Please cite this paper as:

OECD (2001-12-21), “The Internet and Business

Performance”, OECD Digital Economy Papers, No. 57, OECD
Publishing, Paris.
http://dx.doi.org/10.1787/233751540382

OECD Digital Economy Papers No. 57

The Internet and Business

Performance

OECD
BUSINESS AND INDUSTRY POLICY FORUM SERIES
 FOREWORD

The OECD Committee on Industry and Business Environment organises

Business and Industry Policy Forums on current and emerging issues facing the
business community. These have included sessions on the industrial aspects of
the Asian financial crisis (1999), the growth and policy challenges posed by
emerging service industries (1999), the effects of the “New Economy” on
industry structures and strategies (2000), and policies to encourage firms to
pursue “beyond compliance” environmental strategies (2000).

OECD Business and Industry Policy Forum

Reports on Proceedings

Asia and the Global Crisis

The Service Economy
Industry Restructuring – Adapting to Change
Encouraging Environmental Management in Industry

Copies of these reports, and related material, can be downloaded freely via
the Internet at the following URL:

http://www.oecd.org/sti/business-forums

A fifth Forum was organised on 25 September 2001 on The Internet and

Business Performance. The purpose of the Forum was to draw major
stakeholders from government, industry and trade unions together to examine:
i) the gains that business could realise through the exploitation of Internet-based
strategies; ii) the principal technological and organisational challenges that
firms were facing in realising these gains; iii) the policy measures that needed to
be taken in different countries to improve framework conditions; and iv) the
respective roles that governments, the business community, trade unions and
civil society could play in developing guidelines and polices for Internet
development and use.

3
 The Belgian Government hosted the meeting, in co-operation with officials
from the Hainaut Province and the city of Mons. The session was co-chaired by
Mr. Olli Rehn, Head of Commissioner Liikanen’s Cabinet in the European
Commission (Commissioner Liikanen oversees enterprise and information
society issues) and Mr. Douglas Worth, Secretary General of the Business and
Industry Advisory Committee to the OECD (BIAC) (see Annex 1 for a copy of
the programme).

The information developed through the Forum will be used in the longer-
term work that the Organisation is conducting on Internet development and use
(see http://www.oecd.org/ecommerce/). This work currently comprises issues in
four principal areas: building trust for users and consumers, establishing ground
rules for the digital marketplace, enhancing the information infrastructure for
electronic commerce, and maximising the societal benefits of electronic
commerce.

4
 TABLE OF CONTENTS

SUMMARY.................................................................................................... 7

IMPACT OF THE INTERNET ON BUSINESS PERFORMANCE............. 9

Marketing.................................................................................................. 12
Inter-firm and customer relations (B2B and B2C).................................... 13
Product development, manufacture and assembly .................................... 17
Organisational structure ............................................................................ 18
Human resources....................................................................................... 20
External relations ...................................................................................... 22
STRUCTURAL ASPECTS .......................................................................... 23
Sectoral effects.......................................................................................... 23
Small and medium-sized enterprises......................................................... 25
Country dimensions .................................................................................. 26
POLICY ISSUES.......................................................................................... 29
Improving Internet access ......................................................................... 30
Facilitating organisational change............................................................. 30
Developing human resources .................................................................... 31
Addressing the needs of small firms ......................................................... 32
Balancing roles in policy making.............................................................. 32
Strengthening multilateral guidelines ....................................................... 33
Building security and trust ........................................................................ 33
Strengthening competition ........................................................................ 34
Addressing issues related to intellectual property..................................... 34
Annex 1. The Internet and Business Performance
Programme of the OECD Business and Industry Policy Forum................... 37
Annex 2. Tables............................................................................................. 39
Annex 3. Ongoing OECD Work on Electronic Commerce........................... 45
References .................................................................................................... 49

Boxes

Box 1. Summary of the Effects of the Internet on Business ..................... 11

Box 2. Covisint Goals ............................................................................... 18
Box 3. Key Issues for Business and Industry............................................ 29

5
 SUMMARY

The Internet is providing firms with new ways to conduct business and
exchange and communicate information and ideas. In doing so, it is enabling
companies to improve efficiency and develop novel ways to co-ordinate
activities. Internal firm organisation and relations with employees and
shareholders, for example, are being affected, as are the external relationships
that firms have with suppliers, customers, competitors and other parties. Some
of the changes that are occurring were explored in the report to OECD Ministers
on The New Economy: Beyond the Hype (OECD, 2001a). The report concludes
that the Internet and related advances in information and communication
technology (ICT) are transforming economic activity, much as the steam
engine, railways and electricity did in the past. They have done so by providing
a catalyst for change in business – helping to spur improvements in work
organisation through reductions in routine transaction costs and rationalisation
of supply chains, while spawning value-generating networks.

The extent to which the Internet and related ICT advances are affecting
business and industry is, however, unclear, as are the potential benefits that
could be realised through further development of Internet-based strategies.
There are also issues related to the different uptake rates of ICT among
countries, some of which are examined in the OECD report on the role of
information technology, innovation and entrepreneurship in spurring growth
(OECD, 2001b). It was against this background that stakeholders convened,
with a view to: i) clarifying the situation in different sectors; ii) identifying key
issues that are affecting the development of Internet applications in different
countries; and iii) examining the policy changes that are required at the national
and international levels to maximise the contributions that the Internet can make
to business performance .

The Forum discussion indicated that the development and integration of

Web-based strategies by firms is in many instances in very early stages of
development, and that considerable time will be required for the benefits to be
fully realised. Governments could facilitate development by pursuing initiatives
to expand Internet accessibility to broader populations of businesses
(particularly small and medium-sized enterprises – SMEs) and consumers, by

7
promoting development of Internet-related knowledge and skills, and by
continuing to work with business and civil society to develop effective
regulatory frameworks and standards to facilitate Internet transactions. Close
attention needs to be paid to ways to enhance security and trust. As most of the
issues being addressed have an important multilateral dimension, international
co-operation will be required to help identify optimal policy approaches, and to
address increasingly difficult cross-border issues. Finally, the reactive, time-
consuming approach that governments typically use in policy making is
ill-suited to addressing many ICT issues, given the speed with which innovation
is transforming the ways in which individuals, groups, business and
governments interact. Supporting further innovation may require governments
to explore more effective ways to respond, through, for example, expanded
co-regulation with industry and/or increased industry self-regulation.

8
 IMPACT OF THE INTERNET ON BUSINESS
PERFORMANCE

The Internet is a technological tool whose effects on business – already

clearly evident in some firms and sectors – are likely to grow significantly in the
future. Development has been particularly dynamic since 1993, when the first
Web browsers became generally available. The dynamism has been enhanced
by a number of structural factors, including: continuous development of higher-
speed, lower-cost computers; related increases in the power of virtually all
electronic devices; rapid expansion of networks; and accelerated distribution of
digital applications over a broadening range of economic sectors (Vergnes,
2001).

Development of common standards has also played a key role, helping to

bridge differences in language and operating systems worldwide. Adoption of
TCP/IP (transmission control protocol/Internet protocol) as a standard for
connecting destinations and sources, and acceptance of HTML (hyper-text
mark-up language) as a standard for Web-page presentations have been key in
this regard. TCP/IP, for example, provides the framework required to support
“e-mail”, which has dramatically changed the ways that most businesses
communicate. HTML, initially created in 1989, has also been critical, providing
a vehicle through which all Internet users can develop and share input.

Development of standards continues, with increased attention being paid to

initiatives that will enable the Web to be “programmed”. One of the key areas
involves the development of Web-tailored extensible mark-up language (XML),
which offers Internet users a vehicle for sharing standardised data and for
processing such data easily across different software applications. The W3C
(World Wide Web Consortium) – an international industry consortium run
jointly by the MIT Laboratory for Computer Science in the United States, the
National Institute for Research in Computer Science and Control in France, and
Keio University in Japan – is developing these standards, with a view to
completing initial work by April 2002 (World Wide Web Consortium, 2001).
On the programming side, considerable progress has already been made in a

9
number of areas. Java, for example, is a popular general-purpose programming
language that can operate on various Web platforms.

