Part 1: Background
a. The "Amplifying" Network
12. Information and communication technologies (ICT), particularly the Internet, are fundamentally changing the structure of economies and societies. ICT is one of the key drivers in the dynamism, constant innovation and accelerating speed of the New Economy. The degree to which these features have become the norm is one of the most striking structural economic changes of the last decade. If New Zealanders are to grasp the significance of ecommerce, the Government must grow its own understanding - and that of New Zealanders - of these New Economy forces and how to work with them.
13. One of the keys is to comprehend and utilise the amplifying effect of networks.
14. The creation and utilisation of networks is a fundamental ingredient for generating wealth in the New Economy. This is because of the effect of "network externalities"; as the network grows, the value of being connected to the network grows exponentially, while the cost to the individual remains the same or reduces. To illustrate, a connection to the Internet in 2000 with 250 million users and a billion web pages is much more valuable - yet much less expensive - than a connection to the Internet in 1994 with 6 million users and something less than 20 million web pages.
15. Consequently a network acts fundamentally as an amplifier. The greater and more complex the network, the greater the amplification. The Internet is the most complex network humanity has yet created - it is a vastly more complex network than the telephone network. The latter is designed for one-to-one connections. But the former derives its power through being designed to facilitate any number of multiple connections simultaneously, in any format - text, images, sound and video.
16. The Internet amplifies opportunities; for creating wealth, increasing social cohesion, participating in global activities, and for living a richer more informed life - irrespective of geographical location or population density.
17. Simultaneously the Internet can amplify inequalities, contributing to the so-called digital divide. It has been shown that those who are already disadvantaged for socio-economic or geographical reasons are less likely to be connected to the Internet and/or e-literate. This lack of access amplifies the existing disadvantage, because those who are e-literate and connected have exponentially greater access to opportunity and information than those who are not. The key point to understand is that the Internet does not create the digital divide per se - it simply amplifies already existing disparities.
18. As an amplifier of opportunity, the Internet specifically, and networks generally, are a fundamental tool for economic and social development. Indeed, management expert Peter Drucker and others have suggested that the dynamic of networks, partnerships and collaborative ventures is a key organising principal in the New Economy.
19. It is instructive to note that networks have always been at the centre of successful societies. The Roman Empire, for example, was based on its network of roads and waterways. Physical networks like roads, sewerage and electricity still underpin our society today. But as the founder of Nua Internet Surveys Gerry McGovern points out " ...the Internet network is different. It is digital, it is global, and it changes faster than practically anything changed in the Industrial age."1 In other words, it is the complexity, speed and reach of the Internet that makes it different.
20. McGovern also points out that although there are wires, computers, modems and web sites, these things are not the essence of the network. The essence of Internet is that it works to help people interact and share information with each other...
"The Network economy is just another name for the caring economy because the network is all about people: people are the network."2
b. Networks and Electronic Commerce
21. Electronic commerce is a business application of networks. Conceptually, the development of electronic commerce is about moving physical business processes, such as supply, production and distribution chains, to the networked electronic environment. Making these processes "weightless", faster and less error-prone markedly reduces the costs of transactions and contributes significantly to business efficiency. Other benefits include the potential for much greater collaboration and customisation in design, lower inventory costs, faster production, lower supply costs and an increased ability to combine markets across borders, making national borders more porous.
22. Simultaneously, the amplifying effect of networks tends to increase the value that can be derived from electronic business processes over and above cost reduction. For example, the reach of the organisation is increased enabling it to interact with non-traditional suppliers or customers. Relationships with business partners can go beyond those defined by existing linear processes, by connecting businesses that are not normally adjacent on the traditional supply chain. These more complex, newly established business relationships can constitute a new business-to-business market - often crossing borders - where information becomes the core of the transactions.
23. Additionally electronic commerce amplifies the ability of SMEs to access new markets across the globe, enabling activities that might not be otherwise supported by the local market. This could be particularly beneficial for those SMEs located in low population areas.
24. In a nutshell, electronic networks make for a much more varied and richer range of possible supplier and customer relationships. Because they are electronic, there is also the ability to collect and analyse much greater amounts of information about those relationships. This provides opportunities for new business models to develop, and new wealth to be created.
