Digital Economy

Preface Information and knowledge have emerged as major sources of wealth in the recent past. There is a digital revolution and it has impact and influences on the consumers, producers, investors, exporters, importers, public policy makers, academics, students, consultants, administrators, lawmakers and all others directly or indirectly involved in various processes of the new economy. It has also huge challenges for all of the above and the shape of things to come will be determined by their response to the fast moving changes, additions and modifications in the Information, Communication, Technologies (ICTs) and their applications.

The pace of the revolutionary changes in the ICTs and their applications and their impacts, influences and challenges are more pronounced in the developed countries. The rest of the world is also catching up with them fast in the digital stakes. Public policy makers in both the developed countries and the rest of the world and administrators, who have even bigger challenges than policy makers, will have serious problems to tackle. Censorship and freedom will be in conflict with each other in relation to the use of and access to the ICTs. ICTs have ushered in a new era of global communication, production, trade and investment.

It has implications for all of the players in the economy and society irrespective of whether they reside and work in the developed countries or in the developing countries. The digital economy is transforming the lives of people beyond recognition. There is a revolution in the way that things are produced and traded before they reach the final consumer. Also there is a revolution of rising expectations as the world is getting transformed to a global village and the access to the good things in life will no more be in the domain of the rich and influential, whether in developed or developing countries.

The buzzword is e-commerce. The term e-commerce goes beyond doing business electronically. Doing business electronically means that the conventional processes are computerized and are done on the Internet, however now it seems that the Internet is not merely an alternative to make a channel for marketing or selling product online. Instead the electronic marketplace enables the seller to innovate the whole business process from the producer to consumer to service by integrating them in the seamless whole, where product choices and prices are updated according to the customer information in real-time on web stores.

viii About the Book This book is not about how to use the web or how to set up your web page for a successful business. This book provides information from socio-economic angle. As a number of books are already available about e-commerce or digital commerce, most of them provide information mainly from a technical angle and the socio-economic aspect had been neglected. Contrary to that, we would like to present the picture of digital information economy from the socio-economic perspective.

This book covers various aspects of global production, trade and investment and the effects of the Internet from a socio-economic angle. While paying attention to the current status of intertwined issues of electronic commerce in technology, standards, policy and legal issues, the focus is on many economic issues and aspects of electronic commerce that other books do not cover. This book aims to provide relevant theoretical frameworks and the latest empirical research findings in this area. The change in the flow of information, computing and communication in the recent past has greatly influenced the world economy.

In the emerging “digital economy,” the players as well as the rules of the game are changing fast. Along with it has come a lot of confusion and uncertainty. The digital economy may bring potential invasions of privacy, more sophisticated and far-reaching criminal activities and host of other unknown problems. The audience of this book is diverse. In addition to the academics, students and other knowledge workers, this book is intended for the business people who are using the Internet to seek a new customer, suppliers and partners around the world.

If a business person is already directly involved in international trade and business and business trade, either as a manufacturer, distributor, exporter and importer, custom broker and freight forwarder, trade financer, diplomat, then this book is for him/her. If he/she is involved in the international trade, perhaps as a lawyer, management consultant, trade show organizer, site developer, business school professor, executive educator or someone who advises international companies, then this book is also for him or her.

The assembling of the chapters and editing of this volume was a very onerous task but has proved to be highly worthwhile and rewarding in the end. The response to the call for chapters was overwhelming. We received proposals from top scholars, professionals and practitioners from various parts of the world. We have received chapters from the USA, Canada, Japan, Australia, New Zealand, Korea, Singapore, India and many other countries. Authors with background from various cultural groups and with firsthand knowledge of the socio-economic impacts, influences and challenges of the digital economy has contributed to this volume.

Choice of the chapters for this volume was a highly challenging task, as we received an overwhelming response. Which chapter to include and which to exclude was very difficult. Chapters included in this volume have gone through a very rigorous review process. The ultimate choice of the chapters for inclusion in this volume were guided by the quality, relevance and coverage of the vital issues and proper analysis and depiction of the impacts, influences and challenges of the digital economy.

The brief ix summaries of the various chapters included in the book in the words of the contributors are provided below for the readers to make their own judgement: The first chapter of this book is Socio-Economic Impacts and Influences of E-Commerce in a Digital Economy written by Sushil K. Sharma. Electronic commerce or e-commerce is the exchange and processing of business transaction information using computers connected through a network. E-commerce does have unique advantages for businesses.