Businesses have responded to the opportunities emerging from Internet

development and expansion in various ways. Many functions related to ordering
and paying for goods and services, for example, have been placed “on line”,
creating new systems which either complement or replace existing systems.
Moreover, the Internet has greatly enhanced the development and use of
auctions to trade goods and services. In addition to the traditional selling of
items to high bidders via auction, reverse auctions – where buyers award parties
the right to supply goods or services to low bidders via auction – have become
more common, particularly in the business community.

In addition, the Internet has prompted the development of new business

models aimed at capitalising on the tremendous customer base that can be built
for goods and services at relatively low cost. The models are based on the
notion that increasing audience and sales can ultimately translate into sizeable
profits, and that this longer-term potential should take precedence over shorter-
term profitability. The models were supported by many investors, as reflected in
the record levels of capital directed to Internet-related start-ups during the
1990s, despite the weak financial performance of the new firms. Rising share
prices provided further momentum and reinforced these tendencies.

Amazon.com is a well-known example of a company that proceeded along

these lines. Launched in 1995 as a venture to make book-buying faster and
easier via the Internet, the company expanded audience and offerings,
increasing sales almost 20-fold during a three-year period, to USD 2.8 billion in
2000 (Amazon.com, 2001). Losses grew even faster, however, rising more than
40-fold, to USD 1.4 billion. However, the lack of profitability did not dissuade
investors. Share prices (adjusted for splits) surged from a low of USD 1.31 per
share when the company made its initial public offering, to a high of
USD 113 per share in late 1999, before easing in recent months to less than
USD 10 per share.

Amazon’s experience has been shared by most other “New Economy”

undertakings. With the recent economic slowdown, many promising initiatives
have failed, while the share prices for remaining companies have slid
precipitously. Over-investment and over-capacity in ICT sectors have
contributed to much of the deterioration, as ICT consumers in the business
community have been unable to absorb new technologies at the rate they have
been developed. At the same time, the slowdown has revealed the weaknesses
in those “dot.coms” which relied excessively on “audience-driven” business
models.

10
 While the slowdown may have tempered expectations, there is ample
evidence that businesses will continue to work with, and refine, Web-based
strategies, with significant implications for the way they operate, and for the
way they are organised. Along the supply chain, there is potential to improve
product and service development, as well as supply, manufacturing and
assembly processes, internal administration, marketing, sales and distribution
systems and customer service (see Box 1 and Annex 2, Table 1). At the same
time, there are potentially important implications for the ways in which firms
interact with their employees, shareholders and the public at large.

Box 1. Summary of the potential effects of the Internet on business

• Lowers search costs and improves search effectiveness.

• Speeds and improves communication within firms and with outside parties.

• Facilitates networking with suppliers and other business clients (B2B),

consumers (B2C), specialists, research institutions, government, etc.

• Improves efficiency and/or effectiveness of key business operations

(administrative functions, human resource management, product
development, manufacture and assembly, marketing, after-sales service).

• Facilitates and expands direct sales potential.

• Expands potential markets.

• Provides a venue for new or modified products.

Source: OECD.

Evidence of the development of broad-ranging strategies is already

emerging in a number of “traditional” industries and firms. At Czech-based
Škoda Auto, for example, personal computers were first introduced in the firm
relatively recently, in 1991 (Kroupa, 2001). From that point in time, the
introduction and use of ICT technology has expanded rapidly, with the Internet
now seen as a key tool, affecting procurement practices, customers and business
administration (Table 1). Convinced of the importance of the Internet, the
company has introduced a two-year training programme to ensure that all
employees acquire and develop the Internet-related skills and competence
required for their respective positions.

11
 Table 1. Internet at Škoda Auto

B2B B2C B2E

Supply chain Customer relations Administration
e-procurement Customer e-marketplace Intranet communication
Supply chain management – Dealer location e-recruitment
Auction - dynamic trading – Car configurator e-training
e-marketplace – Accessories e-shop e-learning
Catalogue management Mobility Catalogue management
– Route planner Office e-shop
– Navigation Facility management
– Traffic information
– Hotel guide
– Remote diagnostics
support
m-commerce (mobile Internet
services)
Source: Kroupa, 2001.

Marketing

One of the areas in which the Internet has enormous potential to improve
business effectiveness and efficiency is in marketing. The posting of universally
accessible compendia of information on the availability, price and range of
goods and services at various locations worldwide represents a highly cost-
effective means for firms to promote visibility and sales.

With the number of sites proliferating, however, firms will have to move
beyond simply establishing a presence, in order to realise the full marketing
potential of the Internet. In this context, they will need to develop strategies to
promote their goods and services in imaginative ways, by linking or associating
their offerings in a contextual manner (Vergnes, 2001; Worth, 2001). Doing so
will provide a potential both to boost the volume and unit value of such
offerings. A winery which associates its products with sites that promote
regional cultural, tourism and/or a particular cuisine, for example, has a
possibility to differentiate its offerings from thousands of related products. This
sort of contextual marketing is particularly important and promising for smaller
firms which do not have name or brand recognition.

In addition to expanding and improving on traditional forms of marketing,

the interactive capabilities of the Internet add an important dimension by
enabling consumers to browse and, in some instances, sample some digital-

12
intensive products prior to making a purchase. Trial versions of software, for
example, can be downloaded and used for limited periods of time, as can music
and passages from written works. Information from databanks can similarly be
shared on a trial basis, as can a variety of financial and related digitally
intensive services.

The Internet also provides a mechanism for sellers to diffuse considerable

amounts of information to a vast audience, albeit in a highly personalised
manner. In addition to collecting information that could be critical for further
product development in general, the setting up of banks of personalised
information can enable suppliers to match their goods and services more
effectively with individual customers. “Smart” systems which use customer
input to develop profiles on preferences are already being used by book
retailers, for example, to suggest other titles that might interest customers. At
the same time, use of broader socio-economic-demographic information could
prove useful in exploring new interests with customers.

While there are clear benefits to firms in exploiting the Internet to develop
and share information on users, doing so raises a number of important issues
related to the protection of individual privacy. The ability of skilled Internet
users to stalk and retrace the paths followed by “surfers”, and/or access
information and files maintained by users on individual work stations, for
example, could be done in obtrusive, abusive or even illegal ways that conflict
with the wishes of users. While there are technological solutions being
developed that will help to address some privacy concerns – by providing users
with tools to manage the types of information that can be shared with other
online parties – caution will need to be exercised. Whatever technologies are
developed will require educated consumers and users who are able to
understand how the protective schemes operate. Even with this knowledge, the
threats to privacy will remain a concern in light of the rapid development and
proliferation of new techniques and technology. As with anti-virus software,
methods to protect privacy are often likely to be developed in response to
abuses, after systems have already been compromised.

Inter-firm and customer relations (B2B and B2C)

The potential to network all parties involved with the design, finance,
production, marketing, distribution, consumption and servicing of a firm’s
offerings provides opportunities to significantly improve the co-ordination and
efficiency of operations. Many of the efficiencies flow from improved handling
of information. Time-consuming transcription of data can be reduced or
eliminated, at the same time greatly diminishing the introduction of errors. In

13
terms of customer support, banks of information can be maintained to facilitate
the handling of inquiries at low cost, while technical assistance, via e-mail or
real-time interaction with a technician, can improve the effectiveness of
customer support systems.

Full development of this potential, however, requires parties to trust one

another sufficiently to share access to their internal Web systems. This is
already the case with firms that permit customers to track the status of their
orders via the Internet. More far-reaching changes are occurring on the supply
side, where some companies are providing vendors with greater access to their
systems to enable more efficient handling of orders. In the case of Microsoft,
for example, pre-approved vendors of computer hardware were granted
authority to interact directly with employees who, in turn, were empowered to
purchase hardware, within prescribed budgetary and related constraints
(Vergnes, 2001). These sorts of arrangements enabled the company to cut the
cost of processing orders from USD 60 to USD 4.