25. It is important to note that business to consumer ecommerce (i.e. shopping on the Internet) is the public face of electronic commerce. While this is having an effect in terms of price, choice and convenience, it is in the area of business to business ecommerce that the most significant impacts are predicted and being felt, particularly for SMEs.
c. The New Economy
26. In the New Economy the degree to which ideas, innovation and technology are integrated into every sector of the economy - regardless of whether its manufacturing, services, or agriculture - determines the opportunities for employment and wealth creation.
27. In the traditional economic view the discovery of key technologies such as the transistor or the steam engine are seen as scarce opportunities that are given to us by nature and are largely beyond our control.
28. We are now learning that - in New Economy terms - this account gets things exactly backward. In fact the opportunities given to us by nature are anything but scarce. While physical resources are indeed finite, there are unlimited potential ideas or "recipes" for turning those finite physical resources into new and valuable products. Silicon, for instance, a virtually worthless element is now used for making computer chips.
29. There are also unlimited opportunities for creating new services - for instance New Zealanders Dennis Dutton and Bruce Simpson have both created world famous (and not just in New Zealand) web-based information services of high value based on the web's linking facility.
30. In the New Economy, instead of supplying mass or commodity markets, identifying and exploiting numerous high value niche markets will become the primary generator of wealth. This greater breadth of more dynamic economic activity will likely imbue the New Zealand economy with greater resilience. In particular smaller communities will be better off with greater numbers of smaller businesses rather than reliance on a single large industrial employer.
31. What is scarce then is not opportunity, but the human talent to pursue the many opportunities available. As new growth theorist Paul Romer says there are hundreds of examples that show that we make progress in almost any area to which we put our minds. Moreover, if we don't put our minds to an area, we don't make progress. The lesson in this rather obvious statement is that innovation and technological progress is something that does not just occur by accident, but can be made to happen. The realisation of this fact is one reason for the increasing speed and dynamism of the global economy.
32. As an example of boundless opportunity and scarce human capital, an Auckland Venture Capitalist stated recently that he is aware of many good investment opportunities in the high tech/electronic commerce sector in New Zealand. However, his constraint is the lack of what he calls "managerial bandwidth". In other words, there are not nearly enough people available with the business expertise to take advantage of the available opportunities. The lack of people with skills, training and experience is the bottleneck.
33. Hence in New Economy terms, encouraging future discovery is a key role of governments. Economic success is increasingly determined by the effectiveness of the support that countries, enterprises, communities and individuals give to technological innovation, entrepreneurship, education and learning.
34. In other words a key element that will deliver the desired future of high skills, high employment and a high value added economy, while reducing inequality, is the rapid creation of as many new businesses as possible, exploiting as many opportunities as possible - remembering that opportunities as such are virtually limitless. To support this goal developing human capital, business and management capability and fostering continuous R & D is of paramount importance.
d. Education in the New Economy
35. An area, which has yet to be fully addressed in New Zealand, is how the growth of ICT will drive changes in education.
36. A cursory analysis suggests that ICT will potentially change the shape of education substantially. ICT greatly enhances the ability to deliver distance courses, and this may well lessen the need for educational institutions to have a big investment in buildings. At the same time, New Zealand educational institutions - particularly at the tertiary level - will increasingly find themselves in competition with overseas universities offering Internet based courses, and delivering better qualifications at a more affordable price. New Zealand tertiary institutions may well have to follow the economy as a whole in concentrating on niche areas of excellence. Additionally ICT may afford opportunities for New Zealand tertiary institutions to form partnerships with overseas institutions, either to offer courses locally to New Zealanders or to co-facilitate courses drawing on those areas where New Zealand has an edge.
37. The Internet is also likely to increase opportunities for life-long learning both on and off the job. Indeed just as the ecommerce is causing new business models to emerge, so the Internet is likely to enable new models of education that more closely match a whole range of learning needs.
