Information Technology in Asia: New Development Paradigms 9789812306074

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Reproduced from Information Technology in Asia: New Development Paradigms edited by Chia Siow Yue and Jamus Jerome Lim (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. i Contents Individual articles are available from < http://www.iseas.edu.sg/pub.html >

© 2002 Institute of Southeast Asian Studies, Singapore

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The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the many-faceted issues and challenges of stability and security, economic development, and political and social change. The Institute’s research programmes are Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. An Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute’s chief academic and administrative officer.

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New Development Paradigms

Editmby

Chia Siow Yue Jamus Jerome Lim

INSTITUTE OF SOUTHEAST ASIAN STUDIES, Singapore

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First published in Singapore in 2002 by Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Singapore 119614 Internet e-mail: [email protected] World Wide Web: http://www.iseas.edu.sg/pub.html All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 2002 Institute of Southeast Asian Studies, Singapore

The responsibility for facts and opinions in this publication rests exclusively with the editors and contributors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters. ISEAS Library Cataloguing-in-Publication Data Information technology in Asia : new development paradigms / edited by Chia Siow Yue and Jamus Jerome Lim. Proceedings of the ASEAN Roundtable 2000 held in Singapore from 12 to 13 October 2000 and organized by the Institute of Southeast Asian Studies, Singapore and supported by Konrad Adenauer Stiftung. 1. Information technology—Economic aspects—Asia, Southeastern— Congresses. 2. Communication—Technological innovations—Asia, Southeastern— Congresses. 3. Electronic commerce—Asia, Southeastern—Congresses. I. Chia, Siow Yue. II. Lim, Jamus Jerome. III. Institute of Southeast Asian Studies. IV. Konrad-Adenauer-Stiftung. V. ASEAN Roundtable (2000 : Singapore) HC441 A843 2000 2002 sls2002045686 ISBN 981-230-146-1 (soft cover) Typeset by International Typesetters Pte. Ltd. Printed in Singapore by Seng Lee Press Pte. Ltd.

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List of Tables List of Figures Acknowledgements Contributors

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1

The Challenges of Information Technology: Introduction Jamus Jerome Lim

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Information Technology in Southeast Asia: Engine of Growth or Digital Divide? Kenneth L. Kraemer and Jason Dedrick

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ICT Industry Development and Diffusion in Southeast Asia Wong Poh-Kam and Annette Amy Singh

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Social and Political Impacts of ICT: How Will They Affect ASEAN’s Agenda? Hadi Soesastro

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Human Capital and IT in Innovation and Growth in ASEAN Rajah Rasiah

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E-Commerce in Southeast Asia: A Review of Developments, Challenges, and Issues Aniceto C. Orbeta, Jr.

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Singapore as a Regional Information Technology Hub Toh Mun Heng

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Multimedia Super Corridor: Introducing a New Economy in Malaysia Paramjit Singh Tyndall

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ICT in Thailand: Initial Steps towards the New Economy Sakulrat Montreevat

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10 Assessing Global E-Commerce Policies: A Perspective from Thailand Somkiat Tangkitvanich

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11 Leapfrogging into the ICT Revolution: The Case of Vietnam and the Transitional Economies Le Dang Doanh

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12 Knowledge-Based Economy and Information Technology: The Taiwan Experience Shin-Horng Chen and Meng-Chun Liu

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13 Bangalore: IT Cluster in India R. Venkatesan and Samuel V. Malvea

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Index The Editors

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List of Tables

2.1 2.2 3.1 3.2 3.3 3.4 3.5 3.6 3.7 4.1 4.2 5.1 5.2

Internet and E-Commerce Readiness, in Asian and Non-Asian Countries, 1998 Computer Industry Growth Rates, 1987–97 Production of Electronics Goods: ASEAN-5 and Selected Asian Countries, 1985–98 Composition of Electronics Production: ASEAN-5, 1985, 1998 Estimated Market Size for Electronics Goods: ASEAN-5 and Selected Asian Countries, 1988–98 Market Composition of Electronics Goods: ASEAN-5, 1988, 1998 Estimated Composition of IT Market in ASEAN and Selected Asian Countries, 1995 Information Society Index: Rankings for Asian Countries, 2001 ICT Penetration Indicators: ASEAN and Selected Asian Countries ICT Infrastructure and Access in ASEAN and East Asia Comparison of the Costs of a Local Call and an International Call High-Tech Human Capital Indicators of Selected Economies IT and Telecommunication Indicators of Selected Economies

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32 42 52 54 57 59 60 61 62 75 76 93 98

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5.3 5.4 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12 6.13 7.1 7.2 7.3 8.1 8.2 8.3 8.4 9.1 9.2 9.3 9.4 9.5 9.6 9.7 10.1 10.2

High-Tech Endowments of Selected Economies PC Penetration and GNP per Capita in ASEAN, 1998 E-Commerce Matrix World-Wide E-Commerce Growth Estimates of E-Commerce Sales Compared with Various Benchmarks E-Commerce Revenues by Activity, of Selected Firms Distribution by Top-Level Domain by Host Count, January 1995 to January 2000 Internet Hosts, Users, and Personal Computers SSL Server Survey, July 1998 Estimated Number of People Who Are Online Internet Dial-Up Accounts Forecast Telephone Lines and Cellular Subscribers Television Households Households in Asia with Cable, 1998 E-Commerce Impact on Various Distribution Costs R&D Expenditure and Manpower in Singapore, 1999 ASEAN-10: Basic Statistics on Social and Economic Variables, 1999 International Digital Divide: Individuals with PC Internet Access (excluding wireless access) MSC Milestones and Targets Seven Flagship Applications of the MSC MSC Statistics on Companies, Jobs, and Investments Malaysian Demand for ICT Workers, 1998–2005 Thailand: Sectoral Shares and Growth of GDP Thailand: IT Market Growth Profile Thailand: IT Market by Industry Segment Thailand: Exports and Imports of Computers and Computer Parts ASEAN-5: Internet Indicators ASEAN-5: Telecommunication Indicators ASEAN-6: E-Commerce Readiness Assessment WTO Work Programme on Electronic Commerce Examples of Thailand’s Commitments to Liberalize the Service Sectors

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100 105 114 116 116 118 120 121 122 123 124 125 126 126 135 163 165 171 180 182 186 189 196 198 199 199 201 203 208 225 228

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10.3 Examples of U.S. Business Method Patents 11.1 Size of the Economy: Southeast Asia, 1999 11.2 Communications, Information, and Science and Technology: Southeast Asia 11.3 Education: Southeast Asia, 1980 and 1997 11.4 Selected Economic Indicators of Vietnam, 1991–2000 12.1 Taiwan’s Integrated Circuit Industry Statistics 12.2 R&D Intensity and Capital Expenditure Intensity of the Integrated Circuit Industry: USA, Japan, South Korea, and Taiwan 12.3 Geographical Breakdown of Taiwan’s Foundry Services Clients 12.4 Indicators of Information Application for Selected Countries, 1999 12.5 Determinants of Labour Productivity, 1996 13.1 IT Industry in India 13.2 Indian Software Industry by Type of Activity 13.3 Indian Software Exports by Type of Services 13.4 Indian Software Companies by Segment of Software Development 13.5 Indian Software Companies by Software Development Application 13.6 Location of Software Companies in Major Urban Areas 13.7 Location of IT Firms in Major Urban Areas 13.8 Start-Up of Firms by Location in India 13.9 Exports from Bangalore Software Technology Park 13.10 Comparison between Silicon Valley and Bangalore

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232 247 249 250 252 281 282

283 287 288 298 300 300 300 301 302 303 303 304 309

List of Figures

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1.1 2.1

2.2 2.3 2.4 2.5 2.6 2.7 3.1 5.1 5.2 5.3 5.4 5.5 5.6

Conceptual Pillars of E-ASEAN The Productivity Paradox of IT: Annual Change in Computing Investment and Productivity for the United States, 1965–94 Growth in IT Spending and Productivity Payoffs from Non-IT Investments, in Asian and Non-Asian Countries Payoffs from IT Investments, in Asian and Non-Asian Countries Gap in Internet Readiness between Asian and Non-Asian Countries PC Diffusion and GDP per Capita, in Asian and Non-Asian Countries Information Services as Link between Production and Use Conceptual Framework of the Information Economy Human Capital, IT, Innovations, and per Capita Incomes: A Systemic Model Primary School Enrolment in ASEAN, 1980 and 1996 Secondary School Enrolment in ASEAN, 1980 and 1996 Tertiary Education Enrolment in ASEAN, 1980 and 1996 Scientists and Engineers in R&D in ASEAN-5, 1985–95 Internet Penetration in ASEAN-5, 1998–2003

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29 30 30 33 35 43 50 86 89 90 91 94 95

List of Figures

5.7 5.8 5.9 6.1 6.2 6.3 7.1 7.2 7.3 7.4 7.5 9.1

10.1 10.2a 10.2b 10.3 10.4 11.1 11.2 12.1 12.2 12.3 12.4 13.1 13.2

PC Penetration in ASEAN-5, 1998–2003 High-Tech Exports and Patents of ASEAN-5 Gross National Product and Personal Computers Percentage of Users in Major Asian Economies Who Reported Ever Using the Internet to Make a Purchase Impact of E-Commerce on a Product Basis, 2000–2005: Estimates of Online Shares Rebuilding the Value Chain The Productivity Cycle Evolution of Singapore’s IT Strategy IT Infrastructure IT2000: Singapore’s Goals Potential Benefits of e-ASEAN in Selective Areas Corporatization Plan of the Telephone Organization of Thailand and the Communications Authority of Thailand Number of Internet Hosts per 1,000 Persons in Asian Countries, 1999 Charges for 20-Hour Dial-Up Internet Access in Asian Countries Monthly Charges for 64 Kps Internet Leased Line in Asian Countries Tariff Revenues from Information Goods An Assessment of the U.S.-Centric Proposals GDP Structure by Economic Sectors: Southeast Asia, 1999 Growth of ICT in Vietnam The Features of Knowledge and Their Implications Taiwan’s World Market Share in PC-Related Products Geographical Distribution of IT Production by Taiwan-Based Firms The Divergent Trend between Export Orders and Exports in Taiwan’s IT Industry Determinants of National Competitive Advantage The Software Development Diamond

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97 103 104 128 131 134 149 153 154 156 168 206

218 221 221 224 234 246 254 271 274 276 277 308 314

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The Institute of Southeast Asian Studies, Singapore, would like to express its appreciation to the Konrad Adenauer Stiftung (KAS) for its generous financial support to the ASEAN Roundtable 2000 and this publication. This volume would not have been possible without the collective efforts of the scholars and researchers who have exercised their intellectual capacities and carved out time from their undoubtedly crowded research agendas to serve as contributors. The editors of the volume thank them for all their input.

