E-commerce: a revolution with power

Directorate for Science, Technology and Industry

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E-commerce offers a truly global marketplace. How is this affecting the traditional economic powerhouses and will they be able to adapt? 

Information and communications technology (ICT) and e-commerce have not only begun to change the shape of business, but the map of the world economy has been affected too.

Everyone is talking about the new economy revolution, but what about the power it gives to those sectors and countries that marshal it? Any major shift of economic power among countries usually presupposes a new product or process to exploit new technology. Japanese industry surged in the 1960s, finally taking the lead from the United States in the 1980s in automation, semiconductors, electronics and computers. It did so by capitalising on the so-called lean production system, exploiting Japanese management know-how and putting technology to work to keep costs down. In the 1990s, the United States stormed back to the top and is now, despite recovery or strong growth in several European countries, possibly even widening its lead in a range of sectors.

The US performance has been impressive, catching many competitors off guard. Indeed, policymakers around the world have been puzzling over it; after all, are we not living in a global marketplace, where trade, investment and the movement of people and technology bind nations together? Surely in this environment, economic performances should converge, rather than diverge.

While there appears to be no single explanation for this trend, most people have agreed that a fundamentally new force is at work and that ICT lies at its heart. Contrary to the adage about computers showing up everywhere other than in the statistics (see article by Ignazio Visco), the figures for ICT speak loud and clear. According to the economists on the US Federal Reserve Board, the contribution of ICT to US growth from 1996 to 1999 was more than 20% (1.1 percentage points out of a growth rate of 4.9 %). For the two other Anglo-Saxon G7 countries, the United Kingdom and Canada, the picture was similar. And despite all the talk that technology would put workers out of jobs, these dynamic economies have reduced their unemployment rates to among the lowest in the OECD area. In contrast, until recently, Japan and the three main continental European economies – France, Germany and Italy – had shown rather modest growth of new ICT investment and overall output.

This is the direct contribution of ICT equipment and software production to growth, but what of its total impact on the deeper reaches of the US economy? Productivity figures provide a clue. The long-term trend in productivity was 1.4% growth per year between 1973 and 1995. This figure more than doubled to 2.9 % after 1995. The timing of this trend-change coincides with the emergence of electronic commerce.

During previous business cycles, productivity tended to show strong growth in the initial years of recovery, but to taper off as the recovery matured. This time, in spite of the long duration of the current expansion period, productivity is still gathering speed.

Business net 

While many extravagant stories have been told about new types of electronic business, from online bookstores to virtual trading floors, the explosion on the scene of so-called dot.com companies is only part of the story. The effect of ICT on conventional industrial sectors and on national competitiveness has been remarkable.

Take company procurement, for example, of parts, components, raw materials and fuels. The Internet has opened up the possibility of doing business with the best possible suppliers, no matter where they are located. A deal can be concluded in several minutes, without the need for costly business trips. The result is that the carefully nurtured long-term business relations between companies that was for so long key to the success of Japan and Germany – a relationship whose cohesiveness was fastened by cross-holding of stocks – is now falling apart. Electronic commerce has rendered this cosier business model obsolete.

As the industry and service sectors embrace electronic commerce more fully, dislocation of redundant white-collar workers will occur on a large scale. This is already happening – in banking, for instance. All types of jobs will become insecure, though particularly vulnerable will be those of office clerks whose task it is to pass information around, like company reps, certain types of brokers and other intermediaries. Even middle-level managers are no longer safe. It is a very different situation from the streamlining of the last 20 years, whereby blue-collar, mainly manual, workers were the primary casualties. In order to survive, white-collar employees will have to develop new skills and expertise. They may even have to “outsource” themselves.

In fact, outsourcing by firms, large and small, is a hallmark of the new economy. Primarily used in advertising and publishing, outsourcing is now spreading into the central functions of firms, such as personnel and cash flow management.

The outsourcing by large firms, mainly of their non-value-adding administrative tasks, and concomitant births of small firms specialising in those business services, is a major feature of the US economic landscape today.

These companies are mostly connected with their client companies through information networks and, from the point of view of the outsourcer, have the potential to operate as though they were an internal unit in the company itself. However, quite often the outsourcing company finds it has to employ someone, or even a team, to manage the outsourced areas of its business. This raises an interesting question about traditional corporate boundaries – where one company ends and where another company begins.

Deregulation in financial services and communications is strongly correlated with the uptake of electronic commerce, with banks and financial investment firms being the most aggressive users of the new technology. Very soon, most financial trade and services will be provided on-line. Dot.com addresses are becoming as important as main street addresses – in some businesses, even more so. That has meant branch closures, but also a boom in the IT equipment and advice business.

Slowly forward 

The move to electronic commerce is happening more slowly in some of the old industrial superpowers for several reasons. One reason is the strong resistance in some countries to abandoning traditional business practices and industrial relations. Dismissal and dislocation of employees are considered to be the last resort by managers, who are expected to hold out against change until the last. Some business leaders and managers are sceptical that the new economy is real. They see it as putting long-standing business relations at risk. Such caution is understandable, particularly in large companies.

But that, of course, is part of the problem, for in e-commerce, speed is key. It is not certain that the rest of the world will therefore benefit from information technology in the same way the United States has. Every country has a different political and social make-up and will react differently to the challenge of ICT as a result. But get ahead they must.

In March, the European heads of state met in Lisbon and reaffirmed their determination not to let the US domination of the ICT sector go unchallenged. A further liberalisation of the European telecommunications market may be in store. And in Japan – which is surprisingly lagging among OECD countries when it comes to Internet use – industry and government are co-operating on putting a programme together to enable their country to make up ground more quickly, even sparking a Japanese renaissance.

There will be competition though. In Asia, emerging market countries could be transformed if they manage to harness the new technology in innovative and efficient ways. And countries like China and India are already beginning to leverage the new economy to improve their foothold in world markets. One thing is sure: the drama of the e-commerce saga is far from over, and the opening decade of the 21st century promises to be eventful indeed as the industrial powers scramble for the lead. Who knows, perhaps a new demarcation of economic power will unfold.


• OECD, A New Economy? The Changing Role of Innovation and Information Technology in Growth, 2000. 

 OECD, The Economic and Social Impact of Electronic Commerce: Preliminary Findings and Research Agenda, 1999.

 Schreyer, P., “The Contribution of Information and Communication Technologies to Output Growth”, STI Working Paper 2000/2, OECD, 2000. 

©OECD Observer No 221/222, Summer 2000 

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