Internet Economy of the Online Game Business in South Korea 311 Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. Power up! What can the Korean experience of broadband tell us about the future of high speed Internet access in the UK? (2003). Internet Magazine. Retrieved June 5, 2003 from the World Wide Web: http://www.internet-magazine.com/features/korea.asp. Rao, M. (2001). South Korea emerges as powerhouse in broadband and wireless Internet markets. Technopreneurial.com. Retrieved June 23, 2003 from the World Wide Web: http://www.technopreneurial.com/articles/madan/national_it_strategies.asp. Rheingold, H. (1993). The virtual community: homesteading on the electronic frontier. Reading, MA: Addison-Wesley. Romer, P.M. (1990). Endogenous technological change. Journal of Political Economy, 98, S71-S102. Shields, R. (Ed.). (1996). 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Environment and Planning B: Planning and Design, 28(1), 3-19. Warf, B. and Grimes, J. (1997). Counterhegemoic discourses and the Internet. Geographi- cal Review, 87(2), 259-274. Wijnberg, N.M. (1994). National systems of innovation: selection environments and selection processes. Technology in Society, 16, 313-320. Wired for life: overnight, South Korea has become one of the world’s most connected countries - and Koreans are doing just about everything on the Internet. (2000, December). Time, 156 (23), B10. Yun, C.H., Lee, K.H., Kwon, N.H., Oh, J.S. and Yoo, S.S. (2001). The characteristics of super-speed Internet service market, and its future trend. Working Paper of the Korea Information Society Development Institute (KISDI), 01-21. Yun, K., Lee H. and Lim, S. (2002). The growth of broadband Internet connections in South Korea: contributing factors. Working paper in Asia/Pacific Research Center, Stanford University. Retrieved May 16, 2003 from the World Wide Web: http://www.kiet.re.kr/files/econo/20021014-grow.pdf. TLFeBOOK 312 Park Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. Zook, M. (2000). The web of production: the economic geography of commercial Internet content production in the United States. Environment and Planning A, 32(3), 411- 426. Zook, M. (2002). Hubs, nodes and bypassed places: a typology of e-commerce regions in the United States. Tijdschrift voor Economische en Sociale Geografie: Journal of Economic and Social Geography, 93(5), 509-521. TLFeBOOK Opportunities and Challenges of the New Economy for East Asia 313 Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. Chapter XVI Opportunities and Challenges of the New Economy for East Asia Donghyun Park Nanyang Technological University, Singapore Abstract The IT revolution has sharply reduced the cost of information and increased its availability. This revolution is also said to be creating a New Economy in which the old rules of economics no longer apply. The first part of my paper discusses the economic impact of the New Economy on East Asia. First, we discuss the potential economic benefits of the New Economy for the region. We argue that East Asian countries should focus on applying existing technology to local needs, since doing so promises large tangible returns, especially in terms of improving the efficiency of the manufacturing sector, the main engine of the region’s economies. In the long run, the IT revolution will also raise the quality of corporate governance in the region. Second, we point out that while the IT revolution may enable East Asian countries to leapfrog some technological barriers, it does not enable them to leapfrog sound economic policies. Such policies remain as relevant to good economic performance in the New Economy as they did in the Old Economy. Furthermore, the potential of IT to accelerate growth and reduce poverty will be largely unfulfilled in the absence of complementary investments such as a sound infrastructure for transportation and logistics. Third, East Asian countries must fulfill certain pre-conditions to make sure that the New Economy takes hold. TLFeBOOK 314 Park Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. Above all, they must liberalize their telecommunication sectors so as to improve the quantity and quality of telecom services. They should also make the necessary investments in human resource development to maximize their returns from the IT revolution. In short, although the New Economy holds out tremendous economic potential for East Asia, realizing that promise will require a lot of determination and hard work. The second part of this chapter deals with the implications of the IT revolution for regional development. Most of the main points raised in the first part of this chapter apply to the second part and in this sense, the second part is essentially an application of the first part, which addressed the broader issue of economic development, to the narrower issue of regional development. East Asian countries suffer from significant inter-regional economic inequalities and these inequalities often extend into all other spheres of national life. Such inequalities inevitably interfere with well-balanced economic development and impose costs on both the magnet cities and the rest of the country. A more balanced pattern of development is therefore desirable, and IT can make significant contributions toward this objective. In particular, by reducing the concentration of information and knowledge in the main city and disseminating those valuable resources to the rest of the country, IT reduces the inequality of opportunity that lies at the root of the inter-regional economic inequality. However, we must be realistic about what IT can do and cannot do in