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Shin-Horng Chen was previously an associate researcher of the Industrial Technology Research Institute and is presently Director of the International Division at the Chung-Hua Institution for Economic Research, Taipei. His research interests include the areas of industrial economics, the economics of technological innovation and ICT, as well as studies on Taiwan with relation to the World Trade Organization and the Asia-Pacific Economic Co-operation, and his research can be found in journals such as Research Policy as well as in several edited volumes. Jason Dedrick is Senior Research Fellow at the Center for Research on Information Technology and Organizations at the University of California, Irvine. His research interests include economic development, industrial policy, technology diffusion, and the globalization of the computer industry. His current work is focused on the international diffusion of computer production and use, as exemplified in his recent book Asia’s Computer Challenge: Threat or Opportunity for the U.S. and the World? (1998), co-authored with Kenneth L. Kraemer. Kenneth L. Kraemer teaches at the University of California, Irvine, where he holds the Taco Bell Professorship of IT for Management. He has conducted research on the management of computing in organizations for more than twenty-five years, and has co-authored nine books, including Asia’s Computer Challenge: Threat or Opportunity for the U.S.

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and the World? co-authored with Jason Dedrick, and Managing Information Systems. Le Dang Doanh is President of the Central Institute for Economic Management, Vietnam, having also previously lectured at Hanoi University. In addition to serving as a member in various national boards and associations, he also maintains an active publication record, including, more recently, the book Vienam’s Economy and the Impacts of the Crisis (1998), with Suiwah Leung. Jamus Jerome Lim was a Research Associate at the Institute of Southeast Asian Studies. His research interests are in the areas of information and communications technology, especially ICT policy, and international economics, which encompasses both international finance and trade issues. His recent research output includes “Singapore's SME & ICT Policies for the New Millennium”, co-authored with Chia Siow Yue. Meng-Chun Liu is an associate research fellow at the Chung-Hua Institution for Economic Research, Taipei. He is an active researcher in the areas of international trade, trade policies, and industrial organization, and his research work can be found both in journals such as the Pacific Economic Review and Economic Record, as well as conference volumes, an example being Regionalism versus Multilateral Trade Arrangements (1997). Samuel V. Malvea is Senior Economist at the National Council for Applied Economic Research in New Delhi. He has worked in the areas of consumer demographics, monitoring and evaluation studies, and market research, in projects ranging from a national analysis of the promotion and structure of small-scale industries to the evaluation of biogas plants in India. He is currently involved in the comparative study of the development of information technology clusters in Bangalore and Singapore. Sakulrat Montreevat is Fellow in the Regional Economic Studies programme of the Institute of Southeast Asian Studies, Singapore. Her research interests are in the areas of financial crises and their resolution

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and consequences in Southeast Asia and macroeconomic management in Thailand. She has published “Impact of Foreign Entry on the Thai Banking Sector: Initial Stage of Bank Restructuring” in the ISEAS Working Paper series. Aniceto C. O rbeta, Jr. is Senior Research Fellow at the Philippine Institute for Development Studies, a government think-tank. His research interests are in the fields of applied economic modelling, social sector issues, demographic economics, and electronic commerce, in particular, concepts and measurement issues in e-commerce. He has recently published Population Growth and Economic Development in the Philippines: What Has Been the Experience andWhat Must Be Done (1999). Rajah Rasiah is Professor at the Institute for New Technologies, United Nations University, Maastricht, Netherlands. In addition to consultancy experience with various international and national bodies, he has a prolific publication record in the areas of industrial organization and relations, technology and development, and international finance, where he has recently co-edited a volume, Industrial Technology Development in Malaysia: Firm and Industry Studies (1999), with K.S. Jomo and Greg Felker. Annette Amy Singh is a research analyst at the Centre for Entrepreneurship (formerly the Centre for Management of Innovation and Technopreneurship), based at the National University of Singapore. Her publications, which reflect her interests in technology policy, include joint work with Wong Poh-Kam on The Role of Foreign MNCs in the Technological Development of Singaporean Industries (2000). Hadi Soesastro is Executive Director of the Centre for Strategic and International Studies, Indonesia, while concurrently holding lecturing appointments at the University of Indonesia, Jakarta, and Atmadjaja University, Yogyakarta. He has written extensively on energy issues, international trade, regional co-operation, the relationship between the economy and security, and the role of technology in development. He has recently co-edited a volume on Domestic Adjustments to Globalization (1998) with Charles E. Morrison.

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Somkiat Tangkitvanich currently serves as Research Director for the Information Economy, Science, and Technology Development Program at the Thailand Development Research Institute. His research interests and publications include studies on the Internet and electronic commerce, and has recently published a research monograph on Information Superhighway and Its Potential for Thailand’s Development (1997). Toh Mun Heng teaches at the Department of Business Policy at the National University of Singapore, where he is also the Deputy Head. His varied research interests and publications are in the areas of econometric modelling, input-output analysis, international trade and investment, human resource development, household economics, and development strategies of emerging economies in the Asia-Pacific. His most recent research output is Competitiveness of the Singapore Economy: A Strategic Perspective (1998), co-edited with Tan Kong Yam. Paramjit Singh Tyndall is Research Fellow at the Malaysia Institute of Economic Research (MIER), where he has been since 1992. His research interests have concentrated on industrial and technology policy, and the use of knowledge as a strategic tool for innovation and competitive advantage. In addition, he has also represented MIER in the steering committee for the National K-Economy Master Plan. R. Venkatesan has been Principal Economist for Industry and Infrastructure at the National Council for Applied Economic Research in New Delhi since 1994, after successful appointments in both the private and government sectors. He has researched and published extensively in the areas of trade liberalization and the environment, policy competition for foreign direct investment, and the design of state-level industrial policies. Wong Poh-Kam is both Director of the Centre for Entrepreneurship as well as Associate Professor in the Business School, National University of Singapore. He has consulted widely for organizations both in Singapore and abroad, and has published extensively in international journals such

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as International Business Review and International Journal of Technology Management, on topics such as information and communications technology, the management of innovation, and national innovation systems in East Asia.

© 2002 Institute of Southeast Asian Studies, Singapore

Reproduced from Information Technology in Asia: New Development Paradigms edited by Chia Siow Y ue and Jamus Jerome Lim (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual are availableTechnology: from < http://www.iseas.edu.sg/pub.html > 1 1. The Challengearticles of Information Introduction

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The Information and Communications Technology (ICT) revolution, which has swept the world since the 1990s, has been the source of much 2 study and debate. Yet, like all general-purpose technologies, the full impact of ICT has yet to be completely understood, although it is most likely to fall somewhere between the world-changing hype generated by optimists and the dismal negativism voiced by sceptics. The ASEAN (Association of Southeast Asian Nations ) region, in particular, has moved boldly to embrace this new technology, and governments in Southeast Asia have been very pro-active in formulating technology policies. How far, therefore, have these nations progressed, and what are the impacts and implications of ICT on their economies, societies, and polities? Indeed, what are the ramifications of these national policies on the region? The aim of this volume is twofold. First, it seeks to provide some broad-brush evaluations of the impact of ICT on the region, with

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respect to several key issues. Second, as it delves into more detailed country-level studies of national ICT policies, it aims to examine the different approaches that countries have adopted in addressing ICT, and their attendant lessons. Through these two interrelated ways, it draws together commentary and analysis from experts in their respective fields to inform academics and policy-makers in the region regarding the ICT revolution. The volume is organized into three main sections. The first section deals with the region as a whole, and explores issues of concern to all countries in the region, such as the digital divide, e-commerce, and the social and political impact of ICT. The second section preoccupies itself with case studies of a selection of ASEAN countries; specifically, it has limited itself to the study of Singapore, Malaysia, Thailand, and Vietnam. The third section treats the cases of Taiwan and Bangalore — other Asian countries that have been heavily involved in the development of ICT policies and are internationally recognized as drivers in the global ICT revolution. 1. Regional Issues in the ICT Revolution

The ICT revolution is, appropriately, a global event, and hence, involves many general issues that impact on all countries. The burgeoning literature on ICT can be broadly categorized into several key threads; these core ideas include: • • • •

technological advancement and innovation; information and network economics; dynamics of domestic politics and international relations; and changes in cultural and social theory.

Research in the first category can be broadly classified into the literature on the impact of technology on economic growth, and the work on general-purpose technologies. The first can be further subdivided into models of neo-classical growth — where technical advancement is treated as a “black-box” and is exogenous in nature — and the later studies on the “new growth theory”, where such technological progress is endogenously driven, primarily through forces such as externalities and 3 innovation. The second is centred on the various contributions that

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distil the macroeconomic consequences that GPTs play in the economy, through mechanisms such as secondary innovations, diffusion, and 4 human capital accumulation. More recently, research efforts have been focused on the contribution of technology to productivity growth, especially total factor productivity — and the corresponding material 5 that has attempted to explain the “productivity paradox” of ICT. The work on information and network economics, which tend to examine more micro-level issues in the ICT revolution, is premised on the potential of ICT to reduce asymmetric information through the promotion of information flows and the benefits that accrue from 6 network externalities. Together, these building blocks form the foundation of research work in Internet economics and electronic 7 commerce. Recent studies have emphasized the need to ensure adequate 8 infrastructure for electronic commerce, influences of the production of 9 weightless goods on industrial production and organization, and changes 10 in consumer markets due to new mediums of exchange. In the third category, political science has examined two correlated areas — first, of the domestic consequences of the emergence of ICT, and second, the international relations aspects involving the global network economy. Studies in the former are on the whole preoccupied 11 with the impact of ICT, especially the Internet, on democracy, whereas the latter includes work on the importance of developing country involvement in international governance regimes for ICT — regimes like the Internet Corporation for Assigned Names and Numbers 12 (ICANN) and the World Wide Web Consortium (W3C). The literature in the final category has looked at the impact of ICT on social development and the gradual diffusion of a singular world culture, or, more broadly, the increased speed by which globalization is expedited due to ICT. Clearly, the primary socio-economic consideration is that of the digital divide, which is yet another form of social stratification involving the disparity between individuals, groups, or countries with regard to their opportunities to access ICTs and the Internet. Other major themes are the debate over intellectual property rights, privacy concerns, and the empowerment of individuals through 13 free speech and information access. The present volume narrows down this extremely diverse literature