In addition to cost savings, the time required to complete purchases can be

reduced significantly, thereby improving operational efficiency (OECD, 2000a).
MCI, a telecommunications firm, for example, reports that its purchase cycle for
computers was reduced from four to six weeks to 24 hours through e-commerce
(Margherio et al., 1998). Bell South, another telecommunications firm, cut the
approval time for expense reports from three weeks to two days (Davis, 1998),
while the US General Services Administration reduced the time needed to
complete a purchase by more than 50% (Girishankar, 1997). In the case of
Microsoft, the time required to process an order fell from four days to ten
minutes (Vergnes, 2001). Moreover, improved communication and
responsiveness provide opportunities to reduce the level of inventories required
to support production and sales.

In the field of competition, Internet-driven business-to-business (B2B)

relationships can provide a vehicle through which competition can be
strengthened. On the provider side, goods and services can be offered for sale to
a global clientele on a highly cost-effective basis while the real-time
interactivity of the Internet enables the suppliers to sell their merchandise more
flexibly using, for example, auctions. On the procurement side, tenders can
similarly be made on a global basis, enabling a much broader range of potential
suppliers to compete. In this instance, reverse auctions can greatly expand
competition.

One of the more interesting developments in B2B e-commerce involves

the co-operative relationships that companies competing in the same markets
have created. In the automotive sector, General Motors and Ford announced, in

14
1999, the formation of separate Internet networks for procuring goods and
services on line. Rather than proceed with rival systems, a decision was made to
develop a single global portal that would be open to all auto manufacturers and
their suppliers, partners and dealers worldwide. The rationale for the joint effort
was explained as follows (Wagoner, 2000):

As we continued to build our separate exchanges, we quickly realised

traditional, individual stand-alone models weren’t the winning strategy for
us, our industry, our suppliers and, ultimately, our customers. By joining
together we can further increase the pace of implementation, thereby
accelerating the benefits for everyone involved.

The idea has since evolved into the Covisint partnership. Three of the
companies now participating in the initiative – General Motors, Ford and
DaimlerChrysler – currently purchase 10% to 20% of their parts and materials
through the exchange (Wall Street Journal, 2001).

Similar exchanges involving the active collaboration of competitors are

being developed in many other sectors, including steel, retail trade, agriculture,
energy, tires and rubber, aerospace, health care and pulp and paper – to mention
but a few. To date, however, these exchanges do not seem to have greatly
influenced the ways in which most firms conduct business. Indeed, a number of
initiatives have collapsed in recent months, while the future of the remaining
exchanges is in question. In the case of automobiles, Volkswagen – citing
limitations associated with a joint undertaking and the need to protect strategic
information – elected to establish an independent exchange rather than become
a partner in the Covisint consortium (Kroupa, 2001; Garsten, 2001; eBreviate,
2001).

In the case of steel, Korean producers, with the support of the government,
have been collaborating on standards that could be used to facilitate the
development of efficient B2B, Internet-driven marketplaces (Lee, 2001). Much
of the focus has been on ways to harmonise product classification schemes and
related documentation. While much progress has been made in the
e-procurement area for products and services associated with maintenance,
repairs and operations (MRO), companies have been reluctant to agree on the
elements that would underlie the common platforms through which their steel
would be sold. Work currently underway at the OECD on e-commerce suggests
that these tendencies (i.e. more limited progress in the sales area than in MRO)
are fairly common in other sectors.

In order to be successful, producers and consumers will of course

ultimately have to “buy in” to the electronic marketplaces. This could require

15
considerable time and effort, as many firms are not convinced of their
effectiveness. This scepticism is reflected, in part, in a recent survey of
US companies participating in exchanges. On a scale of 1 to 10, the firms
indicated that product searching (8.6), order status (8.6) and catalogues (8.3)
were the most important features sought in an exchange, with auction
capabilities assigned a relatively low score of 4.2 (Moozakis, 2000).

While interest may be high, the effects of Internet on purchasing practices

in general appear to be relatively low, suggesting that business is still in the
early stages of implementing e-procurement strategies. According to a US-
based survey conducted in March 2001, only 6.3% of respondent firms
indicated that that the Internet had changed their procurement practices in a
significant or dramatic way (NAPM and Forrester, 2001). A number of
impediments, including difficulties associated with internal and external
integration and the lack of data standards, were seen as providing obstacles to
more vigorous Internet activities. As a result, more than half of the respondents
had made less than 5% progress in adopting Internet purchasing, while only a
small percentage (7.6%) had implemented more than 40% of their plans.

In addition to the sector-driven exchanges discussed above, the Internet is

providing a venue for new types of collaboration across industries, as evidenced
by the bundling of related goods and services at many sites. E-marketplaces
focusing on real estate, for example, provide prospective homeowners with
related information on home finance, insurance, removal services, community
information and news, etc. Within industries, intermediaries are being created to
collect basic information from potential customers which is then shared with
potential providers of goods or services who, in turn, are in position to make
competitive offers. This is evident in the field of finance, for example, where a
single report filed by a potential borrower is distributed to a group of
participating lending institutions which, in turn, can choose to make competing
loan offers.

While intermediation has increased in some areas, dis-intermediation is

also occurring in light of the diminished need for traditional distribution chains.
Many goods and services, for example, can be ordered directly from producers
via the Internet. The degree to which dis-intermediation occurs, however, is
likely to vary widely among products. In the case of the auto industry, for
example, the desire of most customers to “experience” a car physically prior to
making a purchase limits the extent to which the Internet is likely to diminish
the role of intermediaries (Kroupa, 2001). Visits will still be made to dealers,
who are likely to continue to play a major role in delivering and servicing even
those purchases which are made via the Internet.

16
Product development, manufacture and assembly

In a number of sectors, the Internet is changing the nature of the products

marketed to consumers by enabling producers to move from mass production of
standardised output to customised output tailored to meet the specific demands
of consumers. The possibilities are particularly promising in information-
intensive activities, where data can be manipulated and formatted according to
individual templates or profiles. While still at an early stage, some signs of this
trend are already evident. Some news organisations, for example, are
supplementing standardised, mass-produced hard copy with customised,
digitised editions containing articles that have been screened and organised
according to criteria established by readers.

The “build-to-order” approach is not, however, necessarily limited to

information-intensive industries. Dell Computer Corporation has been a pioneer
in transforming mass-produced computers into a “built-to-order product”, and
there are signs that other industries are moving in this direction. In the case of
one of these industries – autos – the challenges are formidable in light of the
complexity of production processes, the broad range of options that are
proposed to consumers, and the long lead times required to produce a finished
car (Fine and Raff, 2000). Pressures to reduce cycle times are, however,
building as producers race to incorporate revenue-enhancing ICT-related
features into their vehicles. Such features currently include enhanced safety,
navigation and concierge services and e-mail/Web/telecom capability. Indeed,
General Motors envisions that its products will evolve from transport vehicles
to “... a rolling platform for a whole range of in-vehicle communications
products and the subscription fees that go along with them” (General Motors,
1999).

To succeed, development cycles in the auto industry will have to be pared

back from their current level of four to six years (Fine and Raff, 2000). The
Internet is expected to play an important role in this regard. It appears that
current technology could be used to shorten the cycle to 36-42 months (Kroupa,
2001). Participants in Covisint, the Internet-based exchange in which General
Motors, Ford, DaimlerChrysler and Renault/Nissan participate, have, however,
established a more ambitious goal of slashing the development cycles to 12-
18 months over time (Box 2) (Covisint, 2001).

17
 Box 2. Covisint goals

• Reduce development cycles to 12-18 months.

• Compress order-to-delivery cycles.

• Increase shareholder valuations within the automotive industry.

• Raise asset efficiency and utilisation.

• Increase profitability with direct impact on the bottom line.

• Enhance integrated supply chain planning.

Source: Covisint, 2001.

Manufacturing and assembly operations are also benefiting from the

development and implementation of Internet-based applications. This is
occurring largely through the ability of firms to synchronise internal and
external business processes more efficiently. This can lead to more effective
management of inventories (both inputs and finished products), for example,
and a more integrated handling of order, processing and shipping information.