38. At the compulsory end of the scale, education at the primary and secondary level must be closely examined to see how it might better deliver the skills and experience that our children will need to prosper in an economy that is more dynamic. Research over the last twenty years in learning styles suggests that it is more than possible to provide education that can unleash the creativity of every child.3 Additionally there needs to be a much greater focus on integrating the use of ICT into the curriculum to create e-literate citizens. There are some excellent examples in New Zealand - such as Tahatai Coast School in the Bay of Plenty - that show that utilising the latest research in teaching and learning combined with use of ICT can deliver impressive results.4
39. In summary, it is vital that the Government's investment in education continues to deliver results that meet the needs of the future.
e. Flux in the New Economy
40. Since 1980 the United States lost some 44 million jobs in the process of adjusting its economy, but simultaneously created 73 million jobs - a net gain of 29 million. Unemployment in the US is at historically low levels.5
41. In the same period policy in the European Union was to protect existing industries and work out ways of distributing existing jobs around more people through shorter working hours or lower retirement ages. The result was a net loss of 5 million jobs, and stubbornly high unemployment levels - even Ireland still has an unemployment rate of around 7%.
42. A recent report in the Washington Post stated that many European leaders are now acknowledging that the European Policy of...
"...subsidising dying industries in an effort to preserve jobs has contributed to the overwhelming superiority of the United States in such booming sectors as computers, Internet services, biotechnology and even investment banking."6
43. The Spanish Prime Minister is quoted as saying "Our problem is not the lack of a scientific or technical base. It is the lack of stimulus for business initiatives, which is the key to North America's success."7
44. A recent study by Donald Hicks of the University of Texas found that the longevity of Texan business had fallen by half since 1970. Austin, the city in which businesses had the shortest expected life span, also had the fastest-growing job base and the highest wages.8
45. Similarly, a report prepared for the Wellington City Council and released in January 2000 noted that Wellington's relative economic health is due to a dynamic business sector constantly reviewing and renewing itself, with the most important component being the ability to generate new jobs in new industries.9 It is instructive to note that one of these industries - telecommunications - is pure ICT. Another - film production - has a large ICT component particularly in terms of computer-based special effects. It is also instructive to note that the Wellington City Council has had a long-standing policy of investing in the ICT infrastructure of the city.
46. The conclusion is that there is powerful evidence that a focus on facilitating a very dynamic business environment, with a strong emphasis on the creation of many new rapidly growing firms, is critical for economic growth. It is this realisation of the role of flux in the economy that underpins the UK Labour Government's initiatives to "modernise the economy" - a key plank of which is support and advocacy for the increased use of ICT, especially among more disadvantaged sections of society.10
47. It would seem that to harness the maximum potential for growth the state should ideally direct most of its efforts toward those things that support the continual re-creation of the economy - such as technological innovation, entrepreneurship, education and learning. This will most likely provide the foundation whereby individuals and communities can improve their standards of living, have real choice and dignity, and participate in society and the economy.
48. The focus needs to be on improving the process that brings new entrants into the market, and enables successful firms to expand and innovate. For instance, what is the best way of getting people to work on interesting new questions so they can start new enterprises?
49. In encouraging the creation of many new businesses a primary role for Government is to ensure there are as few barriers as possible to this process. In this context work on facilitating more start-up and spinout companies, and making it easier for New Zealand firms to both succeed and fail with dignity is crucial.
50. Technology is important not only because it creates new business, but because it makes existing business more efficient, thus enabling greater competitiveness in the global economy.
51. The adoption of new technologies by firms enables them to be much more dynamic, innovative and quicker to change than ever before.
52. The adoption of new technology by individuals enables them to be more fleet of foot in the labour market, improving their overall employability and their likelihood of gaining higher paid jobs.
53. Indeed the process of adopting new technology in itself is an element of innovation, which challenges both individuals and firms to look at new ways of doing things. This ability to respond to change is a critical factor for New Economy success, on an individual, regional and national level.