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into several key concerns that impact on most, if not all, the countries in the region. These key concerns include the contribution of ICT to development, the diffusion of ICT and the informatization of society, the importance of human capital and its influence on innovation, the economics associated with electronic commerce, and the impact of ICT on the social and political landscape. The chapter by Kraemer and Dedrick takes up the pressing issue of the contribution of ICT to economic development. It surveys the literature on the contribution of information technology to economic growth, before estimating the contribution to gross domestic product (GDP) of ICT investment for a sample of thirteen Asian countries and an average of thirty-five non-Asian countries that include both developed and developing nations. It arrives at the somewhat dramatic conclusion that whereas there are positive returns to ICT investments in non-Asian countries, this is not so for Asian countries. Kraemer and Dedrick interpret their findings using a range of explanations, with the argument that ICT production — so often associated with Asia, especially East Asia — does not equate to use. The danger, therefore, is that “there is a digital divide between Asian and non-Asian countries, and that the digital divide is growing”. This is clearly cause for concern. However, the upside of Asia’s strength in hardware production can be translated to general, economywide productivity gains if governments exploit their economies’ strength in ICT production and create favourable conditions to support ICT use — including, but not limited to, policies such as encouraging competition in ICT markets, realigning production towards the software and services industry, or what the authors call “production close to use”, and — perhaps most significantly — promoting ICT use over production. This final theme is the central thesis of Wong and Singh’s contribution. The chapter draws a conceptual framework of the role of ICT in an economy and categorizes them into four main blocks: first, the ICT goods sectors; second, the information contents sectors; third, the communications network sectors; and fourth, the informatization sector.14 It then draws from data from the ASEAN-5 (Singapore, Indonesia, Malaysia, the Philippines, and Thailand) and selected Asian countries to argue that although the ASEAN-5 countries have “made

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tremendous strides in leveraging the ICT revolution for economic development”, this has primarily been attained through the first block of ICT goods production and less so in the others. In particular, with the exception of Singapore, the degree of diffusion and adoption of ICT in these countries remains low vis-à-vis the United States and selected European countries. With the emergence of increasing competition from low-cost labour from countries such as China, India, and Mexico, coupled with relatively low-priced skilled labour from countries such as Ireland and the Eastern European nations, ASEAN countries will need to embrace ICT and ensure that its adoption is widespread in their economies. Practical issues that need to be addressed include the need for a change in the traditional compartmentalization of policy-making institutions to ensure superior integration and co-ordination of policies affecting the four conceptual blocks, and the development of a national model for ensuring high levels of “e-readiness”. Such a model should possess common underlying elements present in the successful examples of Silicon Valley or Israel; including a system for national innovation that supports research and development (R&D) activity. Such innovations that arise from ICT human capital are supported by four main factors: the degree of ICT utilization, the level of ICT education, the amount of participation in innovative activity, and the existence of an entrepreneurial spirit and atmosphere. Rasiah argues that these are best captured by, respectively, the levels of PC and Internet penetration; the literacy level and the number of science graduates; the number of scientists, engineers, and technicians involved in R&D; and 15 the number of entrepreneurs and start-ups in an economy. His conclusion is that ASEAN economies show large variations in all these indicators, but other than Singapore, the other members have fallen behind in their development of ICT human capital. The solution to this conundrum, as suggested by Rasiah, is to strengthen ICT infrastructure in order to promote economic growth. This statement, however, invites two critiques. First, the author has failed to fully consider alternative development objectives in making such a bold assertion about ICT investment. Many ASEAN countries, especially the transition economies of Cambodia, Myanmar, Laos, and Vietnam

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(CMLV), are in a much earlier stage in their development, where ICT simply cannot feature amongst development priorities. Second, and more problematic, econometric issues render any statement declaring causality between infrastructure and growth as largely tenuous. Although this has been conceded in the chapter, the policy recommendation has been made nonetheless. Still, this does not detract from the importance of ICT infrastructure in economic development. This must, however, be pursued under the rubric of a wider development policy — one that gives due diligence to the unique situation in each country. The danger of excess investment in ICT in the quest for seeking to embrace the knowledge-based economy is very real, and this is more so when spending on ICT is engaged in as a showcase or a political tool as opposed to an economic investment. Political and social concerns such as these lead to the need for a systematic, careful study of how ICT might change the dynamics of politics and social interaction in the context of ASEAN. Although the volume concerns itself mainly with the economic questions that arise from ICT, political and social impacts are nonetheless of concern, and Soesastro’s chapter appropriately sheds some insight on these other disciplinary viewpoints. Rather than attempt to hash together the wideranging literature in the area, he limits its focus to several key areas: the digital divide, the impact of free dissemination of information on the political control, and empowerment and democratization brought about by ICT. This final point is particularly relevant in the context of ASEAN, where governments have traditionally held monopoly control over information and knowledge flows, and have emphasized Asian values and the attendant interventions in political, social, and cultural development. With the advent of the ICT revolution, and especially the Internet, such an approach towards state sovereignty may no longer be tenable, as ICT can concomitantly erode political authoritarianism whilst enhancing human security. This has been alluded to in the concluding note of Soesastro’s chapter, but the topic deserves greater analysis and study; and as such, represents a possible direction for future research. Another key area that has not been well covered by the chapter by Soesatro is that of e-government, although the respective country chapters

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briefly touch upon this topic. E-government, which calls for a redefinition of the mode of delivery of government services as well as feedback mechanisms for parliament-citizen interaction, is not a preserve of developed economies alone. This issue therefore commands careful study in the context of ASEAN, and such an endeavour can also be the basis for future research. The recent bursting of the technology bubble in the United States, coupled with the dramatic failures of a slew of dot-coms and the 16 continued non-profitability of others, have led to the reassessment of the entire ideology of e-business and e-commerce. Certain assumptions, 17 often paraded as wisdom, have been debunked. In studying e-commerce in Southeast Asia, therefore, there is a need to draw from these collective lessons in understanding the developments, challenges, and issues. Although the development of e-commerce in Asia remains in its nascent stages, estimates of business-to-consumers (B2C) e-commerce revenues in the Asia-Pacific place the figure at US$14 billion by the end of 2001 (Michael, Sutherland, and Lang 2001), with estimates of business-to-business (B2B) revenues even higher at US$996 billion by 2004 (GartnerGroup 2000). Clearly, these are numbers that cannot be ignored. Orbeta’s chapter, hence, outlines global developments and initiatives that are likely to spill over into ASEAN, as well as early regional and national efforts. It also discusses benefits and costs presented by ecommerce. Such gains include those that accrue to producers, consumers, and society, stemming mainly from reduced business costs, a superior purchasing experience, and improved interactivity in the economy. The challenges arise from infrastructural considerations and the need to adapt current social, cultural, and legal systems. Indeed, as Orbeta has highlighted in his chapter, one such problem involves the taxation of ecommerce activity: suppose a piece of music is composed by a German-citizen artist residing in the United States. The music is then produced and copyrighted in France. That particular music now sits on a server/seller in Japan. A copy … is subsequently purchased by a Filipino in Manila using his credit card, which he has sent to the server. After the credit card is verified, the music is now downloaded into the Filipino’s computer. The sale is then completed. Which jurisdiction has the right to collect sales taxes for this and other similar transactions?

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In light of the relatively less mature legal and regulatory systems present in most Asia-Pacific nations, this aspect of e-commerce policy needs to be urgently addressed by governments. To a limited extent, the ASEAN countries have begun to formulate such laws, as evidenced by the country studies in this volume. Still, e-commerce-related policy issues are far from easy to assess, as Tangkitvanich contends. His assessment is limited to five areas: telecommunications liberalization, taxation, trade negotiations under the General Agreement on Trade in Services (GATS), harmonization of e-commerce-related commercial laws, and intellectual property rights. Although the perspective of the chapter is written from that of Thailand, the conclusions drawn also apply more generally to most ASEAN nations that are in the midst of engaging e-commerce policy. The policy recommendations include the establishment of a competitive market for telecommunications, a need to broaden the tax base in order to compensate for the erosion of tax revenues due to e-commerce, a classification of e-commerce transactions 18 as Mode 1 services, a harmonization of commercial codes fashioned after the UNCITRAL E-Commerce Model Law (UNCITRAL 1998), and improved protection for intellectual property rights. In the final analysis, such e-commerce policy recommendations can be classified along a dual continuum of consumer and producer welfare. Hence, in the assessment of global e-commerce proposals, there are clearly those that would have a negative impact on both consumer and producer welfare (such as the extension of patentable subject matters to include business methods), as well as those that increase both consumer and producer welfare (such as telecommunications liberalization). In the absence of political and economic influences, Asian nations should pursue e-commerce policies that fall in the first quadrant, that of increased producer and consumer welfare. 2. ASEAN Approaches to ICT Development

At the national level, the countries in ASEAN, together with others in Asia, have forged ahead in ICT policy. Naturally, the stage of development differs between countries. The volume selects a representative case of four nations, which broadly signify four different levels of ICT development. These range from very developed, world-class, ICT

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standards (Singapore) to moderate levels of ICT development (Malaysia), to low levels (Thailand), and to virtually non-existent ICT development 19 (Vietnam). Toh examines the case of Singapore in light of its recent policy to position itself as a regional IT hub. Besides outlining the four-phased development of Singapore’s ICT infrastructure and policy which has led to achievements such as a Civil Service well-integrated with ICT (phase I: 1980–85), the establishment of electronic data interchange (EDI) networks for various trades (phase II: 1986–90), an advanced National Information Infrastructure (NII) (phase III: 1991–99), and the embracing of the Internet and e-commerce through various standards, laws, and regulatory regimes (phase IV: 2000 onwards). The analysis further extends the case to the role of Singapore as a hub for ASEAN. This aim will be attained by leveraging the e-ASEAN 20 Framework, the ASEAN Free Trade Area (AFTA), and the ASEAN Investment Area (AIA) to foster ICT application in the region. As Singapore already possesses an existing, highly developed ICT infrastructure, it can “play a catalytic role in the development of other hubs in the region … [and] cooperative competition will suggest that hubs resonating with one another will create far more network externalities than otherwise”. It is with this target in mind that regional issues — such as an ASEAN Information Infrastructure (AII), a regional e-commerce initiative, trade in weightless goods, and the digital divide — should be viewed. Although Malaysia lags behind in terms of its level of ICT development, the country has made decisive steps in order to accelerate the pace of information and knowledge production, distribution, and dissemination in the economy. The flagship project to realize this objective is the creation of the Multimedia Super Corridor (MSC) — a 15-by-50-kilometre strip that is to be an experimental test-bed for multimedia and content industries. Phase I of the MSC is expected to be completed between 1996 and 2003, and benchmarks include a worldleading framework of cyber laws, fifty world-class companies, and seven “flagship applications”.21 Phase II (2004–10) would include a “web” of corridors, coupled with 250 world-class companies, and four to five “intelligent cities”, whereas phase III (2011–20) would extend the project

