The fourth industrial revolution is the next generation industrial revolution driven by intelligence information technology. Specifically, the digital innovations related to artificial intelligence, big data analysis, cloud computing, and the internet of things have driven hyper-connection between all products and services through global networks, thereby advancing the data-driven economy.
  This study describes the trend of digital innovations in the wake of the fourth industrial revolution, discussing the changes in the economic paradigm and international trade patterns in the future. This study also compares industry-level digital innovation by country using the data on patents reported to the US Patent and Trademark Office (USPTO), as well as the dataset provided by the OECD and the International Federation of Robotics. We simulate the effect of digital innovation on trade according to various scenarios, setting up the theoretical model for counter-factual analysis using data from World Input-Output Table released in 2016. In order to quantify the trade effects from digital innovation, we add fundamental productivity into a multi-country and multi-sector Ricardian model with input-output linkages, trade in intermediate goods, and sectoral heterogeneity.
  According to the results of the analysis, the significant improvement in the world’s digital innovation, led by the US and Japan, shows an increasing step curve during the years of 1998 and 2010. The quantitative and the qualitative level of Korea’s digital innovation is steadily rising, and the latest data rank it at a high level. However, Korea’s level of digital innovation is still relatively low compared to the US and Japan. When considering the recent drop in Korea’s H index with an increase in the level of digital innovation in China and India, Korea may experience a similar decline as the EU.
  Overall, industrial robots are showing an increase in the level of digital utilization. Around 72% of the world’s industrial robots are installed and operated in the US, Japan, Korea, China and Germany. Korea is the third largest robot installation station, and the fourth largest robot operator country which uses industrial robots actively. In particular, the number of robots that are operated per 10,000 workers in Korea is 631, the largest rate in 2016. As for the other indicators of digital utilization, despite the nation’s high usage rate of high-speed internet at enterprises (99.3%) and households (99.5%), the usage of ICT at enterprises is not that high in Korea, with the exception of the RFID utilization rate.
  For the simulations, this study considers ten different scenarios depending on productivity shocks from sector-level and country-level. At a bottom line, counterfactual analysis based on a variant of the Ricardian model shows that digital innovation is beneficial to international trade. In other words, if digital innovation boosts fundamental productivity, it triggers growth in international trade at both sector-level and country-level. If countries/sectors have higher productivity due to digital innovation, those become much more competitive in producing goods or services, affecting trade share, price, expenditure, and many others within the model.
  As fundamental productivity induced by digital innovation becomes higher and the number of countries that experience enhanced productivity grows larger, the model predicts that world trade volumes will become larger accordingly. However, the growth in trade volumes are uneven. Although digital innovation contributes to growth in world trade volumes, increases in world trade are concentrated in certain countries and/or sectors that lead digital innovations.
  The above-mentioned results of this study indicate that the Korean government must step up wide-ranging deregulation measures to facilitate digital innovations. In addition, trade rules such as Technical Barriers to Trade (TBT), Intellectual Property Rights (IPR), Telecommunication Agreements, and Electronic Commerce need to be urgently revised through the WTO negotiations. Policy governance also needs to be set up to systematically support digital innovation in private sectors.