Organisational structure

The speed and efficiency with which large volumes of information can be
shared between unrelated business units via Internet-driven networks has
enhanced the ability to collaborate on a wide range of information-intensive
activities. This has helped to overcome limitations related to the need for
physical proximity, enabling firms to engage outside parties to take over, or
contribute to, functions that were previously carried out internally. The sharp
growth in outsourcing illustrates how firms are focusing resources on core
competencies, relying on external, specialised firms to provide ancillary goods
and services on a more cost-effective basis (OECD, 1999a).

These developments have implications for firm organisation. Traditional

autonomous structures, for example, are giving way to more flexible
configurations in which specialised firms enter into relationships with other
entities on a project-oriented basis (McAfee, 2000). A computer firm previously
engaged in developing, manufacturing and installing systems, for example, is
now more likely to focus on one aspect and rely on third-party partners to
supply software, equipment and/or system support.

18
 In some instances, companies have moved far from their traditional
businesses, eliminating major operations and functions entirely. Cisco
Corporation is a case in point (McAfee, 2000). The company is known as a
leading supplier of information and communications equipment, although it
currently does little actual manufacturing itself. Instead, it has created a supply
chain in which associated companies co-ordinate and share information through
Internet-driven networks. In this, and a growing number of other cases,
conventional linear manufacturing chains are being replaced by networks of
specialised firms. A similar phenomenon occurred at UK-based ICL
(International Computers Limited) (OECD, 2000b). Originally an ICT
equipment manufacturer, ICL refocused its activities on the design and
operation of information and communication systems, abandoning
manufacturing altogether. As with Cisco, ICL oversees and works with partner
firms to provide finished systems (including hardware) to clients.

There are indications that major manufacturing industries are undergoing

similar transformations. In the automotive industry, for example, fast and
flexible communication can facilitate co-ordination with suppliers in ways that
increase outsourcing and promote the development and use of more
standardised modules within the industry (Fine and Raff, 2000). Like the ICT
firms cited above, auto-makers can “outsource” much of their manufacturing,
engineering and design, with the firm’s ultimate value resting on its ability to
co-ordinate and oversee the whole process (Helper and MacDuffie, 2000).
Interest in proceeding along these lines is already being shown. The Porsche
Boxster, for example, is designed by Porsche, with manufacturing and assembly
operations contracted out to a variety of other networked firms (Savitz, 2001).
Moreover, a company has recently been formed that “aims to deliver a portfolio
of new vehicles leveraging a single modular platform by 2004 through the use
of computer-aided industrial design, an end-to-end technology infrastructure
solution, contract engineering, contract manufacturing and a direct distribution
channel” (Build-to-Order, 2001). The Internet is seen as one of the key
technologies that will enable this project to proceed.

The extent to which transformation will occur may, however, be limited as

there seems to be a strong reluctance on the part of many companies to abandon
existing, successful approaches to their businesses (European Commission,
2001). More profound changes are likely, and already evident, in information-
intensive sectors, such as financial services, travel and tourism, training and
education, and news and information services.

In financial services, for example, traditionally closed and rigidly

controlled systems are giving way to new business models and competitive
behaviour which is more open. As a result, financial markets are converging,

19
while the number of cross-cutting financial products is growing. Conventional
regulatory models, including those that are self-regulatory or co-regulatory in
nature, may therefore have to be adapted to address changes in the competitive
environment. In this regard, differences in regulatory frameworks across
jurisdictions can place constraints on the extent to which business can take full
advantage of emerging opportunities. The effects on industry structure have
been pronounced. Mega-mergers have served to consolidate financial services
in certain respects, but competition has remained keen as low barriers to entry
have enabled new players to emerge.

Human resources

Internet applications are being developed and introduced in ways that are
improving the efficiency, effectiveness and productivity of human resource
administration. Recruitment, for example, is being conducted by firms through
the Internet, through open solicitations for applicants. In addition to reducing
search costs and increasing the potential pool of applicants for open positions,
these recruitment techniques can result in a more effective matching of
employee and employer interests and needs. While most firms with an Internet
presence provide information for prospective employees at their individual sites,
there are also opportunities for broader exposure through more generic sites that
consolidate employment solicitations from multiple employers. At Škoda Auto,
for example, job vacancy notices provided to employment agencies in the Czech
and Slovak Republics – at a cost of EUR 1 000 per month – have proven to be a
highly effective means of recruiting employees for entry to mid-level positions
(Kroupa, 2001).

There is also great potential for improving the accessibility, cost and
effectiveness of training through online resources and courses. Development of
“streaming” applications is enriching possibilities in this area, providing an
enhanced means through which lectures, seminars and instruction can be
accessed as needed, on a group or individual basis. Savings can be sizeable.
Interactive Internet-training involving the introduction of a new customer
relations management system at IBM, for example, cost the company a total of
USD 30 000 for 29 000 employees (Worth, 2001). The cost of traditional
training, which would have been conducted in stages and involved travel and
related expenses, would have been on the order of USD 1 000 per person, or
USD 29 million – almost 100 times the Internet cost.

At Škoda Auto, the importance of providing timely and effective training

to workers has been assigned high priority, reflecting the company’s emphasis
on education as a key competitive factor (Kroupa, 2001). The role of the

20
Internet in providing this education has evolved and Internet is currently being
used for PC and language training, technical courses on standards, and courses
focusing on skill development and managerial practices. The general benefits of
using the Internet in lieu of more traditional classroom training has been the
open access (everyone has access every day), the possibility for employees to
establish their own pace for training, the ability to evaluate the efficiency of the
training via e-tests, and the possibility to update course content rapidly. The
impact of Internet use has been notable, as the time spent in classrooms and the
cost of instruction has fallen while the effectiveness of training has increased
(Table 2).

Table 2. Beneficial effects of e-training at Škoda Auto

Item Effects
Time spent in classrooms 50-80% less
Learning time 40-60% shorter
Cost of education 15-35% lower
Level of acquired knowledge 35-65% higher
Need for repeating courses 25% lower
Source: Kroupa, 2001.

Human resource administration and communication are becoming more

efficient as the Internet (or the more restricted internal Intranets that are being
developed by firms) provides personnel departments with a far more effective,
interactive means to deliver services to employees. In the field of programme
administration, a recent survey of US firms indicates that Web-based
applications are currently being used most widely to facilitate benefit enrolment
(39%), personal data changes (31%), 401(k) changes (35%) and new hire
enrolment (19%) (Towers Perrin, 2000). Users indicated notable increases in the
timeliness and accuracy of human resource transactions, while service providers
recorded a notable decrease in workload.

In the realm of compensation, the Internet is enhancing the ability of firms

to introduce and administer cost-effective, global compensation schemes that
include an equity component (NCEO, 2000; ECEO, 2001; GEO, 2001). This is
of particular importance in light of the growing interest shown by firms in using
equity-based compensation to improve performance by aligning the interests of
employees more effectively with those of the firm. In this regard, the Internet
serves as a key enabling technology to link firms (which administer and assign
equity rights) with brokers and bankers (which provide financial and brokerage
services) and other service providers, doing so in a way that provides employees
with a single interface for exercising purchase rights and managing portfolios

21
on a 24-hour, seven-day per week basis, from anywhere in the world, through
customised, language-sensitive portals.

External relations

The Internet provides business with a vehicle for engaging stakeholders

and other interested parties in new types of relationships. In effect, it removes
the filtering role that the media has traditionally played in distilling and
analysing company and industry information, replacing it with direct interface
with interested parties. In doing so, it enables business and outside communities
to communicate on a scale heretofore unreachable, via e-mail, surveys and
participation in interactive “conferences”. The Internet thus has potential as a
powerful tool for informing the public about the conditions and issues facing a
company and for soliciting feedback. Many firms have exploited this, posting a
range of information-intensive products – including financial statements, annual
reports and news releases.

This increased transparency and visibility can be advantageous to

stakeholders. Investors, for example, are in a position to make more informed
financial decisions. Those interested in public policy can improve their
understanding of the issues facing particular firms and industries and the
rationale underlying their positions. There may also be important implications
for the way that firms make decisions and conduct their affairs. Interest in how
companies respond to environmental, economic and social challenges, for
example, appears to be rising, putting pressure on firms to articulate their
positions and goals in key areas. The highly visible treatment that these
positions and goals receive via the Internet is likely to heighten accountability,
pressuring companies to become more conscious about the implications of their
decisions for the communities in which they conduct business. Novel ways to
reinforce the potential that this trend could have in improving corporate
governance need to be explored more fully.