It allows a shop, a show room or an office to open 24 hours a day, seven days a week. It also means that time zones are not a problem. A Web site can bring a prospect from the point of advertising and information directly to the point of sale, seamlessly, without involving any other medium. Adoption of new information technologies, particularly e-commerce, is expected to result in improvements in firm performance, such as reducing transaction costs and closer coordination of economic activity among business partners.

E-commerce also is expected to facilitate entry into new markets or extension of existing markets and greater integration of systems with suppliers and customers. E-commerce is changing business economics and as a result many firms are re-engineering their core business processes. Suppliers and retailers are able to collaborate on product forecasts, product flow and inventory management decisions using the collaborative Internet-based networks between suppliers and retailers. In addition to reducing costs, e-commerce solutions permit customers to custom order products based on individual needs and preferences.

Retailers are able to allow customers to mass customize orders based on virtually thousands of choices. The Internet’s growth and e-commerce has begun to create fundamental change in government, societies, and economies with social, economic and political implications. These advances present many significant opportunities but also are having wide-ranging effects across numerous domains of society and policy makers. As e-commerce continues to grow rapidly, it could have significant effects on the social and economic structures of economy.

The impacts of these changes are diverse and may even widen the digital divide among nations, alter the composition of trade, disrupt labor markets and change taxation, may have ramifications for intellectual property rights, privacy protection, and data filtering, etc. Some of these effects of e-commerce are unintentional and create adverse business and personal conditions that could have societal consequences. Social and economic aspects of ICTs have been studied by a wide variety of researchers and practitioners for over 50 years.

However, the influences of e-commerce are far bigger than imagined before. This chapter describes the various socio-economic impacts and influences that have been created by e-commerce in a digital economy. The second chapter is Re-Intermediation and Deferment through E-Commerce: NeoAustrian Interpretation of Capital and Time written by Parthasarathi Banerjee. It is commonly believed that electronic commerce reduces intermediation and the time in a business circuit. This is an efficiency view. This borrows from the Chicago view.

Alternatively, transactions cost economics (TCE) theorists argue that electronic commerce decreases transactions cost by way of reducing the distance between the producers and the customers. TCE too argues that dis-intermediation in electronic commerce reduces transactions cost and hence increases economic efficiency. In contrast x to this efficiency theory of dis-intermediation and of quickened money, this chapter argues from Neo-Austrian perspective that efficiency can refer to technological changes alone. Efficiency, it is argued, fails to increase rate of profit or innovation. Electronic commerce is an innovation in trade.

Electronic commerce brings in several layers of possible intermediaries. In this chapter authors argue that electronic commerce keeps transactions incomplete and extends the completion of transactions indefinitely and thereby; electronic commerce instead of shortening the business circuit would extend such a circuit indefinitely. Indefinite extension of business circuits—that is the lengthening of business transactions—increases effectively the period of production. Austrian theory argues that capital is time. This theory argues that a longer period of production implies a higher rate of profit and an increase in capital.

Based on this theoretical stance, the authors argue that electronic commerce enhances capital and increases the rate of profit by lengthening the circuit of transaction through re-intermediation and through an increased period of production. Velocity of money or goods in an economy, as the efficiency theorist suggests, refers to technical efficiency. This efficiency refers to particular states of affairs of technology. As a result this perspective fails to explain why such technological states change or why certain particular economic agents reap great profits.

Moreover, efficiency theorists’ “profit” is actually a rent earned. Interpreters of TCE have assumed that electronic commerce brings about a frictionless or transactions-cost-free market. They have wrongly committed TCE to such an explanation. Moreover, reduction of transactions cost would increase efficiency and would not increase rate of profit or the capital and even would not hasten innovation. It follows contrarily that electronic commerce would increase transactions cost. Internet pricing has shown personalized effects based on quality differentiation and on personalized offerings.

Electronic commerce has opened up the possibility of offering extremely variegated personalized pricing. This forum can also offer equivalents of typical market place bargains. Production organization of a vertically integrated corporation stood upon standardization. Production of apiece products with variegated quality, chosen often by the buyer himself, demands that the entire chain of logistics and the supply chains get linked to the electronic commerce platform and that the stages in production are increased immensely and at each step of production each apiece product contains unique information.

