Lecture 3

Digital economy: Global aspects

3

Copyright © 2012 Karol Pelc;

Initial questions:

1. Why the IT ( information technology) may be viewed as a “general

purpose technology” such as steam engine, railways, electricity etc ?

2. What are potentially positive and/or negative effects of digital

economy? Consider different impacts on society.

3. How is digital economy shaping your own future? Present examples

or discuss potential benefits and difficulties.

Digital economy

“…represents the pervasive use of IT - Information

Technology - (hardware, software, applications and

telecommunications) in ALL aspects of the economy,

including:

* internal operations of organizations, * transactions between organizations, and

* transactions between individuals, acting as consumers and citizens, and organizations…”

(Atkinson and McKay, Digital Prosperity, 2007).

ChipsProcessors

ComputersTelecommunications

IT– enabled Services

IT-enabled Advanced Manufacturing

Other Manufacturing and ServicesFarming, Fishing, Mining, Forestry

The Pyramid of the Digital Economy

Adapted from: Malecki, E. J., Moriset, B., The Digital Economy, Routledge, London and New York 2008.

I.

III.

II.

IV.

Moore’s Law

Gordon Moore (1965) , co-founder and chairman of Intel Corporation

Feature density of a chip is doubling approximately every 18 months or number of transistors on every processor chip is doubling approx. every 18 months. It means the functional capacity is growing exponentially. This growth has been observed during last 40 years.

Recent studies indicate a possibility that the rate of growthmay slow down in the second half of current decade to the doubling period of 2 – 3 years.

Adopted from: Wikipedia article on Moore’s Law

Semiconductor devices (chips):

- Price decline acceleration took place simultaneously with the functionality growth

- In the early 1990’s prices declined approx. 15% annually

- Between 1995 and 2003 prices declined approx 28% annually

As a consequence the processor and memory chips as well asall computing tools became more accessible and moreeconomic for mass scale applications (due to rapidlyimproving functional capabilities and lower costs).

The main global aspects of the digital economy

* Innovativeness and innovation networks

* Productivity

* Labor market transformations and global mobility

* Mass-scale collaboration, education and crowdsourcing

* Global digital divide

A. INNOVATIVENESS AND INNOVATION NETWORKS

Theoretical background: Joseph Schumpeter’s theory of economic growth and innovation (1911).

1. Economic growth is a result of innovations.

2. Innovations are new combinations of products, processes, markets, sources of supply, and organizations.

3. New combinations are discovered through experimentation.

The economy may be viewed as a system consisting of elements and connections.

Greater connectivity among actors and ideas creates more possible combinations (identifying opportunities and creating new ones). Entrepreneurs identify profitable innovations and convertthem into business opportunities.

IT (Information Technology) and Internet increase connectivityhence the number of new possible combinations i.e. innovations.

Global innovation networks

Global innovation network is a collaborative network of organizations and/or individuals operating together across the globe for generating and applying new knowledge in products/services, processes, and systems developed for economic and social benefit.

Three main factors influencing the networks development:

• Complexity of new technologies, products, services and systems

• Advances in communication and information technologies

• Globalization of markets

Economic and Business

Environment

Managerial and Legal

Environment

Social and Political

Environment

Intellectual and Cultural

Environment

Global

Innovation

Network

Environments of global innovation network operation

Environment /Network Type

Economic Managerial Social Cultural

Inter-firm networks Cost sharingRisk sharingAccess to resources (installations, labs etc)Contractual tradeoffsMarket division

Complementary competenciesAccess to talents of partner firmsIntellectual property: Legal rules and constraintsOrganizational barriersLimited cohesivenessBusiness intelligence opportunities and threats

National diversitiesNew behavior standardsWeak ties vs strong ties in collaborationBroader strategic outlook

Differences of company culturesEducational discrepanciesLearning across organizational boundariesIntellectual inspirationReducing the “not-invented-here” symptomsLanguage barriers and inaccuracies

Intra-firm networks (distributed within MNC)

Lower R&D personnel costs Reduced failure risk in parallel projectsImproved work efficiency due to use of time zone differencesAcquisition efficiency

Attracting talents Infrastructure of local R&D unitsLack of formal barriers to IPJoint databasesDifficult coordination and controlAdaptation to local production processesAcquisition management

Access to informal social connectionsCustomer specific new product/service developmentCloseness to lead users Learning local valuesImproving local image of the company.

Access to tacit knowledgeAccess to local scientific community Diversity of knowledge resources

Inter-governmental networks

Large resource pool accessibleShared costs and risksBalanced budgetsLong-term and large-scale financial commitments

Information channels designInternational law frameworkRules and regulationsComplexity of bureaucratic proceduresCoordination difficulties

Political influencesand biasesEducational effects and challenges

Perception of national interestsDiscrepancies between national and international interestsDifference between cultural traditions

Examples:

* SAP AG – Multinational company based in Germany Domain: software systems for business management

- Network of R&D units in 19 countries- 800 external partners (companies, universities,

govt. agencies etc)

* Boeing Corporation based in the U. S. Domain: aircrafts, space vehicles

Project of new passenger airplane Boeing 787 Dreamliner involved 43 international

partners in R&D located in 13 countries.