The empowerment that the Internet provides to individuals and groups can
help to reinforce the pressures on firms to improve governance. At the same
time, the enhanced ability to disseminate misleading or erroneous information
can expose firms to misguided “campaigns” or “attacks” that can disrupt
operations. This could prove increasingly problematic as Internet use develops
and expands.

22
 STRUCTURAL ASPECTS

The effects of the Internet are not uniform across firms, sectors or
countries. Different industry characteristics and variation in Internet access and
regulatory conditions among countries are key issues in this regard.

Sectoral effects

In general, information-intensive service industries have been the most

affected by the Internet, along with manufacturing sectors which sell products
that can be digitised and traded over the Internet (such as software, written
literature, and the like). It appears, however, that there is also considerable
potential for the effects to be significant in a wide range of “old-economy”
arenas (Litan and Rivlin, 2000). In basic and intermediary industries, for
example, e-business technologies are seen as having a significant effect on
productivity, competitiveness and the level of service provided to consumers
(European Commission, 2001). Changes are, however, viewed as more
evolutionary than revolutionary in the case of large firms, reflecting their
mature use of new technology to reinforce existing practice and tendencies. As
indicated below, more significant impacts could occur with SMEs.

Quantifying the potential effects of the Internet on different sectors is

difficult in light of the rapid changes that are occurring in Internet applications.
One analysis – prepared by Goldman Sachs – indicates that efficiencies in B2B
transactions could be on the order of 2% to 39% (see Annex 2, Table 2)
(Goldman Sachs, 1999). The largest reductions were seen in electronic
components, with a number of basic industries (chemicals, paper and steel)
looking set to achieve savings on the order of 10%. Separate analysis of the auto
industry suggests that total savings due to e-commerce are likely to exceed 13%
(Fine and Raff, 2000).

One traditional sector that is being significantly affected by the Internet is

health care. The Web provides the means to diffuse large volumes of
information and knowledge that have heretofore been restricted in many
countries to physicians and other health-care providers. This diffusion is

23
empowering patients in ways that will make them more effective partners in
diagnosing and treating ailments (Bouchard, 2001). Moreover, it could prove to
be a valuable tool in boosting overall well-being by providing individuals with
an information resource that can be used to develop “healthier” life styles.

Much has already occurred on the “supply side” through the posting of
substantial volumes of health-related information. Merck & Company, a major
pharmaceutical concern, has, for example, provided free Internet access to a
number of key products and services, including home and professional versions
of The Merck Manual, a comprehensive general medical text that describes the
diagnosis and treatment of numerous ailments. By doing so, the company hopes
to enhance its long-term relationships with health-care providers and
consumers/patients, and to improve the diagnosis and treatment of ailments.
Other firms have proceeded along the same lines, as have some governments.
The National Institutes of Health in the United States, for example, provide a
considerable amount of medical information and information about their
research on the Internet.

On the demand side, the public is showing interest in this information. In

July 2001, for example, Merck Web sites alone registered over 2 million unique
visits, including over 700 000 visits to the professional edition of The Merck
Manual and over 500 000 visits to the home edition (Bouchard, 2001). As
consumers and health professionals utilise these resources and act on the
knowledge that they acquire, the potential to improve the quality and efficiency
of health-care systems should rise. The extent to which it does will depend in
large part on how four key issues are resolved:

• Right to privacy (for health-care data).

• Quality of available information (the Internet is indiscriminate).

• Absence of common standards among countries.

• Different regulatory approaches.

In the case of different regulatory approaches, the controls imposed by

many countries on activities related to health care can be effectively
undermined if users are simply able to access a source outside the regulated
area. This sort of dilemma has already arisen in the case of the United States,
where information flows are relatively liberal, and the European Union, which
is more restrictive in this respect (Bouchard, 2001).

24
Small and medium-sized enterprises

The Internet has proven to be a powerful catalyst for promoting the growth
of “start-ups”, including software firms that have developed Internet-related
applications (utilities, games, systems, etc.) and newly established firms that use
the Internet as the principal medium for buying and selling goods and services.
In addition, the Internet is providing a broader range of SMEs with
opportunities to expand their customer bases by providing a low-cost, global
platform for promoting information and commerce. In a sense, the Internet is
allowing many SMEs to become global players in ways that have heretofore
been reserved primarily for large multinational companies.

While uptake of the Internet and related ICT by SMEs is increasing, it has
lagged behind that of larger firms (European Commission, 2001). A lack of
awareness, together with skill shortages and the relatively high costs associated
with developing electronic commerce strategies, appear to be key factors in this
regard. In the area of technical expertise, a survey conducted by the US-based
National Association of Manufacturers (NAM) indicates that more than half of
the small manufacturers surveyed did not have an internal information
technology (IT) staff, whereas only 4% of large manufacturers were without
such resources (NAM, 2000). In terms of cost, simple Web presence can be
established at low cost with little required technical expertise. More
sophisticated e-procurement systems, however, are more demanding and
expensive, with system prices (including licensing fees, implementation and
maintenance) averaging USD 1.09 million for stand-alone systems, with
alternative, hosted systems available at 60% lower cost (Aberdeen Group,
2001).

Financial and technical issues aside, the need to increase awareness of the
potential benefits that Internet-based strategies could provide to SMEs is a
critical one. ICT-driven companies are helping to increase such awareness, to
the extent that they pressure or require the SMEs with whom they do business
to develop and implement Internet capabilities. Both government and the
business community have important roles to play in this area by providing
technical assistance and advice to smaller entities and forming networks to
exchange information. More governments are now developing e-government
and e-procurement services, thus helping to increase small-firm uptake of the
Internet.

Another challenge that many SMEs have to address concerns their

credibility. Little-known firms may have difficulty selling in global markets
until such time as they have established a “reputation”. The process could be a
lengthy one, depending on the nature of the good or service provided.

25
Recognised independent intermediaries could play an important role in this
context, to the extent that they are able to ensure or certify that firms or products
meet recognised standards. Market acceptance of products designed by
independent software developers, for example, could be enhanced through
third-party certification. Such certification could ensure the stability and
functionality of a product, as well as its operational “safety”. SMEs especially
need low-cost and reliable authentication and certification mechanisms to
establish their online identity and trustworthiness as well as access to alternative
dispute resolution mechanisms (OECD, 2001c).

Country dimensions

Framework conditions differ considerably within the OECD area, affecting

the extent to which Internet use is developing. Availability of basic technology,
such as computers, for example, varies widely. In eastern Europe, for example,
per capita PC penetration is less than 10%, compared to more than 60% in the
United States (Mikuš, 2001). Telecommunications infrastructure varies as well,
influencing the extent to which users can access the Internet, and the speed and
convenience of connections. The prevalence of Internet hosts (an indicator of
the state of infrastructure development) is by far highest in the United States,
where there were more than 234 hosts per 1 000 inhabitants in October 2000. In
contrast, the average for the OECD area was 82, with ten countries having less
than 20 hosts per 1 000 persons (see Annex 2, Figure 1). The extent to which
high-speed access is available is also influencing Internet development. In this
regard, commercial high-speed digital subscriber line services are growing
rapidly, expanding from seven OECD countries in 1999 to 22 in 2000; at the
same time, high-speed connections via cable were available in 21 countries.

In addition to infrastructure, the costs associated with accessing the

Internet can be an important determinant of use. In some areas, such as the
United States and New Zealand, unmetered access has provided users with a
highly cost-effective means to explore the Web (Annex 2, Figure 2). Variations
of this approach are becoming more common in other areas, particularly as
Internet service providers join with telecommunications firms to offer hybrid
products. With regard to price levels, costs, adjusted for purchasing power, are
lowest in the United States, where the price for 40 hours of use was about
USD 24 in September 2000, compared to USD 135-174 in three eastern
European counties (i.e. the Czech Republic, Hungary and Poland) (Annex 2,
Figure 3). Despite the higher cost, interest in the Internet is growing rapidly in
these latter countries. In the Slovak Republic, some 17% of the mature
population worked with the Internet in mid-2001, almost double the 9% share
registered in August 2000 (Mikuš, 2001). Business use has been growing as

26
well, but lags behind other countries in a number of areas: of the 50 000 Slovak
firms working with the Internet, only 4% were using leased lines in mid-2001,
with the balance relying on dial-up connections.

