A Single Market for an Information Society

Transcription

1 A Single Market for an Information Society Economic Analysis Final Report for the Directorate General Information Society and Media Berlin, 18 March 2010

2 DIW econ GmbH Dr. Ferdinand Pavel Mohrenstraße Berlin Germany Phone Fax ii

3 Table of Contents Executive Summary Introduction Context Report Overview Objectives and Background Relevant Terms and Main Concepts Single Market Information Society e-business The Single Market, Information Society and e-business Theoretical Background Development of e-business in the EU and its Major Trading Partners Introduction International Comparisons of Household and Business Indicators Methodology Results of Indicator Summary of International Comparisons of Household and Business Indicators Business-to-business Developments in the European Union and North America B2B e-commerce Market E-Business Technologies Uptake of e-business Technologies Developments in Asia-Pacific South Korea Japan Australia Summary of Asia-Pacific Development of B2C e-commerce and Its Impact on Consumer Prices Introduction The Development and Usage of e-commerce Market Demographics Cross-Border Purchases Typical B2C Business Models...65 iii

4 4.3 Theoretical and Empirical Analysis of e-commerce s Impact on Consumer Prices Background Literature Review Methodology and Data Collection Statistical Analysis Price Dispersion Analysis Price Level Analysis Summary of the Main Findings The Impact of e-business on EU Trade Introduction The Gravity Model Basic Specification Extended Specifications ICT in the Gravity Framework Data Estimation Results First Estimation Approach Second Estimation Approach ICT and Trade in Services Conclusion E-Commerce, e-business, Competitiveness and the Single Market e-business and Growth e-business and the Single Market Measurement of Integration into the EU Single market ICT Usage and Integration into the EU Single market Barriers and Obstacles to e-business Summary Summary and Policy Outlook Key Findings New Rules for an Information Society: Policy outlook References Appendix: Technical Model Specification iv

5 Index of Tables Table 1: e-business System Utilization...35 Table 2: Use of e-commerce and ICT investment...36 Table 3: Household Internet and Broadband usage...37 Table 4: IT Infrastructure and e-commerce Use, by company size, Table 5: Indicators of Business Use of Information Technology, 2002/03 to 2005/ Table 6: Indicators of Information Technology and e-commerce Use...46 Table 7: Overview of e-commerce Usage in Various Countries, Table 8: European Online Sales Revenues by Category, 2002 and Table 9: American Online Sales Revenues by Category, 2002 and Table 10: Canadian Online Sales Revenues by Category, 2003 and Table 11: Payment Type Preferences by Country (percentage of population that prefers to use a specific payment type, 2008)...63 Table 12: List of Products Used for the Study of Price Dispersion...74 Table 13: Coefficient of Variation (Country and Product Specific)...77 Table 14: Coefficients of Variation (All Countries as a Single Market)...78 Table 15: Coefficient of Variation (All Countries Compared to Eurozone)...79 Table 16: Two Sample T-Test on Mean Coefficients of Variation: Online Versus Offline Price Dispersion...82 Table 17: OLS Regression on Price Dispersion (Dependent Variable: Log Coefficient of Variation)...84 Table 18: Two Sample T-Test on Mean Prices: Online Versus Offline...87 Table 19: Results from Estimation Approach Table 20 : ICT Development of EU-27 Countries that are Part of the Sample Table 21: Results of Estimation Approach 1 when Sub-indicators are used Table 22: Results from Estimation Approach Table 23: Results of Estimation Approach 2 when Sub-indicators are used Table 24: Link between the Quality of Nations Legal Abidance of the Single Market Directives and Macroeconomic Indicators v

6 Index of Figures Figure 1: Developments of ICT in Relevant Economic Regions, Figure 2: Business Developments, Figure 3: Business Developments, Figure 4: Business Developments, Figure 5: Household Developments, Figure 6: Household Developments, Figure 7: Household Developments, Figure 8: Worldwide and Western European B2B e-commerce Shares, Figure 9: e-business Technology Usage Indicators...27 Figure 10: e-business Technology Usage in the EU-27, by size class (%), Figure 11: Share of South Korean Companies Engaged in e-commerce...31 Figure 12: e-commerce Trade Volume in South Korea...32 Figure 13: B2B e-commerce by Industry in South Korea, in billions of Won...34 Figure 14: Internet Diffusion Growth Rate...36 Figure 15: Enterprise Internet Usage Rates...40 Figure 16: Household Computer or Internet Access in Australia...43 Figure 17: Percentage of Population Who Access the Internet Once a Month, Figure 18: e-commerce Market Sizes and Percentage of all Adults who Shop Online, Figure 19: Overall B2C Market Size (2008) and Compound Annual Growth Rate ( )*...53 Figure 20: Average Annual Online Expenditure per Person and Online Shopping Penetration Rates...54 Figure 21: Percentage of Online Shoppers who made a Cross-Border Purchase, Figure 22: Paypal Adoption in Various Countries, 2007 and Figure 23: Total Internet Sales and the Percentage of Total Sales...66 Figure 24: Total Internet Sales and the Percentage of Total Sales, Europe (2008)...67 Figure 24: Cross-Border Online Transactions...69 Figure 25: Example of Kelkoo Netherlands...72 Figure 26: Top Sales Categories for Online Sales in Western Europe...75 Figure 27: Coefficient of Variation Time Trend...76 Figure 28: Composition of the ICT Development Index...99 Figure 29: Development of Real Intra- and Extra-EU Trade in Goods and ICT assets, (in billions USD) vi