Source:

SAP AG

Annual Report2011

B. PRODUCTIVITY

Perceived IT impact on European business

% executives indicating IT impact areas(data based on survey of European business execs)

Adapted from: Atkinson, R. D. and McKay, A.S., Digital Prosperity, ITIF, Washington, D.C. 2007

SOURCE: Atkinson, R. D. and McKay, A.S., Digital Prosperity, ITIF, Washington, D.C. 2007

IT impact on productivity

OECD data indicated 109% productivity growth between1996 and 2002 due to application of IT

Some forms of IT impact on productivity and efficiency:

• Allows routine tasks to be automated thereby increasing economic output

• Enables to dramatically improve the efficiency of internal operations

• Allows workers do more things at the same time

• Lets firms restructure their supply chains

• Enables more productive self-service (airlines, hotels, banks)

IT implementation rates by European companiesin the selected business management functions in 2005 [% of companies]

INDUSTRY Using an ERP system

Using an SCM system

Using an Intranet

Selling goodson-line

Automotive 71 48 85 7

Pharmaceutical 71 35 75 18

Aeronautics 52 35 98 8

Food 37 21 46 12

Construction 13 7 29 4

Tourism 12 10 41 36

ERP = Enterprise Resource PlanningSCM = Supply Chain Management

Data selected and adapted from: Malecki, E. J., Moriset, B., The Digital Economy, Routledge, London and New York 2008

C. LABOR MARKET TRANSFORMATIONS AND GLOBAL MOBILITY

• Mobility of manufacturing and service operations

• Mobility of workers (teleworking/telecommuting)

Mass-scale use of IT based systems for business transactions - B2B transactions - B2C transactions

Trade barriers reduction/elimination (WTO)

Relocation of manufacturing plants to lower labor cost countries e.g. from the U.S., Europe, Japan to China, India, Mexico

Outsourcing of production operations (modules, assembling)

Outsourcing of services (e.g. software, data processing, consulting,customer support)

Telework (telecommuting)

Share of employed population who are teleworking in selected countries [% of employees] (2002)

The Netherlands 26.4U. S. 24.6Finland 21.8Denmark 21.5Sweden 18.7U.K. 17.3Germany 16.6Italy 9.5France 6.3Spain 4.9

Source: Malecki, E. J., Moriset, B., The Digital Economy, Routledge, London and New York 2008

Telework benefits to business

Based on survey of employers in the U.S.

[% of surveyed] Increases employee motivation 91

Improves productivity 78

Improves employee concentration 67

Reduces unexcused absences 61

Reduces office space requirements 55

Reduces employee commuting cost 47

Source: Malecki, E. J., Moriset, B., The Digital Economy, Routledge, London and New York 2008

D. MASS-SCALE COLLABORATION – CROWDSOURCING - AND EDUCATION In the first decade of the XXI century, several mass scale projects have been developed based on voluntary (usually unpaid) work. Crowdsourcing is used in:

* large scale research projects* interactive knowledge systems* market preference studies* public opinion studies

Examples:

Project Gutenberg - global digital library with free access toover 40,000 books; tens of thousands of volunteer proofreaders, www.gutenberg.org

Project Galaxy – global identification of galaxies and other astronomical objects by classifying telescope photographs; about400,000 volunteer classifiers of pictures, www.zooniverse.org

Project Wikipedia – global interactive encyclopedia; http://en.wikipedia.org/

As of May 2014, Wikipedia included over 22.6 million articles in 284 languages, written by over 35 million registered users and numerous anonymous contributors worldwide.

The English edition of Wikipedia has grown to 4,572,905 articles (by August 3, 2014); there were 21,992,192 registered users

It is estimated that Wikipedia receives more than 10 billion global page-views every month, of which 2.7 billion are from the United States

Selected data on Wikipedia

http://en.wikipedia.org/wiki/History_of_Wikipedia

Wikipedia was formally launched on 15 January 2001 by Jimmy Wales and Larry Sanger.

Open education system

Free access to about 15,000 university courses (not for credit).

About 250 universities across the globe contributing courses and lectures

Example:

MIT (Massachusetts Institute of Technology)Since 2007, Open Course Ware system global on-line with over 2,700 coursesWebsite: http://ocw.mit.edu/index.htmRecorded over 127 million visits by about 90 million people.

E. GLOBAL DIGITAL DIVIDE

Number of enabled on-line connections to Internet per capita isthe indicator of connectivity in a country.

There are huge differences in this respect between two groups of countries:

* Most connected countries, such as the Netherlands,and all Scandinavian countries

* Least connected countries, such as Bangladesh, Burma, Cambodia, Congo, Ethiopia

These differences constitute “the global digital divide.”

1) Least connected countries % of population with

Internet access

Myanmar/Burma 0.2Bangladesh 0.3Ethiopia 0.4Congo 0.5Cambodia 0.5

2) Most connected countries

Iceland 90.6Sweden 87.8Netherlands 86.5Denmark 83.9Finland 82.6

Source: De Kare-Silver, M., E-Shock 2020, Palgrave Macmillan, Basingstoke, Hampshire 2011.

Consequences of digital divide in less developed countries:

• Reduced chances for exchange of information

• Limited capacity to receive economic help

• Limited capacity for participation in international trade

• Limited access to education

• Low productivity of labor

• Limited capability to deal with natural disasters

• Limited capability to solve economic and social problems

SUMMARY

1. Digital economy – definition and pyramid

2. Moore’s Law and acceleration of semiconductor technology (microelectronics , density, prices)

3. Innovativeness and innovation networks

4. Productivity

5. Transformations of labor market and global mobility

6. Mass-scale collaboration projects and crowdsourcing

7. Global digital divide