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to all of Malaysia, include twelve intelligent cities, and house 500 worldclass companies. The MSC is managed by the Multimedia Development Corporation (MDC), which has come under criticism for being a political vehicle for Prime Minister Mahathir Mohamad or, worse, a misguided project that 22 is at conflict with the country’s other economic priorities. Although Tyndall does not undertake a full-blown impact assessment at this premature stage, he draws from corporate, info-structure, and macro indicators to gauge the progress and development of the MSC. His conclusion is that whilst “hard” infrastructure such as the establishment of a Multimedia University has been relatively more successful, “soft” factors that include ICT and R&D talent development and venture capital are still either lacking or underdeveloped. In fact, Tyndall goes so far as to assert that “the lack of knowledge workers … is a major concern, especially in the short- to medium-term”. Similarly, “sources and avenues for [venture capital] are visibly lacking in Malaysia”. These findings have been echoed by an independent report of the status of the MSC (Chen 23 2001). Evidently, the need for a more rigorous assessment at a later stage would be the starting point for future research in the area. ICT in Thailand faces greater challenges. As Montreevat argues in her chapter, the market for ICT infrastructure remains largely closed to competitive forces, with the Communications Authority of Thailand holding key stakes in all Internet service providers (ISPs), telecommunications provision still a government monopoly under the Telephone Organization of Thailand, and mobile phone providers similarly being subject to the need to obtain concession rights from these government bodies. E-commerce activity is light, reaching only an estimated US$15 billion by 2004 (Nation, 2001). Thailand has therefore worked on creating an “e-Thailand”, with the National Electronics and Computer Technology Centre (NECTEC) as its lead agency. The guidelines include a stress on e-society, egovernment, e-business, e-commerce facilities, and an information infrastructure. The main initiatives that have been undertaken thus far are SchoolNet Thailand, the Government Information Network (GINet), a Software Park, various e-commerce projects, and social projects utilizing

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ICT. In addition, NECTEC has also drafted six ICT-related laws, including an Electronics Transactions Act, a Data Protection Act, and a Computer Crime Act — all to be completed by 2001. Admittedly, Thailand is at an initial stage in terms of its ICT development, and as such, it is difficult to fully evaluate the returns expected to ICT investment. The challenge here is to learn from the experiences of more advanced ICT nations and, without the burden of existing legacy systems, to leapfrog the other nations by the implementation of advanced technologies and infrastructure. As Montreevat contends: [previous] empirical study … finds evidence that investment in digital infrastructure is responsible for a substantial fraction of the recent growth in consumer welfare and business revenue … Thailand could well learn from that lesson.

Doanh picks up on this theme in his contribution on the case of ICT development in Vietnam. Although there is a significant digital divide between the CLMV countries and the rest of ASEAN, if properly addressed, the possibility of leapfrogging should not be dismissed. In this respect, the constituents of the divide — namely, differences in economic structure, GDP per capita, human resource development, the number of ICT professionals, accessibility to ICT, organizational structure for R&D, institutional framework, ICT infrastructure, and socio-economic status — require attention. For the case of Vietnam in particular, significant steps have been made towards developing ICT. Policies have included a programme of ICT training in selected universities in 1994, an accelerated application of ICT in the government in 1996, and a government action plan for developing the software in 2000. Still, outstanding issues remain numerous. Doanh suggests that there is a need to reform educational policy to improve training in creativity and innovative capability, restructure the legal and regulatory framework to better engage ICT, increase the level of competition in the ICT industry, improve the existing ICT infrastructure, and further assimilate and disseminate ICT into the economy. Specifically, a masterplan for ICT development in Vietnam is urgently needed. One can easily imagine that these policy prescriptions

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are just as applicable in any of the other CMLV countries. At this juncture it is perhaps appropriate to engage in a brief digression on the e-ASEAN project, as its ultimate aim of establishing an AII is relevant for all ASEAN nations, and for the future regional development of ICT in general. The e-ASEAN Task Force was founded in November 1999 to develop a broad and comprehensive action plan for an ASEAN e-space and to develop competencies within ASEAN to compete in the global information economy. It was asked to examine the economic, legal, logistical, physical, and social infrastructure needed to ensure ASEAN’s competitiveness into the twenty-first century. The Task Force noted severe obstacles to effective e-commerce in ASEAN. In order to achieve a seamless environment for e-commerce, policies would have to focus on not just the physical infrastructure, but also the legal framework and human resources in each country. The points in the agreement include the creation of a legal and regulatory Figure 1.1 Conceptual Pillars of E-ASEAN

Source: Working Group on ASEAN Information Infrastructure (1999).

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environment favourable to the uptake of ICT by the private sector. A time schedule was drawn up for achieving region-wide targets; these include establishing a standard for certifying digital signatures by 2001, creating a secure payments system by 2002, writing an e-commerce code by 2003, introducing cyber laws by 2004, and the formation of a region24 wide broadband telecommunications backbone — the AII — by 2005. (Working Group on AII 1999). The conceptual pillars of e-ASEAN are summarized in Figure 1.1. 3. Regional Approaches to ICT Development

The other two countries examined in this volume have extremely different backgrounds. Taiwan has a strong ICT goods industry that comprises small and medium enterprises. Its government has been relatively involved in the development of ICT, and, more recently, the economy has 25 complemented its capability in hardware innovation with upstream value-added activities, such as the production of weightless knowledge goods and services. India — and for the purposes of this volume, Bangalore — is an innovational hotbed for software development that has little or no hardware production capacity to speak of. The disparities in the approaches and comparative advantages of these cases make their inquiries especially interesting. The study of Bangalore is often of deep interest to researchers due to its ability to have emerged as a internationally competitive, hightechnology cluster in the midst of a country that is not generally regarded as being very advanced in its ICT development. Venkatesan and Malvea pose the question, “Why Bengalore?” before proceeding to draw from various schools of thought to explain the emergence of the software cluster in Bangalore. Essentially, these explanations are: first, extensions of neo-classical trade theories based on factor intensities; second, an extension of the Porter (1990) competitiveness diamond model to the software industry; third, international comparisons with other successful clusters; and fourth, an urban economics-based approach that is premised on microeconomic, macroeconomic, and multi-disciplinary theories. These factors add to Bangalore’s international competitiveness as a software hub although, as they state, “no single theory explains the

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phenomenon, [but] various approaches yield insights that are crucial 26 towards increasing our understanding of the process”. The role of government in Bangalore has primarily been in the provision of a superior infrastructure. The state government in Karnataka has provided industrial parks for ICT goods, export-oriented industries, and software technology, physical infrastructure such as transport and a fibre-optic ICT network, and non-physical infrastructure including intellectual property laws and an environment that encourages innovation, inter alia. These, together with the continued availability of human resource and human capital training, should sustain Bangalore’s competitiveness into the future. Chen and Liu broaden their study to include not only ICT, but that of the knowledge-based economy in general, arguing that “information technology and networks, which are central to knowledge creation, distribution and utilization, will become necessary conditions for industrial development in the knowledge-based economic era”. This overlap between the contribution of ICT to the knowledge economy and vice versa is evident throughout the chapter. For example, in Taiwan’s information industry, its involvement in the global production networks for ICT manufactures are now complemented by global logistics, where logistical operations are also outsourced. Similarly, OEM, once the mainstay of Taiwanese ICT operations, is increasingly being supplemented with both upstream and downstream knowledge activities, such as R&D and distribution. Another theme that emerges from the study of the case of Taiwan is its strong network linkages with the United States. A detailed sector-level study of the integrated circuit (IC) industry in Taiwan highlights this trend. The authors find that there is an “interesting pattern emerging in the international division of labour between the United States and Taiwan”. This is evidenced by comparing statistics for R&D intensity and capital expenditure for the four largest 27 IC industry players, together with data for the geographical breakdown of Taiwan’s IC foundry service clients, and the literature on the intensive interface between ICT specialists in both countries. However, Taiwan’s software and applications industry is still underdeveloped — a phenomenon that Chen and Liu hypothesize could be the cause of the

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inferior productivity of the service sector vis-à-vis the non-service sector in terms of productivity. Although the regression run in the study suffers from minor data problems and an odd specification for the production 28 function, the crux of Chen and Liu’s argument — that Taiwan needs to look beyond industrialization and into increasing the level of valueadded activity in order to reap productivity gains — remains valid. 4. Conclusion

This brings the volume a full circle, back to the argument first set forth by Kraemer and Dedrick, and echoed by the other authors — that a organized, well-developed ICT policy can be a source of productivity and hence economic growth. This central thesis has been reiterated not only in the general chapters that form the first part of this volume, but also in the specific country studies, where it is evident that due to the public good nature of innovation in general and ICT in particular, there is some merit in policy that promotes its production, application, and diffusion in the economy. The focus of the volume on the countries of Asia has been deliberate, and for good reason. The economies of the Asia-Pacific have generally been regarded to be at the forefront of the ICT revolution, but as the chapters make amply clear, production of ICT goods cannot be equated to its diffusion, and the sustainability of economic growth further requires a shift from ICT goods to service and content provision. The countries in the region have adopted different strategies, and enquiries into these differing experiences can be a valuable resource for others seeking to embrace the ICT revolution. Evidently, the study of the challenges as well as opportunities posed by the new ICT remains unfinished. In a sense, it can never be, since general-purpose technologies by definition will impact on all sectors of economy and society, making any comprehensive analysis of its influence superfluous. That is not, however, something to rue; indeed, it is precisely when ICT has become an integral and essential part of life that it has fulfilled its true potential not just in economic terms, but also in a political, social, and cultural context.

