How Global Is the Internet Economy?Published: March 26, 2003 in Knowledge@Wharton
When the dot-com boom was going strong during the late 1990s, several books touted the Internet as the greatest technological breakthrough since electricity. After 2001, when boom turned to bust, the pendulum has swung to the other extreme. Tome after tome has appeared chronicling the high-stress, caffeine-charged, stock option-driven atmosphere in Internet start-ups; the meteoric rise and fall of teenage CEOs; and so on. Like their puffy predecessors, these volumes have had a breathless quality. Books that take a balanced view – and separate the speculative frenzy surrounding the Internet bubble from its measured, unobvious, long-term impact on business and society – have been few and rare.
Last month MIT Press published a book, however, that fits that bill. The Global Internet Economy, edited by Bruce Kogut, is a serious, wide-ranging examination of the technical, social and business challenges that the emergence of the Internet poses. Until recently Kogut was co-director of the Reginald H. Jones Center for Management Policy, Strategy and Organization at Wharton; he is now with INSEAD business school in France. In The Global Internet Economy, he joins colleagues from Wharton and elsewhere to probe the growth of the Internet globally and its evolution along distinct paths in seven countries – the U.S., Sweden, France, India, Germany, Korea and Japan. In addition, the book delves into issues such as global convergence in regulating electronic markets and the relations between suppliers and intermediaries. Kogut and his colleagues argue that the Internet is not just a business phenomenon but also a cultural one.
Kogut defines the book’s broad theme in his introduction. “The story of the global Internet gold rush hides another and a fascinating tale,” he writes. “Here we have an intrinsically global technology – for once a country is connected, it becomes virtually co-located with all other countries – but its development occurs within the physical and institutional geography of nations.”
According to Kogut, the Internet took off internationally because web explosion coincided with a period when powerful forces of globalization were at work in fields such as finance, corporate governance and trade. At the same time, though, these global trends had to play out within individual nations, each with its own institutions, laws, conventions and entrepreneurial modes. “The Internet technologies crashed on the shores of most countries about the same time, challenging existing institutions and powerful interests,” Kogut writes. In other words, though the Internet technology was global, “its economic and business development was molded in the context of prevailing national institutions.”
The outcome is clear. National differences played a big role in the way the Internet evolved in various countries. In the U.S., for example, the Web appeared to fit naturally into the American model of entrepreneurship – but for that very reason it also seemed unsettling to other national systems. Business in Germany, for example, is organized by "corporatist principles," notes Kogut, in which "business and labor are represented by their associations, banks and firms are highly intertwined by cross holdings, and the government actively supports programs to maintain the contract of a social economy." In Japan and Korea, the economies consist of "competing business groups; labor unions are often fragmented, and tax rates are low, pushing many social programs onto individuals and companies." India, in contrast, is "a classic dual economy, with a backward and advanced agriculture…and with a backward retail sector coupled with relatively advanced industries, with pockets of global activity in software design."
The Global Internet Economy tries to answer two key questions that arise as a result of such national differences. The first, according to Kogut, is "how much," or how much the Internet economy has contributed to a country’s growth. The second question is "how different," or what evolutionary paths countries have followed in their attempts to build an Internet economy.
The heart of the book’s exploration of the second question consists of chapters that attempt to probe these issues in the context of different countries. In examining the growth and development of the Internet in the U.S., for example, Martin Kenney, a professor at the University of California at Davis, compares the technological impact of the web as being similar to the arrival of the telegraph more than a century earlier. Though Kenney believes that the Internet investment craze during the late 1990s was "wasteful in the extreme" and "wild ideas of all sorts received funding," he admits that even after blowing through enormous amounts of speculative capital, U.S. companies "remain dominant in nearly every area related to the Internet, except in mobile telephony." The fact that companies like eBay and Amazon have become household names around the world in a relatively short time shows that this is true.
Mari Sako, a professor of management at Oxford University’s Said Business School, contributes an insightful chapter on the Internet economy in Japan. She notes that at the end of 2000, 47 million users (34% of Japan’s population) were connected to the Internet, up from 19.1% in 1999. While this adoption rate is not high when compared to the U.S. or some Scandinavian countries, it is significant that Japan was the first country in the world to offer third generation mobile services in October 2001. The success of NTT DoCoMo’s i-mode service shows that despite the overall U.S. dominance in Internet businesses, specific areas such as wireless might still offer other countries opportunities to forge ahead.
In Germany, the economy has excelled after World War II but not in high technology, as Steven Casper of Cambridge University’s Judge Institute of Management Studies, points out. Following the 1980s, however, information technology became the fastest-growing segment of the German economy, growing by more than 10% a year. "At about $250 billion in 2001, Germany’s information technology sector, driven…by the Internet, is the third largest in the world behind the U.S. and Japan, and the largest in Europe," Casper notes. Much of this success was driven by the strength of Germany’s impressive IT infrastructure.
Suppliers and Intermediaries
In addition to examining differences (and similarities) in the way the Internet evolved in different countries, The Global Internet Economy looks at themes that cut across different nations. One of the strongest essays in the book comes from John Paul MacDuffie, a Wharton management professor, co-written with Susan Helper of Case Western Reserve University. As Knowledge@Wharton readers know from previous examples of MacDuffie’s research featured in this journal, he explores the working of business-to-business (B2B) relationships in the automobile industry and the way they have been affected by the arrival of online exchanges such as Covisint. In addition to looking at differences between U.S. and Japanese auto companies, MacDuffie and Helper consider technical as well as organizational issues. Their key insight is that business-to-business exchanges are evolutionary (not revolutionary) in nature, and that they "accentuate and reinforce existing modes of exchange."
The book also has other valuable contributions. Dennis Yao, a Wharton professor of business and public policy, weighs in with a chapter on non-market strategies and regulation of electronic commerce in the U.S. (Yao’s essay supplements another chapter about the regulatory landscape in Europe.) Yao argues that while it is difficult to decide how to regulate dynamic marketplaces, complete reliance on the market is also a defective solution. "Unregulated markets may have imperfections, and the markets of cyberspace are not different in this regard," he notes. "Although new technologies offer opportunities for self-corrections that benefit consumers, new technologies also offer opportunities by which existing regulations and the consumer interest can be circumvented."
If the book has an overarching denouement, according to Kogut, it is that the global Internet economy has yet to emerge from the hodge-podge of national Internet economies. The first phase of the Internet’s commercialization has accelerated institutional change and also "defined more clearly roles in the global supply chain of information technologies," Kogut says. Even more importantly, however, "the Internet has sparked the emergence of global communities that permit the harnessing of a distributed intelligence with potentially far-reaching implications." Kogut cites the open source movement in software and the music exchange communities (Napster, etc.) as examples of such communities.
As the Internet continues to evolve, such global networks should multiply. And that, perhaps, will offer researchers opportunities for future studies in this fascinating area.
Note: Some of the themes of this book will be discussed at a Wharton Impact conference titled, "Catching Our Breath: Reorienting Strategy During the Internet’s Quiet Time," to be held on May 1 in Philadelphia. The Reginald J. Jones Center and the Wharton e-Business Initiative are the organizers.