7 Figure 30: The Impact of an Exporting Country s (i) ICT Development on its Exports for Different Levels of Destination Country s (j) ICT Development (figure refers to model a) Figure 31: The Impact of an Importing Country s (j) ICT Development on its Imports for Different Levels of Exporting Country s (i) ICT Development (figure refers to model a)115 Figure 32: The Impact of an Exporting Country s (i) ICT Development on its Exports for Different Levels of Destination Country s (j) ICT Development (figure refers to model b) Figure 33: The Impact of an Importing Country s (j) ICT Development on its Imports for Different Levels of Exporting Country s (i) ICT Development (figure refers to model b)117 Figure 34: The Impact of an Exporting country s (i) ICT Usage on its Exports for Different Levels of Destination Country s (j) ICT Usage (figure refers to model a2) Figure 35: The Impact of an Importing Country s (j) ICT Usage on its Imports for Different Levels of Exporting Country s (i) ICT Usage (figure refers to model a2) Figure 36: ICT Development and Trade in Services Figure 37: ICT Development and Trade in Services in the EU Figure 38: ICT Development and Trade in Services in the New Member States Figure 39: ICT Indicator and the Monetary Contribution of the Knowledge Economy Figure 40: e-business infrastructure and innovation Figure 41: Variation and Dynamics in the Degree and Quality of Integration into the Single Market (EU-15 Member States from 2003 to 2008) Figure 42: Legal Integration into the Single Market and Business ICT Indicators Figure 43: Legal Integration into the Single Market and Household ICT Indicators Figure 44: Barriers for Enterprises to Automated Data Exchange, Percentage of Enterprises, Figure 45: Percentage of Enterprises that Identified the Following Barriers as Important to Their Enterprise, percentage of enterprises, Figure 46: Problems Encountered by Individuals when Making Purchases over the Internet, percent of individuals, Figure 47: Barriers for Individuals to More Intensive Internet Use, percent of individuals, Figure 48: Reasons why Individuals Did Not Order Goods or Services Online, vii

8 Relevant Abbreviations ABS ADE B2B B2C B2G BPM BUIT CAGR CEPII COV DOTS EDIFACT EIU ERP EU FDI FTA G2B G2F GDP HUIT ICT IMF IT ITU KCCI MIC OECD OLS R&D SCM SMEs SRA Australian Bureau of Statistics Automated Data Exchange Business to Business Business to Consumer Business to Government Business Process Management System Australian Business Usage of Information Technologies Survey Compound Annual Growth Rate Centre d'etudes Prospectives et d'informations Internationales Coefficient of Variation IMF Direction of Trade Statistics Electronic Data Interchange For Administration, Commerce and Transport Economist Intelligence Unit Enterprise Resource Planning Software European Union Foreign Direct Investment Free Trade Agreement Government to Business Government to Foreigner Gross Domestic Product Australian Household Usage of Information Technologies Survey Information and Communication Technology International Monetary Fund Information Technology International Telecommunication Union Korean Chamber of Commerce and Industry Japanese Ministry of Internal Affairs and Communications Organization of Economic Cooperation and Development Ordinary Least Squares Regression Research and Development Supply Chain Management Systems Small and Medium Enterprises Sales Force Automation Software viii

9 StatCan UK USA WOE XML Statistical Office of Canada United Kingdom United States of America IMF World Economic Outlook Database Extensible Mark-up Language ix

10 Executive Summary The Single Market, which was established by the European Union in 1993, has improved economic efficiencies and created economic growth. Nevertheless, economic development and in particular the growth of labour productivity has been much more pronounced in other regions, in particular in the USA. As empirical evidence suggests, a major driving force for this observation are differences in the contributions of the knowledge economy in particular the use of Information and Communication Technologies (ICT) and e-business. Theoretically, the increased use of e-business and ICT should further support the EU Single Market, e.g. by increasing transparency and efficiency, reducing transaction, search and distributional costs or by lowering barriers to entry. Moreover, it should enable the EU economies to raise their labour productivity and thus, generate economic growth. Development of e-business in the EU and its Major Trading Partners However, the level of e-business, e-commerce and ICT development in the EU varies among the member states. While countries such as the United Kingdom, Sweden and Denmark exhibit extremely high levels of infrastructure and usage, others like Bulgaria, Romania, Greece and Italy perform very poorly. This is seen for both households and businesses. However, those countries with the highest levels compare to or have higher levels of development than the EU s major trading partners (Australia, Canada, Japan, Korea, and the United States). Additionally, when only looking at business developments, large differences exist between firm size clusters. Across all countries, small and medium size firms perform less e-business activity than the larger firms. However, when comparing the largest companies in the largest e-commerce markets in Europe with their North American counterparts, the European large firms engage in as much e-business activity and employ comparable levels of e-business technologies. Meanwhile, large differences exist throughout the Asia-Pacific region. For example, Korea is marked by a large government infrastructure program in the 90s that catapulted the country to the forefront of ICT infrastructure. Additionally, Australia has a better business performance and relatively more enterprises are engaged in e-commerce activities. It is also observed that the use and diffusion of ICT for e-commerce is likely not only to depend on a 1