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NOTES 1. Or, alternatively (and more narrowly), Information Technology (IT). In the late 1990s, traditional tools of IT (such as computers) began to rapidly converge with communication technologies, leading to the introduction of the new terminology and yielding products that combined the two (such as mobile telephones with basic computing functions or personal digital assistants with communication capabilities). Throughout this volume, the terms ICT and IT shall be used interchangeably. 2. General-purpose technologies (GPT) are dramatic technological innovations that have a widespread impact on a large range of economic activity as well as generate innovational complementarities. Examples of GPTs include the dynamo and the steam engine. 3. The standard reference for neo-classical growth theory is Solow (1956), whereas the contributions of Aghion and Howitt (1992), Grossman and Helpman (1991), and Romer (1986, 1990) exemplify the latter. Beyond these essentially supply-side explanations, Quah (2001a) convincingly argues for a demand-side approach to the role of technology in development. 4. The sociological literature on the diffusion of innovations (Rogers 1995; Utterback 1996) can be regarded as the theoretical antecedent to the formal modelling by economists, of which the volume edited by Helpman (1998) is the seminal work in the field. 5. The productivity paradox was first coined by Solow, who stated in a 1987 New York Times book review that “we see the computer age everywhere but in the productivity statistics”. The paradox was not limited to the United States, with similar situations being found in both industrialized as well as the developing nations. The chapter by Kraemer and Dedrick in this volume briefly surveys the literature on the productivity paradox. Triplett (1998) summarizes the various explanations that have been proposed to resolve the phenomenon. 6. Network externalities are based on the concept that high-technology products increase in value as their adoption becomes more widespread. 7. In these areas, academic publications have mixed freely with pop-culture books. The more authoritative academic sources include the collection edited by McKnight and Bailey (1996) on Internet economics and the survey on network economics by Economides (1996). The books by Choi, Whinston, and Stahl (1997) and Shapiro and Varian (1998) are standard references for the economics of e-commerce and the network economy. 8. This includes both the physical, such as national telecommunications networks, as well as the non-physical, such as a legal and regulatory framework that supports electronic transactions. 9. As in the recent furore involving Microsoft over the likelihood of path dependence

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leading to monopoly emergence. The volume by Evans, Fisher, Rubinfield, and Schmalensee (2000) summarizes the two opposing views in the Microsoft case. 10. Including, but not limited to, online auctions (and its variants) and electronic exchanges. 11. Significant studies in this vein have included Davis (1999), Hill and Hughes (1998), and Tsagarouisanou, Tambini, and Bryan (1998). The online forum Democracy Online — Asia (http://groups.yahoo.com/group/do-asia/) is another excellent resource for exploratory studies into the effect of the Internet on trends in governance, civil society, and the media. 12. See NAIS Final Report (2001) and Yergeau and Dürst (1999) for academic studies on international relations regarding ICANN and W3C, respectively. 13. The treatises by Castells (1996, 1997, 1998) are possibly the authority in the field. On the topic of the digital divide, see also NTIA (2000). 14. Examples of each are computers, music, network cables, and Internet service providers. Wong and Singh elaborate on these in their chapter. 15. Due to data problems, however, Rasiah did not capture this final aspect in his chapter. 16. Celebrated dot-coms that have folded include eToys, Pets.com, and Webvan. Amazon.com continues to struggle to attain profitability, and even in the financial sector — where the lower transactions costs associated with Internet trading were expected to make a big splash — E*Trade and its contemporaries have only enjoyed limited success (Currie 2000). The general disillusionment is summed up in Streitfeld (2001). Webmergers (http://www.webmergers.com) tracks merger and acquisition activity of e-commerce firms. 17. These fallacies include the belief that first-comer advantage would ensure market share, the elimination of the role of the middleman, and the need to completely reengineer firms to position them for the Internet age. 18. The concern here is the appropriate classification nomenclature for online service provision under the GATS. Tangkitnovich argues that developing countries such as Asian nations benefit most with progressive liberalization, and hence proposes that online services be classified as Mode 1, or cross-border supply, type services. 19. The Information Society Index (ISI) ranks fifty-five countries according to their position in taking advantage of the information revolution. Singapore is ranked 9th (under a category known as “skaters”), Malaysia 32nd (“sprinters”), Thailand 47th (“strollers”), and Vietnam and the other CMLV countries do not feature in the list (IDC and World Times 2001). The chapter by Wong and Singh lists the rankings and scores of selected Asian nations. 20. The e-ASEAN Framework is a comprehensive action plan to create an ASEAN espace that would develop competencies and enable the region to compete in the

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global information economy. e-ASEAN is elaborated upon in detail in Toh’s chapter, and briefly at the end of this section. 21. Flagship applications are areas of multimedia application that have been earmarked for priority development. For phase I of the MSC, these are electronic government, multi-purpose cards, smart schools, telemedicine, R&D clusters, world-wide manufacturing webs, and borderless marketing. 22. In particular, the imposition of capital controls and the fixed peg of the Malaysian ringgit to the U.S. dollar have severely affected foreign investment flows into the country, and this has been exacerbated by the regional financial crisis that has led to an economic downturn in Malaysia. 23. The confidential study was performed by the international consultancy firm McKinsey & Co. Other suggestions made in the McKinsey report include the need to be directly aware of high-value contracts to high-priority global technology companies, to provide special incentives to big local companies to entice them to work with technology companies within the corridor, and to build a stronger talent pool by bringing in top universities. 24. The AII is to build on the information infrastructure plans of member countries, such as Indonesia’s Nusantara 21, Malaysia’s Multimedia Super Corridor, and Singapore’s NII, in order to increase efficiency in information and technology transfer across ASEAN nations. 25. The national innovation system in Taiwan, and that of most of the Asian Tiger economies, has followed a “reverse value chain” strategy that moves from original equipment manufacturing (OEM), to original design manufacturing (ODM), followed by original idea manufacturing (OIM), and then own brand manufacturing (OBM). This development strategy is characteristic of latecomer economies seeking technological catch-up. This is elaborated in Wong (1999). 26. A somewhat glaring omission would be recent research on the New Economic Geography, which is well-summarized in the book by Fujita, Krugman, and Venables (1999). Quah (2000, 2001b, 2001c) has actively applied the tools of the literature to explain ICT cluster emergence. 27. Namely, the United States, Japan, South Korea, and Taiwan. 28. Specifically, the data used in Chen and Liu’s chapter dates up to only 1996, and the production function used is fairly uncommon although, admittedly, drawn from another source. REFERENCES Aghion, P. and P. Howitt. “A Model of Growth Through Creative Destruction”. Econometrica 60 (1992): 323–51.

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Castells, M. “The Rise of the Network Society”. In The Information Age: Economy, Society, and Culture. Vol. I. Oxford: Blackwell, 1996. . “The Power of Identity”. In The Information Age: Economy, Society, and Culture. Vol. II. Oxford: Blackwell, 1997. . “End of Millennium”. In The Information Age: Economy, Society, and Culture. Vol. III. Oxford: Blackwell, 1998. Chen M.Y. “Glitches Zap Malaysian Tech Corridor”. Asian Wall Street Journal, 26 March 2001. Choi S.Y., A.B. Whinston, and D. Stahl. The Economics of E lectronic Commerce. Indianapolis, IN: Macmillan Technical, 1997. Currie, A. “The X-Men of e-Finance”. Euromoney, September 2000, pp. 62–67. Davis, R. The Web of Politics. New York, NY: Oxford University Press, 1999. Economides, N. “The Economics of Networks”. International Journal of Industrial Organization 14, no. 6 (1996): 673–700. Evans, D.S., F.M. Fisher, D.L. Rubinfield, and R.L. Schmalensee. Did Microsoft Harm Consumers? Two Opposing Views. Washington, DC: AEI-Brookings Joint Centre for Regulatory Studies, 2000. Fujita, M., P. Krugman, and A.J. Venables. The Spatial Economy: Cities, Regions and International Trade. Cambridge, MA: MIT Press, 1999. GartnerGroup. “GartnerGroup Forecasts Asia/Pacific Business-to-Business E-Commerce to Reach $1 Trillion in 2004”. GartnerGroup Press Release, 17 February 2000. Grossman, G.M. and E. Helpman. Innovation and Growth in the Global Economy. Cambridge, MA: MIT Press, 1991. Helpman, E. General Purpose Technologies and Economic Growth. Cambridge, MA: MIT Press, 1998. Hill, K.A. and J.E. Hughes. Cyberpolitics: Citizen Activism in the A ge of the I nternet. Lanham, MD: Rowman and Littlefield, 1998. International Data Corporation (IDC) and World Times. 2001 IDC/World Times Information Society Index (http://www.worldpaper.com/2001/jan01/ISI/2001_Information Society Ranking.html). McKnight, L.W. and J.P. Bailey, eds. “Special Issue on Internet Economics”. Journal of Electronic Publishing 2, no. 1 (1996). Michael, D.C., G. Sutherland, and N.S. Lang. Digital Dragons — How Asia Pacific’s Large Companies Can Generate Real Revenue from Consumer E-B usiness. Kuala Lumpur: Boston Consulting Group, 2001. National Telecommunications and Information Administration (NTIA). Falling Through the Net: Towards Digital Inclusion. Washington, DC: U.S. Department of Commerce, 2000.