Different framework conditions also have implications for the use of the
Internet for e-commerce. The prevalence of “secure servers”, which is
indicative of e-commerce activity, was highest in the OECD area (in July 2000)
in Iceland and in the United States, where there were over 24 servers per
100 000 persons (Annex 2, Table 3). The average for the whole OECD area was
only 8.4, indicating sharply lower development in most other countries. Annual
growth rates, however, are robust in all countries, suggesting that firms are
rapidly recognising the opportunities offered by e-commerce and are vigorously
expanding their capabilities in this area.

Finally, cultural factors may also play an important role in Internet

development and use. The EU report on the conference on The e-Economy in
Europe, for example, concludes that entrepreneurship and risk-taking are the
main factors which determine the success and extent to which ICT technologies
are exploited (European Commission, 2001). In this context, the United States
was seen as having an edge, given its deep capital markets and buoyant firm
creation. The effects on the European Union were nonetheless seen as being
relatively high as the internal market strengthened and deregulation advanced.

27
 POLICY ISSUES

The Internet has the potential to influence the way in which firms operate
at virtually every phase of the value chain and across most industry sectors.
While the process is advanced in some firms and sectors, in most areas Internet-
based strategies are being developed and implemented on an incremental basis.
The full potential of the Internet will be realised gradually, over time and in step
with continuing technological advances. However, there remain a number of
important unresolved issues which encompass technical standards, regulatory
frameworks, pricing, taxation, competition, infrastructure and cultural/societal
norms (Box 3).

Box 3. Key issues for business and industry

• Improving Internet access.

• Facilitating organisational change.

• Developing human resources.

• Addressing the needs of small firms.

• Balancing roles in policy making.

• Strengthening multilateral guidelines.

• Building security and trust.

• Strengthening competition.

• Addressing issues related to intellectual property.

Countries differ with regard to the key Internet challenges to be addressed.

Some need to focus on enhancing infrastructure and access, while others should
give attention to regulatory and legal frameworks which are limiting use.
Reaping the full benefits will require governments to work closely with
business, unions and civil society. They will also need to work together since

29
many issues have an important multilateral dimension. The diversity in
conditions and policy approaches across countries raises additional challenges
which are being addressed in a number of international institutions, including,
for example, the OECD and the WTO (see Annex 3).

Improving Internet access

There are wide variations across OECD countries in terms of Internet

infrastructure, access and pricing, and these are reflected in differing levels of
e-commerce uptake across nations, sectors and firms. The use of the Internet by
business and industry depends on its cost effectiveness, reliability, speed and
reach. The price and terms of access are critical, both on the business-to-
consumer (B2C) side and in business-to-business (B2B) relationships. In this
context, policy initiatives to open up the Internet to broader populations are
needed, particularly with regard to telecommunications infrastructure for digital
interchange (e.g. the basic telephone network and more sophisticated mobile
telephony and broadband networks). On the business side, broadband and the
priority of leased lines are crucial. Countries without adequate bandwidth
technologies will be competitively disadvantaged and evidence a slower pace of
e-commerce adoption.

Further liberalisation of telecommunications systems and price reductions

and the advent of alternative access infrastructures are needed in many
countries. “Unbundling” – the separation of the local network and infrastructure
from the services that are provided over that network – is key to increasing
competition. Unbundling of the local loop enables new entrants to offer services
such as unmetered Internet access to their customers. Countries with unmetered
access, where users pay a flat fee or no fee for Internet access, include
Australia, Canada, Mexico, New Zealand and the United States. More time is
spent on line in these countries and this supports higher levels of electronic
commerce. Countries with unmetered access typically have more secure servers
which also enable secure payment and thus online commercial transactions.
Internet access pricing and metered charges are key issues to be addressed by
governments who wish to maximise the benefits of ICT for business.

Facilitating organisational change

The structural changes that the Internet is facilitating and/or driving could result
in significant adjustment challenges for some firms and industries. Evidence
shows that productivity growth is highest in firms which combine
organisational change with their ICT investments. Organisational change

30
encompasses production processes (quality management, lean production,
business re-engineering), management approaches (teamwork, training, flexible
work and compensation) and external relations (outsourcing, customer relations,
networking). There may, however, be significant internal obstacles to change,
reflecting managerial conservatism, lack of strategic vision, insufficient
technical expertise, and limited financial resources to develop and implement
new Internet-based strategies. At the same time, there may be risks associated
with “dis-integration” as outsourcing and dependency on outside firms can rise
to relatively high levels. Governments can help to overcome some of these
obstacles by identifying and promoting the beneficial effects of organisational
change, and by supporting the development of frameworks for
labour/management relations that are receptive to examining and introducing
modifications in work practices.

Developing human resources

The dynamic and continuous organisational changes that are being

prompted by ICT advances result in a need for workers to adapt to new
environments on a frequent basis. Skill shortages have been identified as a
stumbling block to furthering Internet-related development and use. The role
that public and private institutions should play in ICT-related training and
educational programmes is being debated. Firm-level or work-related training is
an area where significant market failures exist in most OECD countries.
Because of the uncertainty and risks related to realising the benefits of such
training, managers and employees tend to under-invest in job-specific training
and upgrading of skills.

In most countries, the government finances a large share of public

education expenditures, while the private sector is responsible for work-related
training. The amount of training received by workers varies greatly by country.
Career- or job-related training is higher in Finland, Sweden, the United
Kingdom and France, and relatively low in Greece, Poland, Portugal, Italy,
Canada and Spain. Governments should explore ways to boost industry
initiatives for training staff in Internet-related skills, including through
compulsory financing, training grants, training leave, fiscal incentives and
labour/management agreements. In the Internet era, it is important to structure
policies to support intangible investments and the development of human
capital more effectively.

31
Addressing the needs of small firms

As discussed earlier, the Internet and electronic commerce present a

number of opportunities for small and medium-sized enterprises. These include
cost reductions, expansion of the customer base or geographical market, new
product and service niches, and easier internal restructuring. SMEs in traditional
sectors can use e-commerce to reach new customers and markets, more
innovative small firms can find market niches in electronic-based goods and
services, and SMEs in all sectors can improve efficiency and performance
through joining electronic supply chains. Despite the many benefits of
electronic commerce for SMEs, they are lagging behind larger firms in adopting
both business-to-consumer (B2C) and business-to-business (B2B) e-commerce.
An estimated 90% of large firms in the OECD area have Internet access, but
less than 50% of SMEs are linked to the Internet and those that are tend to use it
primarily for e-mail. It is estimated that about 20% of SMEs maintain a Web
site, but less than 5% engage in online sales and purchases.

Because SMEs often do not have the resources or technical expertise to

benefit from the Internet, direct and indirect assistance may be needed. OECD
governments have implemented a range of e-commerce initiatives which benefit
SMEs, including improving access to network infrastructure and providing
frameworks for assuring privacy, consumer protection, etc. Small firms in the
United States, the Nordic countries, Australia and Canada have the highest
levels of Internet connectivity in the OECD (partly related to the cost of ICT
goods and services, level of network access and number of secure servers).
Some governments are developing schemes targeted to small firms, including
diffusion of information and training on e-commerce, facilitating access to
financing for e-commerce activities, and linking large and small firms in
e-commerce networks and supply chains. Countries need to review their
individual situations to identify where bottlenecks to greater SME use of
e-commerce exist.

Balancing roles in policy making

While there is increasing consensus on the desirability and need for all
stakeholders – business, unions, governments, consumers – to be involved in
the formulation of policies that affect the development and use of the Internet,
how this should be done is sometimes unclear. More consideration needs to be
given to the ways that appropriate balances can be struck between industry self-
regulation, co-regulation and more traditional government regulation. Key
questions in this regard concern the approaches which can be used to include
stakeholders in local, national and international contexts. The types of criteria

32
that can be applied to determine the roles of industry and public authorities in
developing and administering regulations also need to be reviewed. While
national approaches will differ, international co-operation is needed in
developing rules and guidelines given the global nature of the Internet (OECD,
2001d).

