4. Special Challenges for New Zealand
Discussion in the previous sections has focused upon many of the theoretical, conceptual and practical issues surrounding measurement of electronic commerce in particular, and information technologies both electronic and non-electronic in general, using a variety of illustrations. One of the considerations for such measurement is the need to derive metrics that are standardised across countries, enabling valid comparison of like with like.
While it is acknowledged that consistent methodology is required to measure figures, thus ensuring that the figures that are compared are derived in like manner, it is important that comparison and interpretation of these figures recognises that the circumstances which give rise to the measured figures may be very different. Thus, the meaning of identical figures from two countries may be very different due to the environment in which they were generated. For example, comparing the proportion of households connected to broadband services in Singapore and New Zealand must also include consideration of the very different infrastructure costs of supplying broadband to a population confined within a very small geographic area and one with significantly greater population dispersion.
Given that most of the measures indicated above depend to some extent upon factors in the economic and social environment of the entity over which they are measured, comparative interpretation of New Zealand's figures must take cognisance of the ways in which New Zealand's economic and social environment resembles and differs from the countries which are used as benchmarks. Only then is it possible to draw conclusions about New Zealand's relative performance53, and to make policy decisions and set targets that are realistic, meaningful and achievable.
There are a number of identifiable ways in which New Zealand's economy differs from others with which comparisons are regularly made (New Zealand is Different (Arnold and Evans, 2000)). The following section identifies some areas where differences have already been identified, and which may have an impact upon how the figures determined in connectivity, capability, uptake and performance are interpreted in relation to those of other countries. While this list is not exhaustive, it is illustrative of the fact that "electronic commerce" performance must be analysed in the context of the economy in which it forms a part.
Scale of Business
Small Businesses
New Zealand is characterised by its small population (3.8 million people), and the small average sizes of businesses - 95% have 5 or fewer employees. There are very few large businesses in New Zealand: for example, only two New Zealand businesses would be bigger (in capitalisation) than the smallest business represented in the Deloittes International electronic commerce survey.
Thus, it is meaningless to compare percentages of businesses in different countries adopting specific applications, without adjusting for the fact that the may be of vastly different size, therefore vastly different information processing needs, as well as having vastly different levels of resource available for investment.
Concentration Levels
New Zealand industries also tend to be highly concentrated, due to the small size of the country. Most industries have only two or three participants, with consequent implications for competition in the uptake of new methods and technologies. With fewer players, it is possible in some industries that there may be fewer pressures for the uptake of new technologies. However, a change by one player will almost certainly prompt a rapid response from the other(s) if the new technology provides sufficient cost advantage to the earlier adopter that survival of the rest is threatened. Thus some industries may exhibit "all or nothing" levels of uptake of some technologies.
However, it is also noted that this may give rise to a contrary tension. Adoption of a new technology that may result in the creation of a position of dominance could be delayed if the consequences of its adoption might include regulatory intervention (Crandall (2001)). In these cases, the ability of offshore providers to compete with New Zealand ones may be much more significant in the timing of new technology uptake.
Resourcing
New Zealand businesses have a higher cost of capital than comparable businesses in many other countries. In particular, it is higher than major trading partners such as Australia, the US, the UK and Japan (Arnold and Evans (2000)). Thus, New Zealand businesses will need higher returns comparable to firms these countries in order to justify investment in new technologies, and having made these investments, to earn higher returns to stay merely at the same level of economic performance. This clearly has impacts on statistics like productivity growth, even after the higher costs of importing equipment (e.g. transportation) have been included.
Implications
Together, the scale of business, concentration levels and resourcing, have impacted upon the profile of electronic and non-electronic technology investment in New Zealand. Investment decisions may have been both needs-based and resource-based.
Smaller businesses (such as SMEs) are less likely to have made heavy investments in the early stages of computerisation. Even now, the costs of EDI applications may be prohibitively large for even medium-sized New Zealand businesses. Lower costs of Internet technology compared to EDI may result in proportionately more New Zealand businesses using Internet applications.