Such a picture of an electronic-commerce-led economy shows that stages of production must increase, that different economic agents must undertake value addition at each stage, that variability must increase and that mass production of personalized wares must hasten. In short, electronic commerce demands that an economy increase both its division of labor and the long period of production. A long period of production refers to the entire input-output table of an economy. A short period of production refers to a specific transaction chain of a business or a sector.

Electronic commerce increases the length of both these periods. Shackle discussed profit and its rate from the perspective of lengthened periods of production and an increase in the division of labor amongst economic agents who are speculators. Electronic commerce has opened up this opportunity. In these commerce intermediations, in particular, cyber mediations have increased and will continue to increase. NeoAustrian framework offers a cogent explanation as how electronic commerce increases the rate of profit and the capital in an economy based on electronic commerce. xi

The third chapter is Risk and Investment in the Global Telecommunications Industry written by Irene Henriques and Perry Sadorsky. Access to affordable technology to improve the flow of information is essential to the development of an economy. Closing the Digital Divide could bring many benefits to developing countries. In many ways, developing countries have the most to gain from improvements in telecommunications and information technology. Bringing the benefits of IT to developing countries is possible, but the governments of these countries need to be aware that the process is going to cost money and require institutional changes.

International investors will frequently calculate the cost of equity for their existing investments and their proposed investments. Development planners must be able to make their own cost-of-equity calculations so that they can see first hand how their investment projects compare with other investment projects around the globe. Consequently, it is necessary to have good measures of equity risk for managers, planners, policy makers and investors. The cost of equity is important in valuing new investment opportunities and in evaluating the ongoing performance of established business projects.

This is especially true in the new economy IT industry where an understanding of equity risk aids in the examination of the relationship between the IT sector and economic development. In this chapter, quantitative modeling and simulation techniques are used to estimate various risk measures and the associated cost of equity for the global telecommunications industry. The approach is to calculate several different cost-of-equity values and then use simulation techniques to build up a probability distribution for each company’s cost of equity.

In this way, a clearer picture of where a company’s cost of equity lies is developed. Estimates of the cost of equity for a particular company vary widely and depend upon the methodology used. For a particular company, cost-of-equity values based on systematic risk tend to be lower than cost-of-equity values calculated from downside risk measures. For some companies, downside cost-of-equity values are twice as large as cost-of-equity measures based on systematic risk. This is true, even though all of the cost-of-equity values use the same risk-free rate and same risk premium.

One of the insights that emerges from this study is the fact that the average cost of equity for telecommunications companies in developing countries is not always greater than the average cost of equity for telecommunications companies in developed countries. This is borne out by the high cost-of-equity calculations for companies like Cable & Wireless, France Telecom and Nextel. In general, it is difficult to find evidence of regional differences in the average cost of equity of telecommunications companies.

This is useful to a development planner who can then use a portfolio approach in which high-risk investments are combined with low-risk investments to promote an investment in a developing country’s telecommunications industry. Closing the Digital Divide could bring many benefits to developing countries but international investors and development planners must be able to make their own cost-of-equity calculations so that they can see first hand how their investment projects compare with other investment projects around the globe. xii

The fourth chapter is Reduction of Transaction Costs by Using Electronic Commerce in Financial Services: An Institutional and Empirical Approach by Thomas Pfahler and Kai M. Grebe. The authors face the subject of analyzing the impact of the increasing utilization of information and communication technology (ICT) and electronic commerce on the coordination of specific transactions in financial services. Bank transfers and stock purchases, as two relevant business processes commonly occurring in the contractual relationship between a financial institution and its customers, will be considered in detail.

For that purpose, the conceptual framework for the target analysis has to be developed at first. This requires the definition of the most important terms and the explication of major ideas. The basic principals of the New Institutional Economics and the instruments developed in the context of the Transaction Cost Approach specifically serve as a theoretical background for the study and all further argumentation. Subsequently, the chapter develops and implements a proposal how to exemplify and to compare the above-mentioned processes under the varying influence of certain technologies.

This new approach will be specified and the proceeding will be elucidated in detail. The authors refrain from attempting to quantify transaction costs in an absolute way and concentrate deliberately on comparative considerations. Transactions will be decomposed and classified into different phases according to their devolution over the period under observation. The intention is to reveal the basic phenomenon and to document the reasons of the current utilization of ICT in this sector by emphasizing relative reductions of transaction costs through the use of electronic commerce.