Strengthening multilateral guidelines

The trade and/or delivery of goods and services via the Internet raise a
series of issues related to customs treatment and taxation (OECD, 1998a).
These include the rate of taxation, the venue, and the ability of tax authorities to
monitor business transactions to assure that companies and individuals are
adhering to tax laws (Annex 3). Progress has been made on a number of fronts.
A framework of principles governing tax and e-commerce was established at
the OECD’s 1998 Ottawa Conference, for example, and a number of reports
highlighting issues such as the treatment of business profits, characterisation of
income, place of taxation for consumption taxes and tax administration were
published by the OECD during 2001 (http://www.oecd.org/daf/ctpa/tec). The
reports recognise that while progress is being made, much remains to be done.
In particular, there is a need for a clearer understanding of how the
implementation of taxation principles in the country of consumption (for taxes
like VAT) can be achieved without imposing significant compliance burdens on
vendors of digitised products.

The Internet is, by its nature, an instrument which tests the abilities of
governments to control access, content and use. With the development of new
technologies, these abilities may be weakened yet further. How governments
will be able to enforce national standards governing e-commerce, intellectual
property, competition, consumer protection, and the like, is unclear (Mansell,
2001). The challenges may be particularly daunting where business enterprises
are “virtual” entities specialising in digitised products. Conflicts between
national jurisdictions, already evident in some areas, may become more
common. The urgency of these issues for business and industry needs to be
clarified and multilateral discussions should be intensified.

Building security and trust

Reliance on technologies that are evolving and have occasionally been

compromised has raised concerns among Internet users (OECD, 1998c, 1998d).
Strengthening security is thus a major issue, to which much attention is being
paid at national and international levels. How great a concern security issues are

33
for business and industry needs to be established, as do measures that can be
taken to improve the situation. Similarly, protection of privacy and personal
data from unauthorised parties or for unauthorised uses is a matter of concern,
as is consumer protection, when existing national and international conventions
prove inadequate. Finally, the need for effective dispute resolution guidelines is
of high priority for business, which is generally concerned about the
consequences of expanding sales to markets where the methods for resolving
disputes are unknown and could be costly (Annex 3) (OECD, 2001c).

Strengthening competition

Co-operation and networking among firms prompted by the Internet has

both pro- and anti-competitive aspects. In terms of promoting competition, the
Internet can lower search and transaction costs in ways that broaden markets
and render them more transparent and competitive. While efficiency is
promoted, insufficient competition among e-marketplaces (or exchanges) is a
concern, as are the terms that might apply to firms participating in Internet
exchanges. Enhanced ability for competitors to collude or act to exclude rivals
might also require attention. The increasing transnational scope of many of the
issues may require greater co-operation among competition authorities.

At the same time, the open competition that Internet exchanges promote
raises the importance of price, at the expense of the long-term partnerships that
many firms have traditionally cultivated with suppliers. In this way, the Internet
may act to enhance competition in many markets. However, with prices being
driven to marginal costs, there is concern that areas such as research and
development (particularly R&D conducted by suppliers) may be discouraged.
The extent and areas in which Internet use by firms is affecting product market
competition may require new approaches to antitrust and competition policy,
particularly at the international level.

Addressing issues related to intellectual property

Growth in the importance and value of knowledge has raised increasingly

complex and important issues concerning intellectual property rights. In the
software sector, for example, open-source software – which is software whose
source code is freely available to interested parties for evaluation, testing and
further development – competes with commercially developed software in
numerous areas. If released with a “General Purpose Licence”, users of the
“free” software are obliged to accord “open-source” status to any products in
which the GPL software is integrated (GNU, 2001). Commercial software

34
providers thus have to avoid GPL products in order to protect their proprietary
offerings and their right to collect royalties and fees (Vergnes, 2001). Some
governments have apparently been promoting use of GPL products, a practice
that could have significant implications for future software development.

35
 ANNEX 1

THE INTERNET AND BUSINESS PERFORMANCE

OECD Business and Industry Policy Forum

held in Mons, Belgium
on 25 September 2001

OPENING SESSION

• Mr. Claude DURIEUX, Député permanent de la Province de Hainaut

• Mr. Charles PICQUE, Ministre de l’économie et de la recherche scientifique,
Belgium
• Mr. Seiichi KONDO, Deputy Secretary-General, OECD

MORNING SESSION

CHAIR - Mr. Douglas WORTH, Secretary General, Business and

Industry Advisory Committee to the OECD (BIAC)

Internet and the firm

Mr. Bernard VERGNES, Chairman Emeritus and Senior Vice President, Microsoft
Europe, Middle East and Africa (Belgium)

Where does traditional business stand with respect to its use of the Internet, the
prospects and principal issues? What are the main country and sector differences in
Internet uptake?

Relationships with suppliers, competitors and customers

Mr. Ladislav MIKUŠ, President and CEO, Slovenské telekomunikacie, a.s. (Slovak
Republic)

What are the opportunities and issues associated with developing, running and
expanding Internet-driven networks on a global basis?

Mr. Charles BOUCHARD, Executive Director for External Affairs, Merck & Co. Inc.,
and Director of the Merck Centre for European Government Affairs (United States,
BIAC)

How has the Internet affected relationships with consumers, providers and other
stakeholders in a service sector such as health care? What are the implications for
public policies?

37
 AFTERNOON SESSION

CHAIR - Mr. Olli REHN, Head of Cabinet of Commissioner Liikanen,

Enterprise Policy and Information Society, European Commission

Organisational change within firms and industries

Mr. Miroslav KROUPA, Head of Product Cost Reduction Department, Škoda-Auto

(Czech Republic)

What are the implications of the Internet for the quality, efficiency, and price of
goods/services and sales? How is the Internet being used in recruitment, training,
communication and business administration?

Mr. Youngkon LEE, B2B Development Team Leader, POSDATA Co., Ltd. (Korea)

What are the expectations/goals with regard to B2B e-commerce and what have been
the results? What are the prospects? What public policy issues have arisen at the
national and international levels?

Policy implications and conclusions

38
 ANNEX 2

Table 1. E-commerce opportunities along the supply chain

Product/service Supply Manufacturing Sales and Customer

Marketing
development management and assembly distribution service

E-commerce economic levers

Improve product Reduce sourcing Lower transaction Strengthen Reduce sales Improve customer
development by costs through costs by reducing customer and distribution service
capturing customer increased price double handling of relationships and costs through
input more effectively transparency and information improve cost automation –
competition effectiveness e.g. sales tools,
through targeting and printed
39

material costs

Enable collaborative Reduce inventory Lower work in Research new user Promote new Lower customer
development across costs through progress costs segments and products and interaction costs
companies and shorter through improved geographies services –
geographies procurement forecasting e.g. cross-selling
process and
delivery times
Source: McKinsey & Company, 2001.
 Table 2. Potential cost savings from business-to-business e-commerce
in the United States, by sector

Electronic components 29-39%

Machining (metals) 22%
Forest products 15-25%
Freight transport 15-20%
Life science 12-19%
Computing 11-20%
Media and advertising 10-15%
Aerospace and related parts 11%
Steel 11%
Chemicals 10%
Oil and gas 5-15%
Paper 10%
Health care 5%
Food ingredients 3-5%
Coal 2%

Source: Goldman Sachs, 1999, as cited in OECD (2000a).

40
 Table 3. Secure servers in OECD countries, July 2000

Secure servers per

Country Average annual growth (%)
100 000 persons

Iceland 24.5 208

United States 24.3 173
Australia 15.1 174
Canada 12.9 160
New Zealand 12.7 218
Switzerland 12.0 231
Luxembourg 10.3 150
Sweden 9.2 230
Total OECD 8.4 185
United Kingdom 7.4 258
Finland 6.7 202
Ireland 6.6 169
Norway 6.2 198
Austria 5.5 178
Denmark 5.5 278
Germany 4.6 332
Netherlands 3.5 163
Belgium 2.6 208
Japan 2.3 288
France 2.2 242
Spain 1.9 109
Czech Republic 1.9 461
Italy 1.4 188
Portugal 1.2 165
Hungary 0.9 200
Greece 0.8 494
Korea 0.5 270
Poland 0.5 359
Mexico 0.2 288
Turkey 0.2 779
EU total 4.3 226
World total 1.6 186
Source: OECD (2001e).