11 country s ICT infrastructure but also on other factors like country size, ICT skills and individual attitudes. Development of B2C e-commerce and Its Impact on Consumer Prices While the USA has the largest B2C e-commerce market in the world, the European market is growing at a faster rate. However, the current statuses of the different markets within the European Union differ. For example, B2C e-commerce markets in the UK, Germany and France make up 70% of all online consumer-spending in Europe. Nevertheless, the Netherlands and Sweden have by far the highest penetration of consumer e-commerce. B2C e-commerce in all regions considered (US, EU and Canada) are driven by similar products, namely apparel and electronics. Additionally, cross-border purchases are much higher in North America than in the European Union. However, the various European countries are differentiated to a large extent, as countries such as the UK display high levels of cross-border purchasing while others such as Germany have quite low. This fragmentation is likely to depend on language barriers, differences in legislation and regulation across EU member states, as well as by specific consumer preferences, e.g. regarding payment systems. Increased use of e-commerce on a national as well as on an international level, may decrease prices due to increased transparency. However, an empirical assessment of price dispersions across 9 EU member states and 19 different products reveals that national markets are rather fragmented and that a single market with comparable levels of price dispersion across individual member states still does not exist. However, differences in dispersion levels are clearly lower for Eurozone member countries, suggesting that the existence of a single currency positively contributes to market integration. Moreover, econometric analysis shows that price differences across countries are mildly statistically significant, while the variation in prices is significantly higher online when compared to offline variation. Fragmentation of B2C markets within the EU is also reflected by ambiguous effects on prices levels which appear to depend on the sophistication of the online market. The Impact of e-business on EU Trade To explore if a vast deployment and application of ICT infrastructure at a national level also affects trade flows within the EU and between the EU and important trading partners, an economic model is developed. The analysis is based on the theoretical assumption that ICT 2

12 development enhances trade by reducing transaction costs across international borders. Additionally, theory suggests that due to the network characteristics of ICT, these technologies further enhance trade when both trading partners exhibit advanced levels of ICT development. As trade enabled by ICT is equivalent to e-business activities, the analysis focuses on the impact of e-business on cross-border trade. Regression analyses support the hypothesis of a significant and positive effect of ICT on trade. In particular, ICT development is important for a country s exports. Additionally, since network effects are shown to be significant, the more sophisticated the ICT developments in the partner country are, the larger the effect on trade is. Finally, trade in services and ICT developments are positively correlated. E-Commerce, e-business, Competitiveness and the Single Market In addition to the effect on trade, ICT and e-business usage also have important impacts on various other economic aspects of the European Union. In particular, there is a more direct connection between ICT and the general competitiveness of the EU. For example, a clear link can be seen between ICT and the contribution of the knowledge economy 1 to value added growth. Additionally, other factors of productivity and competitiveness can be linked to ICT usage, such as overall innovative activity or participation in the European Single Market. The analysis provides evidence that a well developed ICT infrastructure and comprehensive usage thereof can foster the consolidation and improve the competitiveness of the European Single Market. However, barriers to more advanced usage of the internet persist. The most commonly reported barriers either involve privacy or trust concerns or exist because individuals and enterprises are not aware of potential benefits. More can be done to ensure a comprehensive legal system exists that will assuage consumers and retailers privacy and trust concerns, while demand-sided programs are needed to overcome a lack of interest. Policy Outlook Despite the multitude of benefits that stem from ICT and e-business usage, many new challenges arise for consumers, firms and policy makers as usage becomes more widespread. For example, both privacy and data protection concerns arise and copyright 1 A formal definition of the knowledge economy by van Ark (2008) comprises of the contribution of total factor productivity, labour composition and ICT capital to value added growth. 3

13 laws acquire new meanings and interpretations with the rise of digital content, as the social and technological context is now vastly different from the context of the time in which the laws were adopted. Thus far, public and private efforts to reinforce the uptake of e- Commerce have only focused on the availability of infrastructure, which is necessary but not sufficient. From a policy making perspective, the development of new rules that meet the challenges of the online world are essential. The creation of new frameworks for rules and institutions through adequate cost-benefit analyses of potential policy scenarios and the participation of all interested parties is needed. 4