After the development of the approach to quantify reductions of transaction costs, the model will be applied exemplarily on the two selected transactions. In detail, the model takes into account seven different phases of a transaction and seven different modes of coordination. The empirical section of the chapter concentrates on existing technological infrastructures, growth rates, and diffusions rates of certain information and communication technologies. Available data will be analyzed, particularly for Germany.

Moreover, certain indicators are introduced to qualify in detail present developments and impacts of ICT. In the final stage the attained results and consequences of the outlined developments are eventually systematized and summarized. The authors criticize and comment on crucial points concerning the elaborated approach, its significance and limitations as well as its explanatory power. Last, but not least, an attempt is be made to relate the diffusion rates of the investigated technologies in the empirical section to the insights on reductions of transaction costs derived from the theoretical cost model.

This will lead to a four-quadrant scheme to illustrate and classify present and future impacts of electronic commerce on financial services. On the basis of this visualization the chapter concludes with deducing a couple of final predictions and with giving a future perspective. The fifth chapter is The Spreading Use of Digital Cash and Its Problems, which is written by Yutaka Kurihara. xiii It has been several years since the words “digital cash” and other related terms were introduced into the modern lexicon.

Needless to say, the progress made in communication and information technology (IT) has been rapid, and change in the area of digital cash is no exception. The volume of such transactions is rising, yet analysis of this revolution in payment is limited, particularly in the academic fields. Although e-commerce has been growing rapidly and attracting much attention, digital cash has not been a focus of such attention. Digital cash has some problems associated with it that need to be solved before its use can continue to grow, and the rate of growth is slowing at present.

The logic behind replacing cash, checks and magnetic credit cards with digital cash is bound to prevail in the end, but there are many barriers that need to be overcome. The author proposes that material cost reduction and service price are cutting resultant factors of the demand for electronic wallet transactions and the means by which digital cash can spread, the technology of IC (integrated circuit) card reformation can be developed, and price cutting on the supply side can occur. The popularity of the personal computer and the Internet has also skyrocketed in recent years.

A general price decline for computer and communication tools has been ongoing as well, helping to promote online-type transactions at the supply side. Moreover, it seems that the spread of mobile telecommunications has contributed to the development of digital cash. In the near future, interactive television will be used to make transactions. IT (information technology) has undergone a global revolution in many fields. Ubiquitous instruments in IT fields have appeared recently allowing for digital cash to develop much further.

There are two points that will be emphasized in this chapter. The first point is that given the essential characteristics of electronic money, its advantages and disadvantages should be carefully examined. It is quite certain that digital cash will be promoted. It also seems that IT progress is unstoppable, and fortunately IT can make our world a more convenient and efficient place in which to live. Nevertheless, there are a number of concurrent challenges with this change. None of these challenges are apt to be resolved swiftly or painlessly.

The second point is this: since financial institutions cannot stop this trend, it would be prudent for them to view it as a business opportunity. If they do not find ways to adapt, they will become obsolete and completely fade away from the market. By promoting efinance, a company can gain market share and negotiating power over suppliers, as well as earn a profit. Monetary authorities worldwide should pay careful heed to the trend as well, guiding the “sound” market to maturity, taking care not to confuse exercising leverage with excessive intervention.

The sixth chapter is Electronic Signature: The Core Legislation Category in Digital Economy authored by Fjodor Ruzic. E-business, as well as all of the active participants in the digital economy environment, raises a host of new legal issues that must cope with the fact that the technical expectations imposed by participation in the digital economy will increase. Three basic segments of the digital economy are converging, and each of them consists of one core category: xiv • • •

Infrastructure: telecommunications infrastructure (the members of the society must communicate) Services: the content (the goal of communications is to transfer the content) Legislation: electronic signature (the goal is to compile rules of intercommunication processes in which the electronic content is interchanged) Businesses that offer services and have taken to the Internet seriously have a responsibility to their customers to offer services in a secure manner. Security is a fundamental requirement for e-business applications using signature-based forms.