The smaller scale of operation of New Zealand businesses may mean that manual methods of information processing (e.g. forms, phones, fax, face-to-face contact) may be more efficient than computer and other electronic technologies for some businesses. The absence of technology does not mean such firms are not participating in the "modern economy" as knowledge workers (undoubtedly, many of them are) - they are just not participating in the electronic technology of that economy54. Thus it is important in measures of uptake to determine whether absence of use of computerised technologies in firms reporting low uptake is a result of conscious choices ("reasoned defectors") or ignorance of the opportunities ("abrogating defectors"). The key to determining the decision to invest in any information processing technology, electronic or otherwise, remains first identifying the information needs of the business (or the unit of analysis), and then determining the most efficient ways of meeting those information needs, considering all the costs of servicing those needs (including opportunity cost).
Types of Industries
The preceding subsection highlights the importance of the differing information needs of different businesses, activities and industries. While there will be variations within industries, it is still possible to classify certain types of industries as having high information and communication needs (high information-intensity) or low information and communication needs (low information-intensity). It might therefore be expected that low information-intensive industries, with lesser need of information inputs and consequent communication of this information, would have lesser, and slower uptake of information processing and communication technologies. Hence traditional "information-producing industries" such as health, education, finance and services would be expected to be the highest users of electronic commerce applications.
Yet, at the present point in time, although the manufacturing sector has one of the lowest proportionate utilisations of Internet connectivity and uptake, it is the highest consumer of B2B applications in the United States (30% of transactions currently by PricewaterhouseCoopers statistics). This is probably due to the high emphasis given to B2B exchanges and supply chain management processes as transaction cost reducers, and the fact that the standardised forms of information transactions for production control, componentry sourcing etc. in the manufacturing sector make them ideal candidates for electronic automation. Hence, despite the comparatively low comparative information intensity of this sector, high standardisation has resulted in high uptake of electronic applications. Given the high US manufacturing sector's uptake of B2B exchanges and supply chain management, New Zealand's uptake of these same applications must be tempered with the knowledge that New Zealand's manufacturing sector comprises a very much smaller proportion of total output than that of the US. Therefore, a lower level of uptake of these applications is to be expected, and is not a measure of New Zealand "dragging the international chain" with respect to these applications.
While valid comparisons of application uptake must be weighted to account for relative shares of the economy, it is also noted that high information-intensity (producing and consuming) industries such as health and education are expected to be the fastest growing implementers of electronic information applications in the foreseeable future (NOIE Bandwidth Inquiry). There is no reason to suppose that New Zealand will differ from the rest of the world in following this pattern. These industries are ones where, given their high share of the New Zealand economy (Health is around 8.0% of GDP), close attention should be paid. As these are also industries where performance measurement has always been problematic, there is much potential for future research in these areas.
Likewise, the very high share of primary products in New Zealand output may also have an influence on New Zealand's information technology and uptake figures. A search for this project revealed very little documented information about the information intensity of the dairy industry, yet this sector contributes over 20% of export earnings. Again, this is an area where more detailed New Zealand research might be informative, both for comparative purposes, and for understanding the information dynamics of one of New Zealand's most significant export industries55.
Another challenge for New Zealand is in addressing whether the current internationally-agreed and reported industry sector breakdowns enable adequate analysis of information exchange dynamics. While this is an issue that requires addressing at an international level, New Zealand-relevant measures may assist in better understanding national usage patterns. Outsourcing practices, for example, have resulted in large components of specialised information processing activities (e.g. payroll, computer and network ownership and operation) being taken out of producing sectors and placed them into sectors such as services and financial. While this is a worldwide trend, there is little detailed knowledge of either how uptake of these information-driven practices compare across industries in New Zealand and with their counterparts in other countries, or how this affects interpretation of performance measures over time. This also begs the question of whether new categories (for example, like the import/export categories of Barua, Whinston and Yin) are required in national accounts to track this behaviour, or whether new analysis techniques will enable meaningful information to be extracted from data already maintained56. The question then becomes which categorisation provides the most relevant analyses? Should the focus be on occupation rather than product class? For example, Business and Property Services includes the activities of both high information-intensive accountants and low information intensive plumbers. With the emphasis in a "modern economy" on people, and the growth of services, should output also be tied to employment classification, to enable comparative assessment across countries of the patterns of information use and avoid the loss of information due to averaging of existing data?