terms of promoting greater inter-regional equality. IT by itself will not enable poorer regions and cities to catch up with the main cities, and will facilitate regional development only if the fundamental ingredients of regional development are in place. Finally, East Asian economies must fulfill certain pre-conditions, especially greater inter-regional equality in telecom and other IT infrastructure, to fully realize IT’s potential benefits for regional development. In the last section of this chapter, we summarize our main points and provide some concluding thoughts. In addition, we discuss the policy implications of our analysis for FDI in Asia, along with implications for potential foreign investors, especially in the telecommunications industry. FDI into IT sectors cannot only be profitable for the investors, but can also promote the host country’s economic growth. Introduction One of the most fashionable words these days among government officials, academics and the general public alike throughout Asia is the “New Economy,” which refers to the economy that is emerging in the midst of the ongoing IT revolution. The IT revolution refers to the sharp reduction in the cost of finding and communicating information that has been made possible by the convergence of information and communication technolo- gies. For this reason, the IT revolution is also known as the ICT revolution. More convenient and more powerful computing equipment, especially personal computers (PCs), in combination with better and more affordable telecommunication services, are jointly driving the IT revolution. Perhaps the most familiar manifestation of this far- reaching revolution is the Internet, which can literally connect us to the rest of the world in the comfort of our homes and offices. The IT revolution is giving rise to a new economic paradigm – the New Economy. TLFeBOOK Opportunities and Challenges of the New Economy for East Asia 315 Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. The New Economy is structurally different in many ways from the Old Economy. The latter is based on hardware, whereas software is the defining characteristic of the New Economy. Value added in the New Economy comes from the creation of new knowledge rather than the application of existing knowledge, as in the Old Economy. The current transition from the Old Economy toward the New Economy is therefore a transition from the industrial age of making and consuming products to the information age of creating and absorbing knowledge. While the focus of the Old Economy is on transforming raw materials into goods and services, the focus of the New Economy lies in transforming intellectual capital into new information and knowledge. For example, transforming iron and coal into steel is a classical example of the Old Economy in action, whereas creating new software to process financial data more efficiently fits our mental picture of the New Economy. In short, intellectual capital, instead of the more traditional factors of produc- tion such as land, labor and capital, underpin the New Economy. While there are other forces such as globalization behind the New Economy, its primary driving engine is the IT revolution. This is because the New Economy is based on creating and disseminating knowledge and information, and the IT revolution has significantly reduced the cost of doing so. The ongoing convergence of information technology and communication technology, which lies at the heart of the IT revolution, is accelerating the creation and dissemination of knowledge and information. It is worth noting that knowledge and information are omnipresent but often ignored inputs of production. In the real world, unlike in the world of textbooks, information is costly, so the IT revolution represents a supply-side revolution of falling information costs and hence transactions costs. Specific examples of firm-level efficiency gains due to IT include lower procurement costs, better supply chain management, and tighter inventory control. According to a 2000 report by Martin Brooks and Zaki Wahhaj at Goldman Sachs, firms’ potential savings from purchasing over the Internet range from 2% in the coal industry to 40% in the electronics components industry. They also estimate that doing business online with suppliers can reduce the cost of making a car by as much as 14%. British Telecom claims that procuring good and services online will reduce the direct costs of the goods and services it purchases by 11%. In a comprehensive recent study of the impact of firm-level information technology investments in a wide range of industries in the U.S. between 1995 and 1997, Kudyba and Diwan (2002) find that IT investment has a substantial positive impact on firm productivity and, furthermore, this positive impact increases over time. Although the efficiency gains vary from firm to firm and industry to industry, at least some firms and industries will realize substantial gains. Figure 1 summarizes the impact of the IT revolution at the firm level. As we can see in Figure 2, at a macro level, the lower information and transactions costs enable the economy to produce more at each price level, resulting in a rightward shift of the supply curve, and a new equilibrium of lower price levels and higher outputs. The positive supply shock entails the best of both worlds – faster economic growth combined with deflationary pressures. At a micro level, while creativity, innovation and risk-taking have always been essential elements of successful entrepreneurship, there is an even greater premium on those qualities in the New Economy. At the macro level, this