Digitalization, Institutional Change, and Government’s Role: Approaches from Transaction Cost Economics and New Institutional Economics

The purpose of this paper is to explore the how and why information and communication technology facilitates digital transformation (DX), grounded in transaction cost economics and institutional economics. The study also examines the pivotal roles that the Japanese government sector assumes in addressing the multifaceted challenges confronting the Japanese economy. Digi-talization’s impact extends to the operational dynamics within firms and reshapes the boundaries between firms and markets. Furthermore, its impact is unevenly distributed within the market due to the dual functionality of the market, encompassing information processing mechanism and institu-tional system. These dynamics necessitate various institutional reforms, in which a significant role assigned to the government sector. With this analytical framework, government DX assumes three critical roles and functions. Firstly, the government-led DX initiatives are identified as catalysts for fostering analogous endeavors within the private sector, thereby promoting the diffusion of “best practices” since the government sector engages in commercial transactions to a similar scale as the automobile industry. Secondly, the government is obligated to spearhead the reform of institutions, such as competitive policies and regulations in specific industries, conducive to a prosperous digital economy. Thirdly, the paramount concern, surpassing specific details of institutional issues, is the capability to adeptly respond to institutional changes along with technological changes. Given the rapid progress of technology, agility becomes indispensable to address emerging issues and to formulate new institutional frameworks. The crux of government DX lies in the strategic devel-opment and allocation of proficient human resources, coupled with managerial competencies in orchestrating professional knowledge towards navigating the evolving digital economy.