Another industry-specific issue in New Zealand relates to sectors of the economy that are not currently measured, or not measured well. These include:
- Government processes (37% of GDP)
Although it is noted that the development of the e-Government project is addressing aspects of measurability of Government performance, the presence of multiple and intangible objectives makes determining relevant measures problematic. Government's role as a significant information generator and user warrants research, given the share of the economy it represents. - the organised nonprofit sector (Churches, charities, nonprofit service providers etc.)
This sector is significantly represented in the growth areas of education and health. These sectors have always had informal ways of measuring intangible and intrinsic inputs/outputs, but these have not always been captured in ways that fit into wider economic performance measurement57. This is a sector where case study analysis of intangible resource management and information production/utilisation may be instructive. - informal networks - informal community groups, families, Maori incorporations, iwi etc
Again, the growing reliance on this sector as a service provider warrants analysis.
It is noted that the Time Use Survey has vastly improved the ability to assess measures of unpaid, but productive time. However, it fails to address issues of changing electronic connectivity (TV watching time is included, but time spent on the Internet is not, even though in the US recreational hours spent on the Internet now exceed recreational hours spent watching TV), and contains nothing to indicate the need for information to support leisure activities. This indicates that a review of this instrument in light of the changes in information-intensity of leisure activities is required to provide a more comprehensive understanding of the society-wide impacts of changes in the use of information. Such information may be valuable in assessing the extent to which substitution of real, but uncosted activities for previously costed ones is occurring.
Number and Type of Trading Partners
The average size of firms, and the types of industries in which they operate, will determine to some extent their number of trading partners. Smaller firms will generally have fewer trading partners, meaning that the benefits from improved connectivity may be less in absolute terms than for larger firms with more trading partners. Firms with fewer trading partners will generally take longer to reach the break-even point for both generalised and specialised interconnection. Even though the Internet offers cheaper direct connection, it still requires a large infrastructure (and manpower training etc.) and software cost to integrate the front and back office operations of two or more firms. Many small firms, with few trading partners, may not have yet reached optimal time to invest. Thus, low New Zealand utilisation of specialised B2B linkages is not necessarily an indicator of backwardness.
While the number of trading partners may be significant, a more important factor may be the level of standardisation of exchanges between partners. If a firm has few trading partners, regular information exchange, standardised methods of data interaction, and high dependence upon the information transferred, then direct B2B information exchange may be both desirable and cost-effective. But if a firm has many trading partners, episodic information exchange, high variability in types of data interaction, and low value per information exchange, then the costs of direct interfacing are more significant, and uptake of applications will take longer to occur. If transaction volumes by type are low, the business case for direct integration of systems may not be supportable. In these cases, investing in such forms of connectivity prematurely is actually inefficient, as it commits capital to the provision of unutilised capacity (see the florist case above). In such cases, nonstructured exchange of information via email and web pages, or even fax, phone or traditional mail, may be optimal. This is a crucial determinant of connectivity in an SME environment, and warrants further case-by-case analysis. The large SME environment in New Zealand may provide a rich learning ground for determining how firms actually decide the point at which to invest, and the extent to which this reflects their current and expected future information (as opposed to equipment) needs.