means that the most successful TLFeBOOK 316 Park Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. economies will be those that are most effective at creating new information and knowledge by taking full advantage of the IT revolution’s information cost savings. Nimble re-allocation of resources associated with flexible and deregulated markets is vital for an economy in view of the fast-paced obsolescence of information and hence technology in the information age. Equally important is human resource development capable of producing workers who can not only absorb existing knowledge but also generate new knowledge. The transformation of manufacturing products into mass-produced, low-margin com- modities is no longer restricted to low-tech products, but is becoming more evident further up the technological ladder as well. This trend, which is a consequence of the globalization of production and economic activity, reinforces the case for a more creative and innovative workforce and economy, especially in higher-income countries that are experiencing a hollowing-out of their manufacturing sector. The IT revolution is provid- Figure 1. The impact of the IT revolution on firms IT Revolutio n Lower Information and Transactions Costs Lower Procuremen t Cost Better Supply Chain Management Tighter Inventory Control Higher Efficiency TLFeBOOK Opportunities and Challenges of the New Economy for East Asia 317 Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. ing further momentum to the shift from manufacturing to services in those countries. Related to this shift in the composition of output is a shift away from mass production and toward customization to suit individual preferences. IT-induced reduction of transactions costs between firms and consumers underlies this trend. At the same time, IT-induced reduction of transactions costs between firms is promoting the contracting out or outsourcing of various services to other firms. To the extent that inter-firm transactions costs dictate the optimal size of the firm, we can expect lower inter-firm transactions costs to result in a smaller optimal size of the firm. This, in turn, implies increasingly higher levels of specialization and thus concentration on core competen- cies, with beneficial effects for efficiency and productivity. Economic globalization and the IT revolution are complementary in a very fundamental sense – they both make markets more competitive than ever before. Economic globaliza- tion, evident in the sustained growth of international flows of goods and services as well as capital and labor, is breaking down the barriers that protected domestic firms from international competition. By subjecting firms to relentless external competitive pres- sures, globalization is forcing them to shape up or shut down. By the same token, the IT revolution is making more information about producers and products available to consumers. Armed with more information, consumers are able to choose more selectively from a wider range of producers and products. They are better able to find the best value for their money. The IT revolution thus breaks down consumer ignorance, which protects firms from competitive pressures just as much as tariffs or barriers to entry. Figure 3 summarizes the impact of the IT revolution on consumer choice and welfare. Figure 2. The macro impact of the IT revolution on supply P S E E’ D Q S’ TLFeBOOK 318 Park Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. Lower information costs for consumers leaves them with more resources available for consuming goods and services. In other words, some of the time and money consumers spend searching for goods and services can be re-allocated on goods and services themselves. If we think of the cost of gathering information as a tax on consumers, the IT revolution brings about a reduction in this tax. Furthermore, the economy’s higher productivity (as a result of the IT revolution) will further increase income and raise demand for goods and services. Therefore, although the primary impact of the IT revolution is on supply, it will also have a positive impact on demand at the macro level, as we can see in Figure 4. This positive demand-side impact will further stimulate economic growth. E-commerce, which does not require a physical bricks-and-mortar presence, reduces the set-up costs of entering and doing business. In the process, e-commerce reduces the Figure 3. The impact of the IT revolution on consumers IT Revolutio n More Information abou t Products and Firms for Consumers More Consumer Choice and More Consumer Power vis-à-vis Firms More Competitive Markets/ Lower Prices and Better Quality TLFeBOOK Opportunities and Challenges of the New Economy for East Asia 319 Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. barriers to entering a market and makes markets more competitive. In short, in the New Economy, stronger competitive pressures will force firms to become more efficient and productive over time. Mere survival requires nothing less. We should also note that the division between the New Economy and the Old Economy is not always a clear-cut one. Although the New Economy is associated with industries such telecommunications and telecom equipment, computer hardware and software, biotechnology, and fuel cells and other alternative energy technology, and the Old Economy with low-tech manufacturing, even in the most technologically advanced developed countries such as the U.S., elements of the two co-exist with each other. In addition, many of the efficiency gains associated with the IT revolution, in particular the reduction of information