14 1. Introduction 1.1 Context Detailed information about the uptake of Information and Communication Technologies (ICT) in EU Member States compared to its main economic partners is needed in the context of i2010 the European Commission strategy for an Information Society. Has the use of ICT by European enterprises, citizens and government strongly reinforced the internal market? And how do e-business and e-commerce contribute to ICT uptake and the Single market? Despite its possibly high importance for economic growth, there is so far little empirical evidence on e-business uptake in Europe (Crespi et al. 2007, European Commission 2001). This research work intends to fill this gap by devoting a special focus on the influence of e- business and e-commerce and its impact on the Single market. The overall trends and developments in Member States will be traced and compared internationally with those of the EU s main economic partners. Additionally, microeconomic findings will be embedded into a macroeconomic analysis to obtain a complete picture of the state of the information society in the EU and its Single Market. Against this background, a policy outlook with necessary steps to support i2010 and foster the development of the EU Single Market will be developed. 1.2 Report Overview This report presents the project work for the economic analysis on A Single Market for an Information Society. The five main chapters present the main definitions and terms used throughout this report and provide a general theoretical background into the economics of ICT and e-business (chapter 2); outline the development of e-business in the EU and its major trading partners (chapter 3); describe the development of e-commerce and its impact on consumer prices (chapter 4); present a detailed analysis on the impact of e-business on EU trade (chapter 5); and discuss the linkages between e-commerce, e-business, Competitiveness and the Single Market (chapter 6). A final chapter summarises and discusses the main results. 5

15 2. Objectives and Background Summary: The Single Market, which was established by the European Union in 1993, has improved economic efficiencies and created economic growth. Nevertheless, economic development and in particular the growth of labour productivity has been much more pronounced in other regions, in particular in the USA. As empirical evidence suggests, a major driving force for this observation are differences in the contributions of the knowledge economy in particular the use of ICT and e-business. Theoretically, the increased use of e-business and ICT should further support the EU Single Market, e.g. by increasing transparency and efficiency, reducing transaction, search and distributional costs or by lowering barriers to entry. Moreover, it should enable the EU economies to raise their labour productivity and thus, generate economic growth 2.1 Relevant Terms and Main Concepts In this section, the relevant terms and main concepts are outlined and defined. So far, these definitions have been developed at the beginning of the project work in order to form a semantic foundation for the research work Single Market Typically, a Single or Common Market is characterized by no internal visible trade restrictions; common external trade restrictions; no internal invisible trade restrictions; and free mobility of factors of production and financial assets. Or as the European Commission describes it: The Single European Market stands for free movement of people, goods, services and capital (European Commission 2008a). 2 2 Additional to the Common Market the European Community works on two further pillars the Monetary Union (common currency) and the Economic Union (common economic policy). This proposal, though, concentrates on the state and enhancement of EU Single Market looking at the impact of e-business and ICT. 6

16 But what then makes a Single Market more efficient than a heterogeneous market? Traditional theories report the following benefits of a Single Market (Hansen and Nielsen 2002): fundamental market changes create efficiency and welfare gains due to: utilisation of comparative advantages (e.g. with respect to technologies or factor endowments), utilisation of economies of scale and scope, greater product variety, and reduced barriers to entry due to harmonisation; increased market size intensifies competition and thereby reduces market power, lowers consumer prices, and increases output; and improves international competitiveness, and fosters sustainable growth. 3 On the other hand, the creation of a single market can also induce costs, at least in the short run. Inter alia, these might be due to: adjustment costs (e.g. closure of production sites, labour shedding) due to structural changes in the economy; limited labour mobility across sectors and regions, which might lead to regional unemployment; or diversion of trade flows away from non-union countries with competitive advantages. Nevertheless, both economic theory (Hansen and Nielsen 2002) and empirical evidence suggest that in the long-run the creation of an internal market leads to a positive outcome Information Society An information society describes a form of economic and social system, in which generation, management and use of information and knowledge attain central meanings (Meyers Lexikon online 2008a). As a result, the diffusion of information technologies in an information society does not only influence work and living conditions in a sustainable manner, it also changes the organisational and institutional structure of the economy and 3 It is also sometimes argued that market integration stimulates innovation activity through stronger competition. However, the link between competition and innovation is theoretically ambiguous. On the one hand, strong competition in established markets can stimulate innovations for new markets. On the other hand, too much competition can also reduce the returns from R&D investment. 7