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NAIS Final Report. NGO and Academic ICANN Study. Stockholm: NAIS, 2001. Porter, M. The Competitive Advantage of Nations. New York, NY: Free Press, 1990. Quah, D. “Internet Cluster Emergence”. European Economic Review 44, no. 4–6 (2000): 1032–44. . “The Weightless Economy in Economic Development”. In Information Technology, Productivity, and Economic Growth: International Evidence and Implications for Economic Development, edited by M. Pohjola. Cambridge: Oxford University Press, 2001a. . “ICT Clusters in Development: Theory and Evidence”. European Investment Bank Papers 6, no. 1 (2001b): 85–100. . “Demand-Driven Knowledge Clusters in a Weightless Economy”. Proceedings of the Knowledge as an Economic Good Conference, Palermo, Sicily, April 2001c. Rogers, E.M. Diffusion of Innovations. 4th edition. New York, NY: Free Press, 1995. Romer, P.M. “Increasing Returns and Long-Run Growth”. Journal of Political Economy 94 (1986): 163–202. . “Endogenous Technical Change”. Journal of Political Economy 98 (1990): S71–102. Shapiro, C. and H.R. Varian. Information Rules: A Strategic Guide to the Network Economy. Boston, MA: Harvard Business School Press, 1998. Solow, R. “A Contribution to the Theory of Economic Growth”. Quarterly Journal of Economics 70 (1956): 65–94. . “We’d Better Watch Out”. New York Times Book Review, 12 July 1987, p. 36. Streitfeld, D. “Amazon.com: Was It Only a Mirage”. International Herald Tribune, 23 July 2001. “Thai B2B to Reach $15bn by 2004 — Gartner”. Nation, 27 December 2000. Triplett, J.E. “The Solow Productivity Paradox: What Do Computers Do to Productivity?” Mimeographed. Washington, DC: Brookings Institution, 1998. Tsagarouisanou, R., D. Tambini, and C. Bryan. Cyberdemocracy. London: Routledge, 1998. United Nations Commission on International Trade Law. UNCITRAL E-Commerce Model Law. New York, NY: UNCITRAL, 1998. Utterback, J.M. Mastering the Dynamics of Innovation. Boston, MA: Harvard Business School Press, 1996. Wong P.K. “National Innovation Systems for Rapid Technological Catch-up: An Analytical Framework and a Comparative Analysis of Korea, Taiwan and Singa-

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pore”. Proceedings of the DRUID Summer Conference on National Innovation Systems, Industrial Dynamics and Innovation Policy, 9–12 June 1999. Working Group on ASEAN Information Infrastructure. Report on the Feasibility Study of the AII. Makati City, Philippines: e-ASEAN Task Force Secretariat, 1999. Yergeau, F. and M. Dürst. “Weaving the Multilingual Web”. Proceedings of the 15th International Unicode Conference, 31 August 1999.

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Reproduced from Information Technology in Asia: New Development Paradigms edited by Chia Siow Y ue and Jamus Jerome Lim (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available from < http://www.iseas.edu.sg/pub.html > 22 Kenneth L. Kraemer and Jason Dedrick

The widespread diffusion of the personal computer and the explosive growth of the Internet have moved information technology (IT)1 into the mainstream of U.S. culture. People trade e-mail addresses, share favourite websites, and debate the merits of Internet stocks as casually as they might have argued over sports or automobiles in the past. Businesses look to IT to solve all manner of organizational problems and gain an edge over their competitors. And economists as respected as Alan Greenspan credit IT for helping sustain the non-inflationary growth of the U.S. economy, referring to it as the “new economy”. There are dissenters, of course, who claim that IT accounts for too small a share of U.S. capital stock to explain the economy’s strong performance, but their scepticism is largely ignored. Outside the United States, however, countries and companies are looking at the issue of IT and economic performance with great concern.

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Countries in Europe, Latin America, and especially Asia fear being left behind in an IT-driven global economy, which is increasingly being characterized, by a digital divide. Yet, they remember that the U.S. economy has invested heavily in IT for decades and still suffered anaemic productivity growth. In fact, the “productivity paradox” was coined to describe the paradox of high IT investment and low productivity growth in the United States. Non-U.S. companies likewise face the challenge of competing globally with U.S. companies that have restructured their operations around internal IT systems and are now using the Internet to build external networks that tie their entire supply chain together. In order to develop strategies to respond to the challenges and opportunities of the early twenty-first century, both companies and countries need a good understanding of the impact of IT on economic growth, on corporate performance, and on the process of globalization. This is particularly true for the Asian region, which enters the new millennium in the wake of an unexpected economic crisis that has raised crucial questions about what countries and companies must do to return to growth and profitability. Three such questions are whether IT can play a role in that process, whether there is a growing digital divide between the Asian economies and others, and what policies and strategies are likely to achieve growth and bridge the digital divide. 1. Information Technology and Economic Growth

There is a consensus among economists that technology innovation and diffusion plays a critical role in stimulating economic growth and productivity. There are also good reasons to expect that investments in IT in particular will promote economic growth. Innovations from the IT industry are captured in easily replicated sets of instructions such as semiconductors and software code that can be used by millions of people at a low marginal cost. They also display a characteristic known as network externalities. For instance, one fax machine is useless, two fax machines have some value, but when millions of people have fax machines, the value of belonging to this network of users is amplified. Similarly, the widespread adoption of a particular set of technology standards, such as Internet protocols, should increase the payoffs from belonging to what is now a global network of users.

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Indeed, the term “new economy” has been coined to mark the association of non-inflationary, sustained economic growth with high investment in IT and a restructuring of the economy due to the use of IT-led innovations such as enterprise systems, supply chain management, customer relationship management, the Internet, and e-commerce. “New economy” reflects the notion that the economy somehow works differently today than yesterday. A recent study by the Organization for Economic Co-operation and Development (OECD 2000) identified three characteristics that mark the new economy: • •

•

higher multi-factor productivity growth due to more efficient business practices linked to the use of IT; economic expansion for a longer period without inflationary pressures emerging because IT puts downward pressure on inflation, while increased global competition keeps wage inflation in check; increasing returns to scale, network effects, and externalities from the use of IT in parts of the economy, which contributes to higher multi-factor productivity growth and fuels further economic growth in a virtuous circle.

The U.S. Department of Commerce’s Digital Economy 2000 report (2000) describes the new economy as follows: The new economy is being shaped not only by the development and diffusion of computer hardware and software, but also by much cheaper and rapidly increasing electronic connectivity. The Internet in particular is helping to level the playing field among large and small firms in business-to-business ecommerce: making it easier and cheaper for all businesses to transact business and exchange information. (P. v) In conclusion, a growing body of evidence suggests that the U.S. economy has crossed into a new period of higher, sustainable economic growth and higher, sustainable productivity gains. These conditions are driven in part by a powerful combination of rapid technological innovation, sharply falling IT prices, and booming investment in IT goods and services across virtually all American industries. (P. viii)

1.1. The Productivity Paradox of IT

Not everyone is sanguine about the new economy or about the productivity impacts of IT. Sceptics have wielded data showing that

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productivity gains from IT in the aggregate economy have been limited, despite the rapid improvement in the price-performance ratio of computers and heavy investment in IT. This argument was based in part on the fact that despite the fact that the United States invested heavily in IT during the 1970s and 1980s, productivity growth slowed during that period as compared with the earlier post-War years (Figure 2.1). 2 Economists such as Robert Solow (1987) and industry analysts such as Steven Roach (1987) have juxtaposed this slowdown in productivity growth against the dramatic increases in IT spending over the same period and argued that IT investment has not resulted in the expected productivity improvements. 1.2. Firm- and Industry-Level Studies

Studies of corporations as well as government agencies (for example, Brynjolfsson and Hitt 1996; Lehr and Lichtenberg 1997) have shown a high return on IT investment, with gross rates of return ranging from 50 per cent to over 100 per cent (when adjusted for the rapid depreciation of computer hardware, the net returns are more modest). It is believed that the returns are higher when the introduction of IT is associated with complementary organizational changes (Brynjolfsson and Hitt 1996). Recent studies indicate that the contribution is growing in all ITusing sectors in the United States (Oliner and Sichel 2000; Council of Economic Advisors 2000). The evidence of sector gains for other OECD countries is more limited, and is believed to be due to a slower rate of adoption of IT, a lower level of investment in IT, and less-advanced statistical records, which fail to discern impacts that might be present. Still, the fact that a certain set of companies (and the studies above focus mainly on large U.S. companies) or industry sectors show high returns to investment in IT does not mean that these gains are translated into productivity improvement at the national level. It might be that the impacts are mostly redistributional with the gains of some firms or industries coming at the expense of others as restructuring occurs in the national economy. However, in a global economy, nations could benefit from IT investment just by making their firms more competitive against foreign

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Figure 2.1 The Productivity Paradox of IT: Annual Change in Computing Investment and Productivity for the United States, 1965–94 25 U.S. OCAM investment per worker

Percentage annual change

20 15 10

U.S. output per worker

5 0 –5

–10 1965

1970

1975

1980

1985

1990

1995

Source: Dewan and Kraemer (1998, p. 57). OCAM is the Bureau of Economic Analysis’ (BEA) “Office, Computing & Accounting Machinery”.

firms. This would suggest a global zero-sum game, but with the potential for redistribution among nations. This prospect has serious implications for national policy because it means that countries can benefit by increasing their investments in IT, while countries that fail to do so will only fall further behind economically. So it is important to conduct country-level studies. If the results are consistent with the firm-level findings, this would then boost confidence that IT really does pay off in improved productivity. 1.3. Country-Level Studies

In order to draw meaningful conclusions about the impact of IT investment at the country level, it is necessary to look at multiple countries over time. We conducted the first analysis of IT investment across countries, using data from 1984 to 1990 for twelve Asia-Pacific countries (Kraemer and Dedrick 1994). We found a significant relationship between growth rates in IT investment and productivity growth at the

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national level. However, the small sample made it impossible to control for other factors such as overall investment rates and initial level of development. The study did identify several factors that appear to drive IT investment. These include wealth (gross domestic product, or GDP, per capita), education levels, structure of the economy (share of employment in the service sector), and level of information infrastructure (telephone lines per 100 persons). More recent multi-country studies by Dewan and Kraemer (1998, 2000) show that the returns on IT investment are positive for developed (industrialized) countries, but not significant for developing economies. The growth in IT capital stocks accounts for over 53 per cent of the average annual GDP growth and labour productivity growth (GDP per labour hour) in developed countries. Based on the economic and productivity growth over the 1985–93 period in these countries, IT contributed about 1.2 per cent of annual economic growth and annual labour productivity growth. Moreover, the contribution of IT is increasing over time in the developed countries (Dewan and Kraemer 2000), suggesting that this impact might be due to the cumulative stock 3 of IT over time. Recent single-country studies of the U.S. (Oliner and Sichel 2000; Jorgenson and Stiroh 2000) and OECD countries (Schreyer 2000) confirm these results. A possible explanation for the substantial payoffs in developed countries is that new IT investments can take advantage of previous complementary investments in infrastructure, human capital, and information-oriented business processes to amplify the payoffs from IT. Accordingly, one explanation for the lack of significant returns on investments in poorer developing countries is the relative scarcity of infrastructure and other enabling investments. It might also be simply that IT investment levels are too small to have a measurable impact on GDP.4 1.4. New Cross-Country Research 5

In a more recent paper, we studied growth rates in IT investment and labour productivity for forty-three countries from 1985 to 1995 (Kraemer and Dedrick 2001). We used a growth theory approach that let us include more countries and years than the earlier studies. With this sample, we

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were able to control for growth in non-IT investment (that is, all other capital investments), along with other factors such as initial wealth (measured in GDP per capita) and labour force growth rates. The results of the analysis show the following: •

•

•

Growth (compound annual growth rate, CAGR) in IT investment per worker is significantly correlated with labour productivity growth, even when controlling for the other factors (Figure 2.2). Growth (CAGR) in non-IT investment per worker is likewise correlated with productivity growth, and the relationship is stronger than for IT spending. Initial GDP per capita and labour force growth were unrelated to productivity growth.