| Keys to the Old and New Economies |
|---|
| Issue | Old Economy | New Economy |
| Economy-Wide Characteristics: |
|---|
| Markets | Stable | Dynamic |
| Scope of Competition | National | Global |
| Organisational Form | Hierarchical, Bureaucratic | Networked, Entrepreneurial |
| Potential Geographic Mobility of Business | Low | High |
| Competition Between Regions | Low | High |
| Industry: |
|---|
| Organisation of Production | Mass Production | Flexible Production |
| Key Factor of Production | Capital/Labour | Innovation/Knowledge |
| Key Technology Driver | Mechanisation | Digitisation |
| Source of Competitive Advantage | Lowering Cost Through Economies of Scale | Innovation, Quality, Time-To-Market, and Cost |
| Importance of Research/Innovation | Moderate | High |
| Relations With Other Firms | Go It Alone | Alliances And Collaboration |
| Workforce: |
|---|
| Principal Policy Goal | Full Employment | Higher Wages and Incomes |
| Skills | Job-Specific Skills | Broad Skills, Cross-Training |
| Requisite Education | A Skill | Lifelong Learning |
| Labour-Management Relations | Adversarial | Collaborative |
| Nature of Employment | Stable | Marked by Risk and Opportunity |
| Government: |
|---|
| Business-Government Relations | Impose Requirements | Assist Firms' Innovation and Growth |
| Regulation | Command and Control | Market Tools, Flexibility |
f. Historical Context
54. To put the impact of ICT into some context it is useful to compare the invention and development of the internal combustion engine, the most recent parallel.
55. The motor vehicle industry hardly existed in the USA in 1900; by 1930, it was the largest industry in the USA. Not least was the impact of the building (by the government) of the Interstate highways - a network - in the fifties and sixties. The widespread use of internal combustion engines and motor vehicles transformed our way of life and changed the basic shape of the economy.
56. The power of ICT will probably have a greater impact, and in a shorter period of time. ICT can radically and very quickly alter relative costs of doing things. In turn, that can lead to very rapid changes in what is actually done. Some recent examples:
57. A major US oil and gas explorer (with whom we have had regular contact) has looked at all its core competencies against the collapse in costs of information management. It discovered it was very good at data manipulation - essential for well drilling - and the change in the relative costs of using that competency meant it could do very different things. It has moved its focus from the high risk/high return drilling of oil and gas wells, to the low risk but still lucrative business of creating operating markets for energy products.
58. A major car company is looking to replace its existing very expensive and high quality headlights with a row of seven very much cheaper lights. These cheaper lights have sensors that can instantaneously change the light output and direction based on external inputs. Hence a relatively small and very cheap chip, some programming skills and an awareness of the possibilities could reduce the costs and increase the quality of this vital piece of safety equipment.
59. The key points in these examples are first, enterprises need to keep looking at themselves, their competencies and at the impacts of the huge shifts in relative costs, and second, even very sophisticated ways of doing things may no longer be the best way. To take advantage of these opportunities we need creative, enquiring minds that appreciate the opportunities that ICT provides.
60. That applies as much to the Government itself as it does to the rest of the economy.
g. Smart Communities: ICT and Economic and Regional Development
59. In policy terms addressing the impacts of economic flux is one of the key New Economy challenges. We need to understand how best to help workers, enterprises and regions innovate, adapt and manage the risks of increased turbulence. As Charles Handy points out, many of those who will have to be the new business starters are the least well equipped for it.11
60. It may be that an active labour market policy should focus more on developing the capacity (i.e. human capital) of disadvantaged job seekers (long-term unemployed, particularly Maori and Pacific Island peoples.), in the context of building the overall capacity of communities to create new business and leverage local advantages. Such an approach might result in more people being employed for longer together with better economic development outcomes.
61. Most communities' idea of economic development is to lure outside companies through a range of incentives. Communities grapple over existing wealth as if it is a fixed quantity. This however is buying into the zero-sum game of the industrial economic view of finite resources, as one community's gain is another's loss.
62. In New Economy terms, economic development is seen as the creation of new wealth - goods, services and jobs that did not exist before. It may well be that investing in a local business incubator programme - while not a quick-fix - will in the longer term be more effective than business attraction schemes in building the total stock of jobs. Additionally ensuring affordable access to ICT, combined with education and support to optimise the use of ICT, has been shown overseas to be a powerful combination in lifting the well being of impoverished individuals, communities and locations, which ultimately builds the capacity of the nation.12
63. The key is not to focus on particular industries or activities, as in more dynamic economies the importance and value of particular activities (or the value and potential of niches) will both rise and diminish over time - often quite rapidly. The key is to focus on growing the total capability of a community to be both industrious and active. The real resource is the skills and talents of the people, and it is these that must be harnessed.