17 raises the share of information technologies in GDP. Such an information society also has the capacity to rapidly diffuse new frontier technologies and develop radical innovations, which in turn leads to sustainable, long-term growth. Therefore, transforming into an Information society plays a significant role in modern economic policies to increase growth and prosperity of a country or region e-business Following the OECD definition, e-business generally stands for automated business processes (both intra and inter firm) over computer mediated networks. It includes e- commerce, but it is a rather broader concept which encompasses the whole value chain including advertisement, business initiation and transaction, as well as payment, (customer) service and electronic commerce. As integral part of e-business, e-commerce refers to trade with products and services via electronic communication channels (Meyers Lexikon online 2008c). This is used especially by media, trade, computer, tourist, insurance and financial service enterprises. Trade relations are differentiated in business-to-business (B2B), business-to-customer (B2C), and business-to-government (B2G). The focus of this work will regard B2B and B2C e- commerce. 2.2 The Single Market, Information Society and e-business In 1993, the European Union established a Single Market to improve economic efficiency (Padoa-Schippoa and Fitoussi, 2005). From 1992 until 2006, the Single Market has increased the EU's prosperity by 2.15% of GDP and has created about 2.75 million extra jobs (European Commission 2007, S. 3). Moreover, EU exports to third countries have increased from 6.9% of EU GDP in 1992 to 11.2% in 2001, foreign direct investment has increased and intensified competition has reduced the prices for European consumers (European Commission 2008b). But despite such achievements, the overall economic assessment of the EU economies since the early 1990s is not entirely positive. Most importantly, labour productivity growth in Europe still lags significantly behind the respective levels in other economic areas, notably 4 See e.g. the Lisbon Strategy of the EU, 8

18 the USA. Worse, the resulting productivity gap between the EU and the USA has even increased since the late 1990s (van Ark, O Mahony and Timmer, 2008). Hence, the Single European Market has failed to generate sufficient levels of economic growth comparable with those in other regions such as the USA. The failure of EU countries to catch up with labour productivity growth in other regions has been identified as a symptom of its failure to transform into an innovation-based economy (Sapir et al. 2004, S. vi). Research outlines that the transformation into an information society is expected to raise the economies long-term growth potential. In fact, although European countries gradually transform into information societies as well, the speed of this process and in particular the diffusion of ICT is rather low (Ilzkovitz et al., 2007). The causes for this observation have been frequently discussed (EU-ICT Task Force Report, 2006, DIW econ, 2008). Among the main factors is a significant regulatory incoherence between different member states, the persistent existence of parallel standards and limited interoperability in many technologies, a lack of relevant ICT skills of European employees, as well as structural factors such as the large share of SMEs in Europe s economies which are particularly hesitant in adopting ICT. As a result, the EU economies lack not only the use of ICT itself, but also the new organisational forms, greater factor mobility, and increased innovations and R&D activities that would result from using ICT in an information society and that has proven to increase productivity and long-term growth potentials. 2.3 Theoretical Background This section briefly discusses how e-business theoretically affects the Single Market. Can increased levels of e-business help to reduce frictions in the European Single Market and thus increase performance and factor economic growth? Generally Positive Economic Expectations: E-business is expected to generate economic gains in a fully integrated market because it: Increases transparency; Reduces transaction and search costs; Reduces distributional costs; Increases firm efficiency; Lowers barriers to entry; and 9

19 Increases product variety. Increased transparency about prices, services, potential business partners etc. reduces information asymmetries and leads to higher efficiency of virtual compared to real markets. Lower transaction, search and distributional costs in virtual markets reduce frictions in the single market even further and thus, increase competition. Additionally, e-business can also increase market size, e.g. by enabling sellers to reach buyers in more distant regions. In turn, this results in welfare gains through greater product variety. Some Limitations in Practice: Despite all optimistic expectations, several factors are also slowing down the speed of e- business uptake in the EU. These include inter alia: Entry barriers due to: infrastructure requirements (e.g. internet or broadband access), computer literacy, increased uncertainty concerning security reasons, or market partners reliability; Structural changes due to increased competition of large companies that take advantage of scale economies, thereby crowding out small- and medium-size enterprises (SMEs); An increased dependency on employees with specific e-skills which in practice has become a serious constraint (EU ICT Task Force, 2006); or Still existing market frictions caused by legal, linguistic, cultural and infrastructure differences between EU Member States, which has been identified to retard e- business uptake on the EU Single Market and to cause significant differences in the level of uptake across Member States (EU ICT Task Force, 2006). Positive Overall Outcome: Overall, the diffusion of e-business in the EU single market is expected to create additional welfare gains. However, the limiting factors as discussed above do reduce the speed of diffusion. This is in line with empirical findings on the general impact of ICT use and diffusion on economic performance and, in particular, productivity growth, where the positive relationship, which has been found in the EU, remains behind the levels observed in e.g. the US (van Ark, O Mahony and Timmer, 2008). 10