These findings are not surprising, since IT investment accounts for a small share of total investment in most countries (ranging from 2 to 20 per cent). While the role of IT in driving productivity might be greater in developed countries, as the study shows, the impacts of non-IT are 6 much greater for the complete set of countries. 2. IT and Productivity and the Digital Divide in Asian Countries

We have done new analyses that look specifically at the differences between Asian and non-Asian countries in terms of their use of IT and the related productivity gains. We also look at the differences in Internet readiness and e-commerce readiness as measures of the digital divide. 2.1. IT and Productivity

Surprisingly, we find dramatic differences in the two groups of countries on IT and productivity. When we measure the relationships between GDP per worker and IT and non-IT investment, we find that for nonAsian countries there is a positive payoff from investments in both IT and non-IT capital. But for Asian countries, the only positive correlation is found with non-IT investment. IT investment comes out with a 7 negative correlation (Figures 2.3 and 2.4). In this analysis, each country together with the year (for example, Japan 1985, Japan 1986) is used as a data point, so that there are over

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Figure 2.2 Growth in IT Spending and Productivity (partial regression) .08

China

.06

GDP per worker: CAGR 85-95

.04 Singapore Thailand Indonesia Korea Ireland Malaysia United States Bulgaria Finland United Kingdom Norway Canada Australia Poland Hong Kong Italy Egypt Chile Sweden Denmark France

.02

0.00

India

Venezuela

Japan ColombiaHungary New Zealand Netherlands Spain Israel Austria Turkey GreeceBelgium Portugal Switzerland Slovak Republic Mexico Czech Republic Philippines South Africa

-.02

Brazil

-.04 -.1

0.0

.1

.2

IT investment per worker: CAGR 85-95

400 data points in the sample, providing strong support for the results. It is important to note that the trend lines in Figure 2.3 are positive for both Asian and non-Asian countries when we look at non-IT investments. However, in Figure 2.4 the trend line is positive for nonAsian countries but negative for Asian countries when we look at IT investments. The negative slope is not as important as the fact that there is no positive correlation between IT spending and productivity in Asian countries. This is not explained simply by a higher prevalence of developing countries in the Asian sample. In proportionate terms, the two samples are roughly equivalent as the Asian sample included six developed and five developing countries compared with twenty developed and fifteen developing countries for the non-Asian sample. It is most likely that the explanation lies elsewhere, as will be indicated later.

© 2002 Institute of Southeast Asian Studies, Singapore

Figure 2.3 Payoffs from Non-IT Investments, in Asian and Non-Asian Countries 30(partial regression, scales show variance above KennethorL.below Kraemer and Jason Dedrick predicted values) 20000

GDP/worker

10000

0

-10000

-20000

-30000 Non-Asian countries -40000

Asian countries

-20000

-10000

0

10000

Non-IT investment/worker Figure 2.4 Payoffs from IT Investments, in Asian and Non-Asian Countries (partial regression) 40000

GDP/worker

30000

20000

10000

0 Non-Asian countries Asian countries

-10000 -400

0 -200

400 200

800 600

1200 1000

IT investment/worker © 2002 Institute of Southeast Asian Studies, Singapore

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2.2. The Digital Divide

We also found dramatic differences in the two groups of countries on Internet readiness and e-commerce readiness. Taken together, they represent the extent to which a country is able to take advantage of the increasing returns and network effects of the new economy. “Internet readiness” is based on measures of connectivity (telephones per 1,000 persons, Internet hosts per 10,000 persons), access to the Internet (personal computers, or PCs, per 100 persons) and Internet use (Internet users per 1,000 persons). Table 2.1, columns 1 to 4, shows that the nonAsian economies are higher than the Asian economies on all measures of Internet readiness, and twice as high, or higher, on all measures except teledensity. Again, the Asian and non-Asian samples are well matched, even with the addition of Brunei and Vietnam in Table 2.1. As might be expected, there is also a digital gap within the Asian economies, and the gap is extremely large. Countries that are uniformly high on Internet readiness include Japan, Hong Kong, Singapore, South Korea, and Taiwan. Those that are uniformly low include China, Indonesia, Thailand, India, Vietnam, and the Philippines. Interestingly, Malaysia and Brunei are between the two groups on all measures. We also measure “e-commerce readiness” in the countries using the density of secure servers (secure servers per million population) in Asian and non-Asian countries (Table 2.1). While Internet readiness provides a measure of the extent to which a country provides an environment supportive of Internet applications such as e-commerce, the density of secure servers indicates the actual readiness of a countr y to engage in ecommerce. Secure servers are those configured to handle transactions such as payment by credit card and are critical to e-commerce operational transactions. As shown in the second last column of Table 2.1, there is also a large gap here between Asian and non-Asian countries. Excluding the United States, there are more than twice as many secure servers in the thirty-five non-Asian countries as in the eleven Asian countries in the analysis. Including the United States, there are more than eight times as many. Perhaps most significant of all, when we compare Internet and ecommerce readiness between 1995 and 1999, as shown in Figure 2.5, we find that the gap between Asian and non-Asian countries is growing.

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253.3 385.9

Asian average Non-Asian average excluding USA* 79.72 247.42

133.64 356.67 259.84 142.75 60.47 39.98 30.21 0.84 1.97 7.25 0.78 3.00 0.00 117.45 197.36

271.88 310.59 343.27 178.46 149.72 n.a. 78.21 7.01 10.61 33.14 3.78 16.26 6.45 36.07 82.20

77.44 98.74 140.04 75.31 24.30 31.75 12.42 1.27 0.52 4.08 0.48 2.41 .13 3.53 8.63

3.39 10.32 21.18 1.85 .82 n.a. 1.08 .01 .05 .10 .01 .04 n.a.

Secure servers per 1,000,000 persons

Internet users per 1,000 persons

Internet hosts per 10,000 persons PCs per 1,000 persons

E-commerce readiness

Internet readiness

1.22 2.17

2.28 1.23 2.84 1.16 1.49 n.a. 1.70 .96 .26 .61 .53 .79 .78

IT investment as a % of GDP

Sources: ITU, Yearbook of Statistics 2000 (Teledensity); AEA, Cybernation 2.0 (PCs, Internet users); ITU, Internet for Development 1999 (Internet hosts); http://www.netcraft.com (secure servers); International Data Corporation (IDC) (IT investment); World Bank, World Development Indicators 2000 (GDP).

* Non-Asian countries include Canada, United Kingdom, Australia, Spain, France, Brazil, Italy, Switzerland, Sweden, Netherlands, South Africa, Austria, Israel, New Zealand, Finland, Ireland, Norway, Belgium, Denmark, Russian Federation, Mexico, Portugal, Poland, Chile, Czech Republic, Hungary, Slovak Republic, Greece, Venezuela, Turkey, Columbia, Romania, Bulgaria, Egypt, Saudi Arabia.

502.6 557.7 562.0 524.4 432.7 246.8 201.6 69.6 27.0 83.5 22.0 37.0 25.8

Japan Hong Kong Singapore Taiwan South Korea Brunei Malaysia China Indonesia Thailand India Philippines Vietnam

Country

Teledensity (telephone lines per 1,000 persons)

Table 2.1 Internet and E-Commerce Readiness, in Asian and Non-Asian Countries, 1998 32

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In other words, the Asian economies as a whole appear to be falling further behind rather than closing the gap with non-Asian economies. Of course, there are again very interesting and important differences within the Asian economies themselves. These differences are appropriately the subject of another analysis. The current analysis has been aimed at identifying digital disparities between the region and outside and identifying only major digital disparities within the region. 3. Interpretation of Findings

These findings suggest that, on average, Asian countries and companies are not using IT effectively to improve productivity or develop their economies, that there is a digital divide between Asian and non-Asian countries, and that the digital divide is growing. How then do we interpret these findings? Since IT does have strong Figure 2.5 Gap in Internet Readiness between Asian and Non-Asian Countries

Difference between Asian and non-Asian countries

200 Gap: computers in use per 1,000 persons Gap: Internet users per 1,000 persons Gap: main lines per 1,000 persons Gap: Internet hosts per 10,000 persons

180 160 140 120 100 80 60 40 20 0 1993

1994

1995

1996

1997

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2000

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positive payoffs for non-Asian countries, and since the same technologies are available around the world, the problem is not that IT is inherently unproductive, or that Asian countries do not have access to the best technology. Although there might be other factors at work, our research in Asia (Dedrick and Kraemer 1998) suggests the following as key factors: •

•

•

Cost of computing: We do not have comparable cross-country data on the cost of hardware, software, or services, but we know that during much of the period in question (1985–95), prices varied considerably across countries. Japan, for instance, had PC prices at least twice the U.S. level, until Compaq started a price war in 1992, which was later escalated by Fujitsu. The same was true of Korea, where local PC makers were protected first by an import ban and then by control of distribution channels. If IT prices were higher on average for Asia, then investments in IT would have bought less computing power; thus the returns from that investment would likely have been lower. Cost of telecommunications: In addition to computer prices, the cost of telecommunications has been high. Most Asian countries had highly regulated telecommunications markets with little competition during the period, which would have increased the cost of building and using data networks. This would have discouraged the IT investments that are likely to have the highest return according to the concept of network economies. This conclusion is borne out by recent research showing that countries with lower telecommunications costs achieve higher IT and Internet penetration than those with higher costs (OECD 1999), and that highly networked companies achieve greater returns to IT investments than less networked companies (Gurbaxani, Melville, and Kraemer 1999). Language: The problems associated with handling ideographic characters (such as keyboarding, English language coding, displays) might have reduced the payoffs from using computers in several Asian countries. This problem might have been even more severe in the 1980s before more powerful processors and easy-to-use graphical interfaces made it easier to work with computers in Asian languages. It was only around 1993–94 that Windows became widely used in

