharing of digital data specifically the data which could impact the government operations in any region, is strictly restricted by some governments. Many government organizations seek to protect and promote security across borders and hence support and encourage data localization.

Where is data localization law passed?

Data localization can be adopted due too various reasons such as national law mandates, or individual preference based on data threats. This law have been passed in South Korea, Russia, Vietnam, Indonesia, and Brazil, amongst other jurisdictions. Currently, other countries like India are also considering data localization requirements, however some others are still looking to expand existing regulations. Almost all of the countries globally, are taking efforts towards creating a robust data protection framework across various parts of government and private sectors. Data localization is being used as a solution to protect the consumers and safeguard the country’s national and economic interests.

Adoption of Data Localization

As digitalization is the ongoing trend transforming the industries, activities such as data collection, storage, processing and sharing are getting easy and hassle-free. Today’s digital economy greatly relies on cross border facilities of services and goods, and trade regulations in past governments have embraced the borderless nature of internet and adopted light-touch regulation. However, with growing importance of data, government across the globe are now taking steps towards limiting the cross-border data flows. According to a report published by the U.S. International Trade Commission in 2017, the number of data localization measures has doubled in the last six years. The report also mentioned that data localization was most cited by U.S. industry representatives as the policy measure hampering digital trade. As governments around the world begin mandating data localization laws, most of the organizations will need to address the wide-ranging implications in strategic ways as part of their national cyber policies.

The major factors attributed to growing demand for localization from government perspective is data security or surveillance concerns. Moreover, the desire to attract significant investments, fuel innovation and create competitive advantage for local companies is another important logic driving data localization efforts. When thought about from a economic and employment point of view, localization is politically appealing and enjoys support of local business constituencies. This approach is working in some countries and has forced companies to setup their local data centers to continue with their business. For instance, Google and Amazon Web Services announced setting up data centers in Singapore, Taiwan and Japan.

Also, a computing arm of the Chinese company, Alibaba Cloud, announced that it would be setting up data centers in India and Indonesia. Though it costs high for the companies to enhance their local IT infrastructure, companies are still complying with this law to continue with their international trade. However, many companies are simply abandoning regions in which they either did or hoped to do business. According to the market experts, around 74% of the Fortune 2000 companies included in a 2017 Accenture report stated that they would exit, delay, or abandon entry into different markets because of data localization regulations. This is simply because may be for some companies it is easy to comply with this law, however few of the companies think that complying with data localization is so difficult, they are willing to leave money on the table.

Advantages of data localization that attracts companies

Data Protection: Today, data has become a significant part of every industry. In such competitive world, data is extremely valuable and if properly analysed, it can be the backbone of a successful business. Local companies can benefit from the data localization laws, as they will gain a competitive edge over international players. Due to this law, all the data is secured locally and the flow of data to external countries is prohibited, which makes the data easily available for internal use by local companies. This creates an information asymmetry which is expected to turn out to be favourable for the local companies.

Financial Benefits: Data generated in any industry is considered as a national resource, and government of the country should have a right to revenue generated from that resource. Similar to the trade of goods and services, government can generate revenue from trading the data by implementing taxes over it. This additional income can help governments run social programs and focus on developments in the country.

Effect of data localization on global organizations

Data localization laws is expected to potentially affect any business that uses the Internet or web-based technologies for services. These laws affect internet service providers (ISPs), social media, and mobile communications companies generally, however it also affects the multinationals and small and medium sized enterprises (SMEs) active in retail, production, healthcare, pharmaceutical, and other business sectors.

Though data localization has some benefits, there are even more disadvantages that might affect the industries on a large scale. Downturn on the internet, increased government surveillance, impact on innovative technologies such as big data are some of the disadvantages. In order to maintain international presence, and stay upfront in the market companies are opting for data localization, no matter how it impacts the organization.