costs, are applicable to the entire spectrum of industries, including those we typically associate with the Old Economy. In this chapter, I will focus on the economic impact and implications of the New Economy for East Asia in the 21 st century. East Asia consists of two sub-regions - Northeast Asia and Southeast Asia. There is a great deal of diversity among the East Asian countries in terms of economic development and income. They range from Japan and the NIEs (i.e., Korea, Taiwan, Hong Kong and Singapore), which are industrialized, high-income economies at one end, to Myanmar and the Indochina countries at the other end, which remain among the world’s poorest countries despite recent economic progress. Table 1 shows the population, per capita GDP and per capita GDP in purchasing power parity terms of selected East Asian countries. Our focus on economics is not to make light of the social, political, and other effects, of which there are bound to be many, some of them profound in their own right, but simply Figure 4. The macro impact of the IT revolution on supply and demand P S E E’’ E’ D Q S’ D ’ TLFeBOOK 320 Park Copyright © 2005, Idea Group Inc. Copying or distributing in print or electronic forms without written permission of Idea Group Inc. is prohibited. to concentrate on my field of expertise as well as to provide a sharper focus to my reflections on this most important subject. And, as its name suggests, the New Economy is above all an economic phenomenon. Casual observation alone suggests that the rate of technological progress in the information technology (IT) field over the past ten years or so has been absolutely breathtaking. Moore’s Law, according to which the processing capacity of silicon chips doubles every 18 months, powerfully sums up the speed of innovation. Although web surfing and e-mailing have now become as much a part of our daily routines as eating and sleeping, they were little more than fascinating novelties until quite recently. Microsoft, Cisco and Sun Microsystems, to name just a few, have come out of nowhere to become among the biggest and most recognized companies in the world. The New Economy is here, and it is here to stay. But what are the implications of this New Economy for the global economy? The extraordinary macroeconomic performance of the U.S., the undisputed standard bearer of the New Economy with its Silicon Valley, countless dot.coms and venture capitalists, in recent years has led some economists to proclaim the arrival of an economic nirvana in which high growth went hand in hand with low inflation. At the other extreme, New Economy skeptics attribute the remarkable U.S. economy simply to an accidental convergence of growth-promoting cyclical factors such as the IT investment boom and inflation-subduing circumstances such as the strong dollar. At the heart of this heated debate between the supporters and critics of the New Economy is an empirical issue – the contribution of IT to productivity. That is to say, theoretical arguments aside, by how much has the IT revolution helped workers to actually produce more with a given amount of capital? Whether or not IT enables an economy to achieve faster growth on a sustainable basis without triggering inflation ultimately depends on the magnitude of productivity gains. 1 Although it is too early to make definitive judgments, 2 the preliminary evidence indicates that IT has clearly led to significant productivity gains. Table 1. Population and per capita GDP for 2000, selected East Asian economies Country Population (millions) GDP Per Capita, US$ GDP Per Capita, PPP, US$ China 1,262 840 3,920 Japan 127 35,620 27,080 Korea (South) 47 8,910 17,300 Taiwan 22 14,000 N.A. Hong Kong 7 25,920 25,590 Singapore 4 24,740 24,910 Indonesia 210 570 2,830 Vietnam 79 390 2,000 Philippines 76 1,040 4,220 Thailand 61 2,000 6,320 Malaysia 23 3,380 8,330 Source: World development indicators 2001, EIU for Taiwan TLFeBOOK [...]... 2(4), 695 -712 Blum, U and Dudley, L ( 199 9) The Two Germanies: Information Technology and Economic Divergence, 194 9- 198 9 Journal of Institutional and Theoretical Economics, 155(4), 710-737 Boekema, F., Morgan, K., Bakkers, S and Rutten, R (Eds) (2000) Knowledge, Innovation and Economic Growth: The Theory and Practice of Learning Regions Cheltenham: Edward Elgars Brennan, E and Richardson, H ( 198 9) Asian... China China Economic Review, 7(1), 1-21 Jorgenson, D and Stiroh, K ( 199 9) Information Technology and Growth American Economic Review, 89( 2), 1 09- 115 Kanbur, R and Zhang, X ( 199 9) Which Regional Inequality? 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( 199 7) The Environment and Sustainable Development in the Asia-Pacific Asian Pacific Economic Literature, 11(1), 39- 55 Wigan, M ( 198 4) Information Technology and Integrated Regional Development In P Nijkamp and P Rietveld (Eds.), Information Systems for Integrated Regional Planning Amsterdam: North-Holland World Bank ( 199 8a) East Asia: the Road to Recovery Washington D.C.: World Bank World Bank ( 199 8b) . selected East Asian countries, 198 5 and 199 8 Country Output in Billions of US$, 198 5 Output in Billions of US$, 199 8 China 5.6 46 .9 Japan 89 196 Korea (South) 6.5 39 Taiwan 56 34 Hong Kong. the digital divide. Environment and Planning B: Planning and Design, 28(1), 3- 19. Warf, B. and Grimes, J. ( 199 7). Counterhegemoic discourses and the Internet. Geographi- cal Review, 87(2), 2 59- 274. Wijnberg,. demand for electronics in general and IT- related products in particular. Global output of electronics reached US$482 billion in 198 5 and US$1,088 billion in 199 8. In 198 5, Japan, the NIEs and