An analysis of B2B exchanges in the United States shows that ownership and control of the applications that link businesses, and their effect upon pricing and trading conditions, may be as important in determining who uses them as issues of connectivity, information efficiency and setup costs. Rationalisation in the number of operating B2B exchanges in recent times ( in the US, fewer than 10% of new B2B exchanges survive one year of trading (Economist Intelligence Unit)) has led to the conclusion that survival appears contingent on ownership and control of the exchange by one large central player or collective (e.g. Covisint, theUS motor assembly exchange). That is, the effective operation requires one central "player" to have the incentive to manage the exchange. The coincidence of ownership and control has implications for the operation of the exchange as a network. If the owner of the exchange is also a dominant participant in the activities of the network (i.e. buying and selling as well as owning and operating the infrastructure), then this increases the probability that the information exchange requirements may favour those of the major player, and result in lopsided value of data exchanged. High degrees of specialisation and sunk costs of back office development may limit small firms' ability to exit, resulting in concentration of the value of the exchange lying with the owner/operator. This may partially explain the findings of Barua, Konana, Whinston and Yin (2000)58 that within supply chain systems, there is a correlation between downstream integration and improved firm profitability, but not upstream - that is, firms who sell have greater power to determine the methods by which they sell, thereby accruing the benefits of controlling the exchange process, whereas as purchasers the control lies elsewhere, and benefits (if any) do not accrue to the purchaser.
This indicates the need for more research into the information exchange consequences of electronically and non-electronically integrated supply chains, from the perspectives of value, volume, standardisation and ownership. This maybe important given the inevitable rationalisation of Australia and New Zealand's 300+ exchanges (40 of which are New Zealand-based) following the US pattern.
Import/Export Patterns
The State of e-New Zealand identifies that to some extent, New Zealand's pattern of single desk exporters may have already addressed some of the issue of rationalisation of B2B exchanges, from an industry level at least. The arguments supporting the creation of GlobalCo indicate the need to centralise control of upstream and downstream information at a single point to maximise returns for an industry, with ownership of the exchange being vested in a collective of those selling produce (Evans and Quigley (2001)).
However, this does not address the issues of where infrastructure is physically located, and therefore which country's national statistics will record the value and volume of transactions generated. For example, single desk exporters selling overseas may locate the exchange an its infrastructure overseas, so the "electronic" returns accrue to the country hosting the infrastructure, even though the financial returns accrue to the country of product creation. This is an issue, for assignment of both infrastructure and value figures, especially if measures of value of goods sold on the Internet is the dominant indicator, as all value will be accumulated in the jurisdiction in which the Internet sale is made.
Import and export patterns need also to consider where data is imported and exported to and from, and the volumes transferred, for bandwidth planning purposes. This is particularly important, for despite the "death of digital distance", New Zealand is still subject to an "inability to eliminate the problems of physical distance". Physical goods must be transported, but information goods require extensive transmission facilities (cable, satellite, etc.). The issue is equally as important for importing and exporting between regions in New Zealand. Infrastructure planning needs to be informed by the volume and direction if information flows, which are contingent upon firm and individual-specific usage patterns. Connectivity alone is insufficient for infrastructure planning, and uptake is driven by a combination of capability and necessity. Both must be factored into decisions about capacity and type of infrastructure.
Typical New Zealand Trading and Information Usage Patterns
Patterns of interaction between firms are also influenced by the legislative and customary business practice environments in which they operate. A complete analysis must also consider how New Zealand may differ from the countries with which it is compared on this dimension as well if statistics are to be understood. While the following list is not exclusive, it is indicative of some of the other influences upon New Zealand firms' information exchange patterns, and how this may reflect in information technology uptake figures.