20 3. Development of e-business in the EU and its Major Trading Partners Summary: The level of e-business, e-commerce and ICT development in the EU varies among the member states. While countries such as the United Kingdom, Sweden and Denmark exhibit extremely high levels of infrastructure and usage, others like Bulgaria, Romania, Greece and Italy perform very poorly. This is seen for both households and businesses. However, those countries with the highest levels compare to or have higher levels of development than the EU s major trading partners (Australia, Canada, Japan, Korea, and the United States). Additionally, when only looking at business developments, large differences exist between firm size clusters. Across all countries, small and medium size firms perform less e-business activity than the larger firms. However, when comparing the largest companies in the largest e-commerce markets in Europe with their North American counterparts, the European large firms engage in as much e-business activity and employ comparable levels of e-business technologies. Meanwhile, large differences exist throughout the Asia-Pacific region. For example, Korea is marked by a large government infrastructure program in the 90s that catapulted the country to the forefront of ICT infrastructure. Additionally, Australia has a better business performance and relatively more enterprises use e-commerce activities. It is also observed that the use and diffusion of ICT for e-commerce is likely not only to depend on a country s ICT infrastructure but also on other factors like country size, ICT skills and individual attitudes. 3.1 Introduction The availability and usage of Information and Communication Technology (ICT) has developed very differently in various regions of the world. The respective developments for the regions considered in this report are highlighted in the subsequent figure, based on country-specific composite indicators modelled after the ICT Development Index (IDI) of the International Telecommunication Union. The indicator generally aims at measuring the 11

21 information society by giving an indication of the extent to which countries have advanced in the area of ICT (ITU 2009, p. 12), including ICT infrastructure, usage and skills. A higher index level indicates a stronger performance. 5 Figure 1: ICT Development Index (IDI) in Relevant Economic Regions, EU15* Australia Canada Japan Korea United States The IDI is an aggregate composite indicator that measures and compares the development of several underlying variables over time and across countries. The variables are grouped into sub-indicators for ICT readiness, usage and capability. They include telephone and internet penetration levels, secondary and tertiary gross school enrolment ratios etc. *Does not include Greece or Luxembourg Source: DIW econ In 1995, when the internet was in its infant stages, ICT advances were strongest in the United States, Canada and Australia. By the end of the 1990s, South Korea skyrocketed to front of the pack, driven by government programs to improve the country s telecommunications infrastructure by deploying fibre networks. Meanwhile, the European Union as well as Japan have lagged behind with lower rates of ICT development. However, 5 The specific methodology of the IDI and its application in this report are discussed in detail later in section

22 the EU has slowly and steadily made improvements in comparison to other countries, except there is much room for improvement. E-Business, defined in section as automated business processes (both intra and inter firm) over computer mediated networks is a key application of ICT. This section provides an overview on the status quo and development of e-business use, as well as its diffusion in different countries and regions. A special emphasis will be made for e-commerce. Altogether, the various sources used for this analysis provide a vast amount of highly segmented information with rather limited comparability. To aid in the comparability of the large number of statistics on e-business, various indicators were constructed and much of the chapter hinges upon these indicators. The chapter proceeds as follows. The first section presents an overview of general e- Business indicators on infrastructure and usage for businesses and households. Secondly, with the support of directly comparable survey data, the e-business developments in North America and Europe are analysed in order to outline not only geographical differences but also differences in usage among different enterprise size classes. Lastly, descriptions of the developments in Asia-Pacific countries (South Korea, Japan and Australia) are presented as snapshots that provide an overview of the development of ICT, e-business and e-commerce both for households and businesses. Altogether, these sections work to test the hypothesis that major differences exist within the European Union, with certain countries having comparable levels of infrastructure and usage as the EU s major trading partners. Additionally, the hypothesis that large differences exist among different enterprise size classes and that small and medium size enterprises (SMEs) have lower levels of usage is tested. 3.2 International Comparisons of Household and Business Indicators E-Business developments are typically measured by numerous variables such as the number of businesses which bought or sold online, or the number of individuals that ordered online, or the number of businesses or households with computer and internet access. Given the large range of possible variables, a comprehensive picture of overall e-business developments over time and across countries is difficult to obtain. To enable such a comparison, composite indicators were constructed by combining all relevant and available 13

23 information in a meaningful way. The indicators are generally similar to the ICT Development Index (IDI) of the International Telecommunication Union presented in Figure 1. However, they follow a slightly different focus in that they specifically focus on the availability and usage of ICT for e-business and less on general ICT deployment and skills. This section outlines the construction of relevant indicators for e-business developments in businesses and private households. The first section outlines the methodology used to construct the indicator and the second section outlines the main results Methodology The construction of the e-business indicators for the European Union and its major trading partners (USA, Canada, Japan, Korea and Australia) is based on variables commonly used to measure e-business developments. Additionally, several variables on infrastructure availability were included to reflect the specific requirements for using e-business applications. The indicators are calculated separately for infrastructure and usage as well as for households and businesses. The specific structure of these four indicators is as follows: Business Infrastructure Businesses with computer Businesses with internet Businesses with broadband Businesses with a website Business Usage Businesses that sold online Businesses that bought online Employees using a computer Employees using the internet Household Infrastructure Households with a computer Households with the internet Households with broadband 14

