We now live in a global village where data can move freely from one corner of the world to another. Such heavy flow of data is the result of the internet which has been bringing extreme advancements, ever since its invention and mass adoption. Though the ease of data flow has improved, some nations have been trying to enforce laws that can control this free movement of data. China and Russia have strongly shown their inclination towards data localization. Additionally, several developing nations (including India) have also expressed concerns over data localization. 

Over time, we have seen how much value does data holds and why it is prone to theft and misuse. For the purpose of safety, data localization is one of many regulations that can provide protection.

The aftermath of cases like Edward Snowden eye-opening leaks is the reason why many countries have persistently emphasised on the need to implement such regulation.

What is Data Localization?

The idea behind the localization of data is to put restrictions on the cross-border transfer of data. The data is stored where it was generated, i.e. within the territorial borders of a nation and can be accessed only through permission. This allows countries to impose taxes on any form of international data transfer.

To encourage such localization, the government often control data flow that has the potential to impact its operations in a domain. 

Storage of data within a country is not only cost-effective but can also provide more dependable solutions to many data-related issues.

Big organizations have sided with the idea of such storage as cybersecurity concerns have become a constant struggle for businesses. As witnessed in the recent trends, precious data is being hacked and breached when it is stored outside the border of the country. This in turn is also expanding the global Cyber Insurance market.

As per the reports published by Next Move Strategy Consulting, the Global Cyber Insurance Market size was valued at USD 6.12 billion in 2019 and is predicted to reach USD 35.21 billion by 2030, with a CAGR of 17.1% from 2020-2030.

The need to store data 'locally' can necessitate compliance with data protection laws- users will receive formal notices and their consents will be obtained to let them know about the usage of the transferred information. This will strengthen local privacy as national laws and regulations related to data protection will be mandated. 

Advantages of Data Localization

In today's dynamic world, data runs the show. It 'oils' the business and acts as the backbone. Let us look at some of the advantages that localization of data holds:

• Data protectionism 

The aggressive political narrative is favouring data localization. It will help governments to provide a competitive advantage to their regional corporations. By curbing the external flow of information, data will be readily available to local companies. This information asymmetry will only affirm and promote economic growth. 

• National Resource

Advocators of data localization argue that data is a kind of national resource and should be treated likewise. Governments own the right to generate revenue from the flow of information. Just like taxation of goods and services, movement of data can also be integrated into a stable taxation system. The additional taxes can further be reinvested for the development of similar social arrangements. Incidentally, the improving and modernizing infrastructure coupled with an increase in data-based firms and increased demand for reliable data management solution is expected to proliferate the data integration services market.

• Foreign Surveillance

Free internet has allowed data accommodation and storage in countries with which a nation might not hold friendly relations. We know the relations between China and the United States have always been turbulent, primarily post-pandemic. In their example, there is a possibility that data of Chinese citizens stored in US-located servers may be subjected to foreign surveillance. Many nations are recognising this threat and are moving towards protecting their information channels.

Disadvantages of Data Localization

While many stand with the idea of data localization, some believe that the flow of data should neither be restrained nor should be monetized. Let's go through the points that suggest the demerits of going through the restricted approach:

• Internet is Free

Unhindered and free movement of data is the motto of the internet. The imposition of taxes or extreme protectionism will take away the power which makes the internet more democratic and accessible. Internet is cheap and provides a plethora of information to any individual or corporation. Excessive regulation will end up destroying the most revolutionary invention that mankind has ever seen.

• Government Surveillance

Storing all the valuable information at one place is risky as well. When you keep all the data within a single location, along with the associated security issues, this approach falls under the fabrication of centralization. On the other hand, multinational companies follow the approach of diversification. Moreover, when governments will have huge information at their disposal, they may resort to citizen-surveillance campaigns. Collation of all the data will make it easier for them to invade the privacy of the citizens.

Challenges of Data Localisation

The major reason why some companies are not willing to support data localization is due to its high expenditure. Maintaining local data hubs for efficient data collection and administration will need investments in infrastructure. Forceful implementation can cause a disorder for both firms and users. The availability of data-dependent services will also experience a dip.

Moreover, national agencies can still access encryption keys even when storage of data is centralized. Protectionist policies will fragment the Internet and result in creating Splinternet. It will push countries to take legal turns which will hamper digital growth. 

Many governments have executed or are proceeding towards the execution of data localisation laws, including — China, Brazil, United States, Russia and Indonesia.

Starting from May 25, 2018, the European Union's General Data Protection Regulation (GDPR) placed limits on international data flows to lands not governed by data protection laws. This was done as an alternative to data localization. After close evaluation, a list of countries was prepared which met the EU's standards of data transfer. By defining the “adequacy status", data related to European citizens can be transferred to other countries and companies accordingly. 

To Sum Up

Globally, economies are majorly driven by the internet which can take a hit if data localization regulations become more prominent. 

The internet has enabled trading across numerous industries. The imposed regulations have the potential to limit down the access of information. It can further take a toll on the Global Database as a Service Market which is predicted to reach USD 773.23 billion by 2030 with a CAGR of 50.9% from 2020-2030. 

Any business dependent on the internet or web-based technologies for their services, including key players like Amazon Web Service, Google, IBM, CSC, Accenture, Microsoft, Oracle, will undergo heavy changes both in their working and management. However, it is still early to comment about data localization and the potential effects it can cause as it is relatively a newer concept for many nations.