64. Internationally there is a move to approach economic and regional development in terms of building "smart communities"; that is using ICT as the basis for transforming the way businesses operate, citizens communicate, and governments interact with citizens and business. Advances in individual and collective wellbeing are achieved through co-operation between government, business, educators and citizens to make optimal use of ICT and encourage a culture of innovation. Essential infrastructure for this includes availability of bandwidth, excellent lifelong education and support for research and development.
65. A Smart Community approach offers citizens the opportunity to:
- Develop the skills to advance economically, improve quality of life and together strengthen their culture
- Stimulate economic growth by helping individuals and businesses to become more adaptive, innovative, co-operative and externally focused
- Attract (rather than buy) new investment and business
- Improve learning opportunities and access to knowledge, and create a more skilled work force
- Increase access to and quality of health care
66. In essence e-literacy and access to ICT is a key tool not only for the successful adoption of e-commerce, but also as a means of increasing the ability of people to create and exploit the opportunities of an increasingly digital world. By utilising the power of ICT, marginalised communities can leap-frog or kick-start their economies, and so move from a disadvantaged position in the industrial economy to a competitive position in the information/knowledge economy. In effect the network enables such areas to be tied back into the web of the national economy, and access directly the global economy. The abundance of relationships that then become possible is the basis of economic growth - remembering that the network is all about people. People are the network.
67. Maori communities may be particularly well placed to benefit from investment to become Smart Communities as they already have a cultural structure in place that facilitates networking and co-operation. In addition, ICT, particularly the Internet, can assist Maori businesses and communities to overcome barriers of location, such as distance from suppliers and markets. Maori is also a unique brand, in global terms, for Maori businesses to utilise to good effect in international ecommerce.
68. A point to note is that while the common focus of smart communities is on optimising ICT, the use to which the technologies are put varies according to the individual needs and circumstances of each community. Indeed, this is a major benefit of investment in ICT; it serves as a platform for advancing whatever agenda a community decides will bring them optimal economic and social advantage. This could be amplifying current endeavours or enabling a regional economy to be transformed for the new economy.
69. Hence when developing policies to grow New Zealand's new economy it will be important not to be prescriptive. Instead government must pay attention to local and regional contexts; explore the nature of any geographical digital divide, and be sensitive to the diversity of responses necessary to ensure that different types of regions gain optimal benefits from ICT. Regional competitiveness is likely to focus on the capacity of a region to develop knowledge, improve human capital, innovate and network. However, regions are likely to vary in how best they can achieve these goals.
70. To understand how individual regions can best develop an environment conducive to new economic development, government will need to work with local government, communities and the private sector. It will also be important to manage the ongoing volatility that is particularly problematic for many small towns dependent on single employers or products.
71. A close-by and interesting example of a traditional one-industry town making the transition to the new economy is the way Newcastle (Australia) has prepared itself for life after the closure of BHP's steelworks. The preliminary downsizing has created high unemployment and attendant dislocation. For some time, leaders in business, the community and education have been developing a strategy to reposition Newcastle around clusters of engineering and IT firms, which is paying dividends. Members of these industries actively and formally network to share knowledge and opportunities. Employment in service industries, including opportunities for those without high skill levels, will develop from the strength of economic growth in new industries and the support for entrepreneurs.13
Conditions for Local Economic Development
Natural Resources (Tangibles)
(Dominant in Industrial Economy) | Human Resources (Intangibles)
(Dominant in New Economy) |
|---|
| Land
Minerals Water Trees Climate Energy | Population
- Birth rate
- Immigration
- Emigration
Culture - Institutions
- Attitudes
- How we do things here
Education - Skills
- Harnessing strengths
- Creativity
- Ideas
Access and use of resources - Transport
- Information and Communication Technologies
|
| + Application of knowledge/technology | + Application of knowledge/technology |
= Ability to do things better through:
- increased efficiency
- lower cost
- more competitive
| = Ability to do things better or differently, e.g. add value through
|
and/or ability to do things differently with the same resources
e.g. new products (wine, olives)
new markets | Plus
ability to create new things to do
e.g. software, film. |
| = Incremental growth | = Exponential growth |
| Dependant on availability of the resource | Dependant on availability of leadership plus attitudes and skills |
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