24 Household Usage Individuals that used the internet in the last year Individuals that ordered online Typically, the term internet as used in these variables refers to the so-called World Wide Web (or public internet). While this is certainly one of the most important networks, there are other important networks as well. Hence, focusing exclusively on the World Wide Web would imply using a too narrow definition of computer mediated networks. On the other hand, very little information is available on those other, mostly private networks. Nevertheless, by also including data on computer availability and usage, the indices are still capable to reflect the usage of other networks, as long as they rely on computer usage. The data for these indicators was mainly taken from Eurostat for the European Union Member States and OECD for the EU s main trading partners. The data runs from 2003 to Due to data unavailability for some countries in many if not all years, these countries were removed from that specific indicator, as is the case for Japan, for example, in the business indicators. This also hinders the ability to construct a completely holistic indicator combining all four aspects of e-business infrastructure and usage in a country. Additionally, data unavailability was quite frequent for many countries in specific years, leaving gaps in the data and creating distortions in the indicator. Therefore, statistical forecasting models were used to fill in missing data points. Almost every statistical trend line used had an R² of above 0.9, meaning that 90% of the variability of the data set can be explained by the statistical model. In other words, it is at least 90% certain that the statistical model has correctly estimated the missing data point. In line with technological development pattern literature which states that technologies develop in an S-pattern, different types of statistical models were used depending on the specific development stage of each country. For example, for a country with low levels of technology development, the initial deployment can be quite quick, in an exponential pattern. However, as the country becomes more saturated with this technology, the deployment slows until the pattern become more logarithmic. Therefore, as stated above, different models were used in different countries, to capture the most likely trend and acquire the highest R². To compare the different information over countries and years and to combine them into meaningful indicators, each of the variables outlined above is transformed to values between 1 and 5, where 1 indicates the lowest and 5 the highest value (across countries for all years 15

25 in order to capture trends across time periods rather than specific developments for individual years) while all others are distributed proportionally. This means that a country can only achieve a 5 if it has the highest infrastructure or usage over the entire time period. In a second step, the variables for household infrastructure, household usage, business infrastructure and business usage are aggregated to separate sub-indicators by taking the weighted sum over the relevant data, again transformed into the range from 1 to 5. To do so, the weights for a specific variable were determined based on its variance across countries and over time. Therefore, variables that show strong differences across countries and over time obtain higher weights. In doing so, the indicator is trimmed to pick up differences in the variables and thus, eventually shows the overall differences in e-business developments across the analysed countries Results of Indicator The results of the indicator are presented as developments in infrastructure and usage separated by business indicators and household indicators. To highlight the actual development over time, the presentation focuses on the years 2003, 2006 and The business indicators are presented first followed by the household indicators Business Indicators In 2003, no country in the European Union or its trading partners had managed to obtained very high scores for both, e-business infrastructure and usage (see the North-east quadrant in Figure 2). Additionally, no country is located in the North-west, signifying that businesses are not able to have high levels of usage without also having first high levels of infrastructure. However, it is interesting to note that quite a few countries (namely Korea, Germany and Malta) have quite high levels of infrastructure while actual usage trails behind while other countries are very close to the threshold of high usage with lower levels of infrastructure though (Australia and the UK). Hence, it generally seems that infrastructure of a sufficient quality appears to be an essential precondition for intensive e-business deployment. For the other countries of the EU large differences exist. For example, central European countries are clustered on the border of the South-west quadrant while Southern and other Eastern European countries have quite low levels for both usage and infrastructure. 16

26 Figure 2: Business Developments, ,0 4,0 UK Australia Belgium Finland Netherlands Business Usage 3,0 2,0 Hungary Lithuania Portugal Bulgaria Slovakia Denmark Czech Republic Luxembourg Ireland Austria Slovenia Greece Spain Cyprus Italy Estonia Poland Latvia Korea Germany Canada Malta Sw eden 1,0 Romania 1,0 2,0 3,0 4,0 5,0 Business Infrastructure Source: DIW econ Later, in 2006, many countries have shown great improvements in both indicators. By this time many countries, mainly Northern European countries, Canada and Australia, have already moved into the North-east quadrant, signifying very high levels of infrastructure and usage. Additionally, many of the Central European countries have moved into high levels of infrastructure and moderate levels of usage, further showing that infrastructure is needed for businesses to have high levels of usage. Yet again, however, many Southern and Eastern European countries still display low levels of both infrastructure and usage, with the extreme example being Romania. 17

27 Figure 3: Business Developments, 2006 Broadband Usage Lithuania Portugal Hungary Poland Cyprus UK Ireland Australia Denmark Sw eden Canada Germany Netherlands Austria Finland Malta Korea Luxembourg Estonia Belgium Slovenia Slovakia Spain Czech Republic Greece Italy 2.0 Bulgaria Latvia Romania Broadband Infrastructure Source: DIW econ Finally, in 2008, many more countries have shown increased performance in both indicators. However, there are actually fewer countries now in the North-east quadrant, signalling a decrease in usage in some countries. Additionally, quite a few countries are displaying very high levels of infrastructure, while usage lags. For example, Italy has shown great improvements in infrastructure since 2003 but has failed to record hardly any increases in usage, even by This signals that further actions must be taken, beyond simply increasing infrastructure, to ensure that enterprises actually increase usage. 18