41
 Figure 1. Number of Internet hosts per 1 000 inhabitants
1
gTLDs , July 1997-October 2000

1997 2000

United States 70.7

Finland 0.9

Iceland 0.0

Canada 4.3

Norway 0.6

Sweden 1.0

New Zealand 0.4

Netherlands 1.4

OECD 100.0

Australia 1.6

Denmark 0.4

Switzerland 0.5

Austria 0.5

United Kingdom 3.5

Belgium 0.4

EU 15.5

Italy 2.1

Japan 4.6
2.9
Germany

Ireland 0.1

Luxembourg 0.0

France 1.3
Spain 0.7
Hungary 0.2

Portugal 0.1

Greece 0.2

Czech Republic 0.1

Korea 0.6

Poland 0.4

Mexico 0.4
tsizer.com), May 2001.
Turkey 0.2

0 50 100 150 200 250

1. Generic Top Level Domains (gTLDs) are distributed to country of location.

Source: OECD (2001e).

42
 Figure 2. Price of 40 hours of Internet use at peak times, September 2000,
in PPP USD
OECD Internet access basket for 40 hours at peak times using discounted PSTN rates,
September 2000

Fixed telephone charge

Telephone usage charge
Internet service provider charge

United States
Turkey
Canada
Mexico
New Zealand
Australia
Korea
Finland
Iceland
Italy
Denmark
Japan
Germany
Greece
Sweden
France
United Kingdom
Norway
Switzerland
EU
OECD
Austria
Ireland
Spain
Portugal
Belgium
Netherlands
Luxembourg
Poland
Hungary
Czech Republic

0 50 100 150 200

PPP dollars

1. In some countries, ISP and PSTN usage charges are bundled and included under the ISP
charge.
Source: OECD (2001e).

43
 Figure 2. Internet online time and hosts, by country, October 2000

Internet hosts per 1000 inhabitants (October 2000)

250
United States

200

150
Iceland

Norway

Sweden
100 New Zealand

Australia
Switzerland

United Kingdom
50

Germany
Ireland
France

Portugal
Czech Rep.
0
0 100 200 300 400 500 600 700
Average online time per month multiplied by Internet subscriber penetration rate

Source: OECD (2001e).

44
 ANNEX 3

ONGOING OECD WORK ON ELECTRONIC COMMERCE

The rapid growth and development of the Internet, and the technical,
economic and societal issues that it raises, have received a significant amount of
attention at national and international levels. The OECD has itself been engaged
in developing solutions to challenges in four key policy areas (OECD, 1998b):

• Building trust for users and consumers.

• Establishing ground rules for the digital marketplace.

• Enhancing the information infrastructure for electronic commerce.

• Maximising the benefits of electronic commerce.

In addressing these areas, priority has been given to issues relating to

privacy, authentication, consumer protection, taxation, access to infrastructure
and the socio-economic impact. During the course of this work, issues have
been raised concerning the role of stakeholders and the manner in which
policies should be developed and applied. In this context, it has been noted that
people no longer speak of a dichotomy between regulation and self-regulation:
the challenge is to obtain the appropriate mix between these approaches.
Second, there is increasing awareness that all stakeholders must be involved,
including civil society. Third, not all countries are at the same level, so common
solutions are not likely to be applicable to all. Finally, now that progress has
been made in defining issues and policy approaches, attention increasingly
needs to be turned to policy implementation.

In addition to these issues, the World Trade Organization has established a

comprehensive work programme to examine trade-related issues relating to
global electronic commerce (WTO, 2001). The programme is looking
specifically at issues related to trade in goods, services and intellectual property,
while examining the situation in developing countries.

45
Building trust for users and consumers

Progress has been made in a number of key areas in the past several years.
In terms of building trust, guidelines establishing the core characteristics of
effective consumer protection for online business transactions were adopted by
the OECD Council in 1999 (OECD, 1999b). The guidelines deal specifically
with principles associated with fair business, advertising and marketing
practices, online business and information disclosures, handling of consumer
complaints, provision of effective dispute resolution and redress, education and
awareness, and global co-operation.

Protection of privacy and personal data is being pursued through a

reinforcement of existing OECD guidelines, as indicated in a declaration
adopted by Ministers at their 1998 conference on e-commerce, held in Ottawa
(OECD, 1998c). In co-operation with industry, privacy experts and consumer
groups, work has since focused on: i) identifying the legal and self-regulatory
instruments used to implement and enforce guidelines on global networks at the
national, regional and international levels; ii) encouraging the adoption of
privacy policies and providing technical assistance to assist webmasters in this
endeavour; iii) examining the development and use of contractual solutions to
facilitate online transborder data flows; and iv) helping to ensure that effective
enforcement mechanisms are available to address non-compliance with privacy
principles and policies.

The importance of security of information systems was reinforced in the

Ottawa Conference, which outlined a number of areas to be addressed by
OECD countries to improve techniques to assure authenticity (OECD, 1998d).

Establishing ground rules for the digital marketplace

The digital marketplace is testing the existing legal and commercial

frameworks. To assure that biases are not introduced either for or against digital
markets, it has become clear that new and/or modified rules and regulations will
have to be developed in the fields of taxation, trade, competition law, electronic
finance. In furtherance of this work, framework conditions for taxation were
developed and endorsed by Ministers at the 1998 Ottawa Conference (OECD,
1998a). Since that time, progress has been made in a number of areas.

46
Taxation

In the field of consumption tax, there is consensus that taxation should be

based on the business presence of the recipient in the case of B2B transactions,
and, in the case of B2C transactions, on the usual jurisdiction of residence of the
private consumer. Work is continuing on refining these principles and on
finding ways to ensure that implementation can take place utilising the
technology itself to lighten the burdens on business. On international direct
taxation issues, it has been agreed that a Web site or Internet service provider
by itself would not constitute a permanent establishment for tax purposes, and
that the mere downloading of digital products would not give rise to royalty
payments. As regards tax administration, there is consensus on the need for tax
authorities to work more closely together to improve co-ordination, and that
efforts to facilitate tax compliance and tax collection should continue.

Other

In the field of international trade, the applicability of WTO commitments

for the online delivery of services has been examined, as have approaches to
liberalising e-commerce. The treatment of online products as goods or services
is being reviewed. Issues related to Internet access and competition are
receiving increased attention, as is the potential need to examine the functioning
of the OECD Codes of Liberalisation in light of the growth in cross-border
e-finance. Cross-border electronic delivery of insurance is also under review.

Enhancing the information infrastructure for electronic commerce

The ability to take full advantage of the opportunities provided by the

Internet depends in large measure on its accessibility, cost and efficiency. The
availability of sufficient bandwidth at the right price is key for businesses
interested in developing e-commerce. The OECD has been addressing such
issues, in co-operation with industry, with an emphasis on four key areas
(OECD, 2001d):

• Public policy implications of the changing information and network

technologies.
• Developments in pricing for access to broadband infrastructures.
• Governance issues.

47
 • Policy requirements for open international telecommunications
markets.
Related work pertains to new measurement tools affecting the domain
names system and Internet traffic exchange. The tools required to assist self-
governance and address access issues are being designed.

Maximising the benefits of electronic commerce

The potential of the Internet can only be realised to the extent that it is
available to and used by businesses, consumers and institutions. Much of the
work that the OECD is conducting in this area focuses on how use is
developing. The economic and social impact, for example, is being explored
through research, with a view to improving the ability to measure the structure
and volume of electronic commerce, deepening understanding of the impact of
e-commerce within and between businesses, and determining how e-commerce
is changing employment levels and skill requirements. Special attention is being
paid to the situation with small and medium-sized enterprises, and the difficult
challenges facing developing countries.

48
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