Lack of trust is a significant problem for any e-business — the parties evolved in the e-business processes must feel trust in the people and companies that are doing business. In many traditional business relationships, trust is based on a combination of judgement or opinion based on face-to-face meetings, or recommendations of colleagues, friends and business partners. However, the e-business environment generally does not involve human interaction and, therefore, this new context requires a new understanding of trust. Several techniques help in establishing online e-trust: • • • •

Electronic authentication Electronic signature Escrow payment services (online) Public Key Infrastructure (PKI) With the advent of electronic signatures, e-business is changing the way we sign and store documents. Thus, any business that wants to succeed in the digital economy must deal with electronic signatures. It is considered an everyday activity whenever a law or other arrangement requires a signature of person. Signature is needed as a medium for authentication in order to identify the person (the signer), to indicate the person’s approval of the information communicated and, to be legally applicable.

Most of the national laws currently in force provide that a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form. Like a handwritten signature, an electronic signature can be used to identify and authenticate the originator of the information and, it can also be used to verify that information has not been altered after it is signed. Electronic signatures play a key role in enabling electronic business by helping ensure that electronic documents are unaltered and have not been forged.

Considering the functionality and applicability of such issues, this chapter finds one key category that links all of the separate e-business legal issues in one regulated scene — the answer is done by introducing electronic signature as equivalence with handwritten signature no matter what type of information technology is in use. There are more legal environments, solutions and applications of an electronic signature from which several examples are described accompanied with the e-business view on electronic signature utilization.

xv The seventh chapter is Impacts of the Digital Economy: The Shift to Consumer-Driven Competition and Life-Span Products authored by Simon Mowatt. This chapter examines changes in innovation and competition made possible in two traditional industries by the adoption of integrated information and communication technologies. The two industry cases used are drawn from the consumer magazine segment of the printing industry and the grocery multiple (supermarket) segment of the retail industry.

Both of these industries have benefited from changes in communication within the industry value system made possible by the adoption of digital information management and communication systems. The primary research in these industries was undertaken by an empirical program of qualitative, interview-based research focused on innovation networks. The informants were involved in production, distribution and retail, and identified by prior secondary research.

The research also employed a census questionnaire survey of consumer magazine publishing firms. The survey response was checked for representiveness against a random sample of the industry population and found to be robust. The chapter highlights the importance of consumer-drive innovation in consumer-facing markets. The industries examined had previously been conditioned by the economics of manufacturing. The development of complex innovation networks to supply consumer needs is examined and the innovation process is explored in detail.

For the process of consumer-driven innovation, the importance of linkages to end-consumer and market experts is acknowledged—something is enhanced by the use of digital technologies. The chapter acknowledges that the development of the innovation systems described was the result of firms reacting to consumer needs. But in addition to this, the chapter offers the concept of “life-span” goods as those developed from the outset as having a short life dependent on changing consumer tastes and fashions.

Life-span goods are emerging as firms continue to explore the possibilities of proactively using innovation systems to forge links with consumers. Within this environment firms have been recently acting more as project orchestrators: using their skills in developing innovation teams based on the deep knowledge of consumer activities to identify and supply new market segments. Production in the innovation systems identified is undertaken across firms and coordinated by shifting and temporary alliances.

This presents a challenge to economic analysis and to the theories of the firm grounded in a transaction-cost framework. Networkbased and sociologically grounded theories of the firm have previously attempted to resolve the inadequacies of contemporary economic theory by emphasizing the importance of social ties and long-term embedded relationships. However, the examples explored in this chapter highlight the role of new technology in short-term non-embedded relationships as well. The project-based firm is identified as having features that are problematic for economic analysis.

Despite this the chapter suggests that changes in competitive pressures towards consumer-facing competition may increase the prevalence of project-based firms with industrial economies. Finally, the chapter concludes by exploring some avenues for future research that offer new pathways for future theoretical understanding of project-based and network organizations. The eighth chapter is Digital Products on the Web: Pricing Issues and Revenue Models written by well read Gary P. Schneider. xvi Products that exist in digital form can be bought, sold, and in some cases delivered, online.

Some products exist only in digital form, such as software and certain types of information databases. Many more types of products exist in physical form, but can be digitized. These products include many forms of intellectual property such as text, pictures, photographs, architectural drawings, choreography notes, sound recordings, and video recordings. In some cases, digital products arise from the transmission of other digital products, as in the case of telephone and fax transmissions. The pricing issues that arise in the sale of these products are different from those that sellers face when pricing physical goods.

These pricing issues lead to interesting opportunities for devising revenue models. These pricing and distribution issues affect the nature, quantity, and quality of competi