28 Figure 4: Business Developments, 2008 Business Usage 5,0 4,0 3,0 2,0 Romania Lithuania Portugal Cyprus Poland Latvia Hungary Bulgaria UK Germany Denmark Ireland Netherlands Sw eden Belgium Finland Korea Austria Czech Republic Luxembourg Australia Spain Estonia Malta Slovenia Greece Canada Italy Slovakia 1,0 1,0 2,0 3,0 4,0 5,0 Business Infrastructure Source: DIW econ Overall, it is quite clear there are great differences between European countries in terms of e-business infrastructure and usage. For the most part, countries can be grouped by geographical location. For example, in all time periods, Northern Europe has performed strongly, outpacing or at least keeping up with Korea and Australia. However, Southern and Eastern European countries consistently lag behind in usually both categories Household Indicators The household indicators are presented in the same way as the business indicators, with observations for 2003, 2006 and

29 Figure 5: Household Developments, ,0 Japan Household Usage 4,0 3,0 Belgium Slovakia Estonia Malta Austria Australia Spain Czech Republic Ireland France Cyprus 2,0 Slovenia Hungary Latvia Lithuania Portugal Italy Greece Bulgaria Poland Luxembourg UK Finland Germany USA Canada Sw eden Denmark Netherlands Korea 1,0 Romania 1,0 2,0 3,0 4,0 5,0 Household Infrastructure Source: DIW econ In 2003, there are two clear grouping of countries for household indicators. In the bottom left there are many countries closely grouped with low levels of infrastructure and usage. Among them are many Western, Southern, Central and Eastern European countries in addition to Australia. The remaining countries, almost exclusively Northern European countries and the remaining trading partners, exhibit higher levels of infrastructure and usage. However, no countries has quite made into the North-eastern quadrant which indicates very high scores for both, infrastructure and usage. Surprisingly, unlike with the business indicator, Japan is able to record high levels of usage without having extremely high levels of infrastructure. Additionally, the USA is close to crossing the threshold with even lower levels of infrastructure. This is a phenomenon exhibited again in

30 Figure 6: Household Developments, USA Australia Germany UK Finland Japan Sw eden Korea Netherlands Luxembourg Denmark Canada Household Usage Austria Ireland France Belgium Spain Slovakia Estonia Slovenia Czech Rep. Latvia Poland Hungary Malta Lithuania Italy Greece Cyprus Portugal Romania Bulgaria Household Infrastructure Source: DIW econ By 2006, many countries had moved into the North-western quadrant, displaying very high levels of usage, without already having high levels of infrastructure: the same phenomenon displayed already in 2003 by Japan. Simultaneously, many countries (Sweden, Netherlands, Denmark and Korea) showed great increases in both infrastructure and usage. The lowerleft hand countries also showed increases but with a widening gap between some countries in this group (Austria, Belgium, France and Slovenia compared to Latvia, Poland, Czech Republic and Italy), while Greece, Bulgaria and Romania lag farther behind. Overall, the countries tend to move more equally upward in a horizontal pattern, rather than rushing to the right with high levels of infrastructure without large levels of usage as occurred with the business indicator. 21

31 Figure 7: Household Developments, ,0 4,0 USA Ireland Austria France Japan Denmark Korea UK Australia Germany Netherlands Sw eden Canada Luxembourg Finland Household Usage 3,0 2,0 Bulgaria Slovakia Belgium Czech Republic Spain Estonia Poland LatviaSlovenia Malta Hungary Italy Lithuania Greece Portugal Cyprus Romania 1,0 1,0 2,0 3,0 4,0 5,0 Household Infrastructure Source: DIW econ As can be seen in Figure 7, the development for household infrastructure and usage, overall, moves in some countries at a slower place than for businesses. Many of the countries of Southern and Eastern Europe still lag behind showing less improvement in infrastructure, indicating that much still needs to be done to improve infrastructure and usage rates. As an example, in 2008, only Romania had a business infrastructure score of less than 3.0 and only 8 countries had a score of less than 4.0. However, for households in 2008, 5 countries are below 3.0 and 21 countries scored less than 4.0. Interestingly though, the USA is the only country to display extremely high usage with a score of 4.9 while still exhibiting low levels of household infrastructure with a score of only 3.8. This is similar to In 2006, quite a few countries exhibited high levels of usage without having high levels of infrastructure. However, out of these six countries, the United States scored the second highest in usage only behind Japan whose infrastructure was much more comprehensive. Also, the final results in 2008 follow a similar pattern seen for all years. Generally speaking, Northern and Western Europe and the EU s trading partners score quite high in both usage and infrastructure. However, Southern and Eastern Europe score significantly lower for both variables considered. 22