While integrated, on-line information exchange and billing systems may prove beneficial for firms interacting with a large number of players, but sporadically with each one, this may not necessarily be appropriate for small businesses. A key element of New Zealand SME business practise is the monthly account. Monthly accounts enable the amalgamation of many small orders over a month in order to qualify for volume discounts, often traded off against customer loyalty. Convention sees firms settling these accounts at specified times, often the 20th of the month, sometimes with the incentive of discounts for prompt payment. The interconnection of these SMEs in networks of sale and purchase, and co-incident settlement dates, has cash flow implications for the firms. There are network effects of all linked firms exchanging payments in this manner. Firms may be reluctant to move into supply chains where real time monetary exchange is required if in doing so, they are required to forfeit amalgamation benefits, or if there are cashflow consequences from having to pay suppliers on order, but not receiving cash from substantial numbers of non-integrated customers until much later. Moving to real time cash exchange actually increases the risk of failure due to cash imbalances for small businesses that do more purchasing than selling - these risks are generally (more efficiently) borne by (larger) suppliers under the 20th of the month precedent59. This may lead to the reluctance of small businesses to move to a supply chain model unless the reallocation of this risk can be negotiated. Further, it may result in an "all or nothing" approach to firms joining supply chains- the costs may be too great if not all customers join, but without the power of a firm to require customers to join, they forfeit potential cost savings as they cannot finance the individual costs and risks of cash flow balancing.
For SMEs, the fixed costs of joining a supply chain may be significant - hardware, software, back office integration, etc. Hardware, software and organisational restructuring requirements often mean that these assets are specific, as they link firms into one, and only one, chain. This may result in increased costs, both of equipment purchase and risk of hold-up. This introduces a barrier to exit not present in manual systems. If the risk of hold-up is too great for some firms to bear, they may decide not to join. Further, there may be reluctance to join if ongoing operation of the processes that the supply chain requires substitute costs and risks out of one firm into the entering firm without adequate compensation. These are issues for the design of supply chains and B2B exchanges which must be addressed if they are to operate successfully60.
Another issue facing SMEs with respect to real time exchange, is the relative transaction efficiency of instantaneous cash exchanges for every activity. While data transfer is getting cheaper, its cost is still notrivial. Scale economies may favour batching of data transfers when there are many exchanges of small value over compressed periods of time. However, this must be traded off against the value of information from the order with respect to production line and inventory processes. While bandwidth costs are high and cashflow risks exist, batching still offers benefits. However, even if bandwidth costs reduce, for small businesses there may still be a case for real time information exchange, but batching of payment processes, to mitigate cashflow risks. For some SMEs, real time payment on line may never be a feasible option.
Availability of Other Information Processing and Support Systems
Online payment in New Zealand business applications may not even be necessary, if substitute payment technologies provide efficient substitutes. The small scale of New Zealand has permitted many centralised information processing systems to develop that have not been feasible in larger countries. By expecting New Zealand businesses to adopt overseas business practice models are we failing to recognise the importance of these already-computerised systems in our usage statistics?
One example is New Zealand's central bank clearing system. This ubiquitous, long-standing (since the 1970s), comprehensive (all major trading banks and finance institutions) system has used bank infrastructure to manage exchanges between businesses and individuals. It facilitates B2C and B2B transactions, as well as interfacing with credit card and Internet Banking systems. Given the specialised nature of the transactions involved, and economies of processing scale, it may well be more efficient for payments to be received and made through this system rather than directly between companies. It is possible that the efficiency and ubiquity of this system, along with lower physical volumes per business, especially if the both sides of the transaction are New Zealand-based, has been a factor in the comparatively low "cash receipts over the Internet" statistics recorded for New Zealand firms.
Further, it is noted that international banking requirements limit how payments in foreign currencies can be processed through the banking and credit card payment systems. These restrictions limit the potential for direct payment over the Internet for New Zealand exporters and importers, as processing has (until recently) required the intermediation of a trading bank in the country of the currency in order to receive the actual payment. This further reinforces the point that what is important is not actual payment received over the Internet but information relating to the proceeds of a transaction available over the Internet.
Thus, the relative maturity of electronic banking options in New Zealand means that there may be little need to develop subsidiary, functionally identical systems, as firms can effectively "outsource" payment management to the trading bank system. Indeed, New Zealand, with its relatively high (worldwide) electronic banking stats (KPMG) (direct credits, direct debits, ATM transactions, Internet banking, etc.) may already be a world leader in this area61.
This inevitably leads to the question of whether there are other examples of New Zealand leadership where a combination of size and relatively early electronic technology adoption have led to advantages. This is an area where further analysis is warranted.
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