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35

Japan and other Asian markets. Before that time, users were forced to struggle with keyboard entry of arcane disk operating system (DOS) commands. Low levels of IT use: While it is true that technological progress tends to favour late adopters through better and cheaper technology per se, the same is not true with regard to technology use. There is clearly a learning process involved in using IT, both for individuals and organizations. The earlier a country starts using IT and the more it uses, the faster it is likely to start seeing results. Asian countries have lagged in adopting IT due to language barriers, organizational resistance, and in some cases, government policies that promoted computer production at the expense of use by raising trade barriers. Figure 2.6 shows that Asian countries have below-average levels of PC penetration relative to their income, as most of the Asian countries fall below the trend line. It might be that those countries failed to realize payoffs from their IT investments because they simply Figure 2.6 PC Diffusion and GDP per Capita, in Asian and Non-Asian Countries 35

*

*

30 PCs per 100 persons

*

**

25

* 20 15 Korea 10

Taiwan *

* Malaysia **** ** * * ** * China PLP***Thailand * 0 India* Indonesia 5

0

5000

10000

*

** * * * Singapore * Japan * ** * HK *

*

15000

20000

GDP per capita (US$) * Non-Asian countries

© 2002 Institute of Southeast Asian Studies, Singapore

25000

30000

36

•

•

Kenneth L. Kraemer and Jason Dedrick

had not used the technology enough to gain the knowledge needed to achieve the potential benefits. Industry structure: The heaviest users of IT world-wide are the financial and service sectors, while the manufacturing sector usually lags. Asian countries have relatively high levels of manufacturing as a share of employment and economic output, and are thus more likely to improve productivity from investments in non-IT capital such as plant and equipment. However, manufacturing success depends increasingly on information activities such as planning and logistics,8 which increases the importance of IT not only for firm efficiency and effectiveness, but also to allow oneself to be a player in global production networks. The U.S. and European countries that make up a large share of the non-Asian countries in our sample have much larger financial and services sectors, so they are more likely to be heavy users of IT. Also, U.S. companies in particular have adopted global production systems that are co-ordinated through extensive information networks and so-called enterprise systems. Corporate management: The management styles of Asian companies are often not well suited to taking advantage of the capabilities of computers and IT. Lifetime employment, prevalent in large Japanese companies as well as others in Asia, makes it difficult to use IT to replace workers. Hierarchical management structures and vertically integrated supply chains are often not amenable to the kinds of business process restructuring that is a necessary complement to effective IT use. Lack of trust in outsiders, and a dislike for paying for services in general can inhibit the use of a variety of consultants and IT service providers who might help companies use the technology better. Finally, top managers in most companies are not familiar with the technology and see computers as tools for secretaries or engineers; therefore they are less likely to think of IT as a solution to the various problems they face.

The finding that Asian countries are not enjoying the benefits of IT use is especially ironic considering the fact that a huge share of the world’s computer hardware is produced in many of the very countries that were

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included in this study. These countries have benefited from production of IT, but apparently not from use. This is different from the United States, where production and use have gone hand in hand, with a large, sophisticated user population putting pressure on producers to come up with better hardware and software. The only place in Asia where production and use have both flourished has been Singapore, where government policies have explicitly pushed both supply and demand. In the wake of the Asian financial crisis, these findings have important implications for both governments and companies in the region, including the many U.S. and European corporations with major investments in Asia. 4. Strategic Implications for Asia

The bottom line implication of these r esults is that Asian countries (governments) can benefit b y promoting IT use and cr eating the environmental conditions needed to support effective use.Likewise, companies doing business in Asia can benefit by investing in IT to improve operational efficiency and to improve their position in the market. The first conclusion is especially important because most Asian countries’ policies have promoted computer hardware production over use. However, our research shows that the economic benefits from IT use are likely to outweigh the benefits from production, which are limited to just one segment of the economy. The second conclusion is important to Asian companies that have been slow to adopt new information technologies and to reorganize their businesses to take advantage of the potential returns from IT. The importance of IT use is being further amplified by the process of economic globalization, which puts a premium on using information and communications to create linkages to international markets and global production networks. Companies and countries that fail to develop the necessary capabilities risk being left out of the markets and production networks. 4.1. Globalization, IT Use, and Productivity

More and more countries see joining the global economy as a path to economic success. Countries that had previously pursued protectionist

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strategies to nurture industrialization, such as China, Brazil, and India, have lowered barriers to trade and foreign investment, and are privatizing and deregulating important industry sectors. Even the shock of the Asian financial crisis has not caused a major retreat from global financial markets. Meanwhile, multinational corporations (MNCs) continue looking to developing countries for new markets and low-cost production sites, creating new opportunities for those countries to participate in the global economy. The potential benefits of globalization for developing economies are great, including increased access to capital, markets, and technology. Countries such as Singapore, Taiwan, and Ireland have achieved rapid growth through outward-looking economic strategies, often in partnership with MNCs. However, the benefits are not automatic, and there are costs to liberalization as well. Domestic companies can be destroyed by foreign competition at home, as we have found to be the case with many Mexican and Brazilian PC companies after those markets were liberalized (Dedrick, Kraemer, and Palacios 2001; Botelho, Dedrick, Kraemer, and Tigre 1999). Also, MNCs may simply import goods to the local market without producing, exporting, or bringing in any technology. And if they do produce and export, they might only perform the lowest-value assembly work, creating jobs with very low pay and sometimes poor working conditions. In order to benefit from globalization, and from foreign competition in the domestic market, countries need to establish competitive capabilities beyond cheap labour. These can take the form of educated workers, high-quality infrastructure, local R&D capabilities, and strong entrepreneurial skills. Information networks along with skilled knowledge workers make up the “soft” infrastructure that will be at least as important as physical infrastructure in the next century. The key payoff from developing this soft infrastructure will be the ability to use IT productively. When markets are opened up, domestic companies face competition from MNCs that bring in the most advanced information systems. In order to compete, domestic firms can develop partnerships with those MNCs to gain access to their technology; they can work with leading information services providers in order to develop their own systems; or in some cases they might decide to outsource their

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information systems altogether. Whatever strategy is used, staying competitive requires investments in IT to develop world-class information systems. In addition to staying competitive in the domestic market, companies that make these investments are also setting the stage for competing in international markets. Time-to-market is becoming critical in many industries (for example, PCs, semiconductors, automobiles, fashion goods, and perishable foods), and these industries are moving quickly to integrate the entire supply chain electronically. Electronic data interchange was a first step, but now companies such as Dell Computer, Cisco Systems, Intel, and others are linking their design, procurement, manufacturing, logistics, and even marketing through Internet-based technologies. Companies and countries that hope to participate in these production networks will need sophisticated IT skills and good information infrastructures. Those that can develop the capabilities will benefit from globalization, while others will be left out. 4.2. Production versus Use

The foregoing analysis of payoffs from IT investment focuses on the use of IT as a productivity tool throughout the economy. There are also benefits at the national level from local production of computer hardware, software, and services. In fact the benefits from production are often more visible than those from use. They include jobs (usually lower-level jobs), creation of national capabilities, and participation in a dynamic, high-growth industry with strong export potential. The value of IT production in the United States has recently been documented by the U.S. Department of Commerce (2000), which estimates that IT industries (computer hardware, software, and services, communications equipment and services) accounted for 8.3 per cent of the U.S. economy and nearly a third of GDP growth between 1995 and 1999. IT production also contributes to lower inflation rates, since a growing share of economic output is in an industry marked by rapidly falling prices. The report argues that actual inflation fell by an average of 0.5 percentage points a year from 1994 to 1998 due to the effect of the IT industry’s declining prices. Finally, the IT industry, including telecommunications, employed 7.4 million workers in 1998 (6.1 per

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cent of total employment), with an average annual wage more than 1.5 times that for all private employees. Outside the United States, other countries have had equally impressive results from IT production. The IT industry is a major source of economic output, exports, and jobs in countries such as Japan, Taiwan, Singapore, Hong Kong, China, Korea, and Ireland, thanks mainly to opportunities created in the PC hardware industry beginning in the early 1980s (Dedrick and Kraemer 1998). Countries such as India, China, and the Philippines are also finding opportunities in the software industry thanks to large supplies of programmers. It is not surprising that policy-makers are attracted by the possibility of developing national computer industries, and that many developing countries (for example, Brazil, Mexico, Malaysia, Thailand, and China) have used various policy tools to encourage investment in IT production. Creating a local IT industry is not a simple matter, however, especially for newcomers to the industry. While a number of new countries entered the industry during the PC revolution of the 1980s, other countries such as Brazil and Mexico had little success, and some earlier industry participants, including many European countries, were squeezed out. Even Japan and Korea have had limited success in computers (as opposed to components) outside their own markets. If anything, the opportunities for newcomers are more limited today. Industry segments such as microprocessors, operating systems, routers, and packaged business applications are virtually closed off because the standards are set by the leading players in the IT industry, mainly U.S. companies such as Intel, Microsoft, and Cisco. Other industry segments such as dynamic random access memory (DRAM) and flat-panel displays require large capital investments, economies of scale, and specialized skills that few countries can hope to achieve. Moreover, many opportunities have already been pre-empted by earlier entrants such as Singapore, Korea, Taiwan, and Ireland, which have developed specialized skills and a strong supplier base. Some countries are offering expensive incentives to attract foreign investment in hardware production, but it is questionable whether they can catch up at this point. And even if they are successful in attracting foreign investment, the resulting industry is

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likely to have limited value added and few opportunities for local companies to participate. Finally, production benefits only one industry sector — the IT sector, while IT use can benefit all industry sectors. So if local production is promoted at the expense of domestic users, for example, through import barriers that raise prices, the bargain is probably a bad one for the economy as a whole. Given the choice between promoting production or use, we would argue for use, especially in countries that are not already 9 part of the global production network of the computer industry. Fortunately, the choice does not have to be so stark in most cases. In fact, there is a policy option that simultaneously encourages IT use while also creating opportunities to develop a local industry — that is, production close to use. 4.3. Production Close to Use

Most national policies to promote computer production have focused on hardware, which is the most tangible segment of the industry. However, the fastest-growing segments of the computer industry for over a decade have been software and services (Table 2.2). In the United States, employment in software and computer services industries nearly doubled from 850,000 in 1992 to 1.6 million in 1998. Over the same period, employment in those IT job categories that require the most education and offer the highest compensation, such as computer scientists, computer engineers, systems analysts, and computer programmers, increased by nearly 1 million or almost 80 per cent. Even more dynamic is the burgeoning Internet sector, which has seen exponential growth rates for several years. These are the sectors that we refer to as “production close to use”, because of the close interaction between the provider and end user of such software and services. The software and services industries offer some specific advantages over hardware production. First, while some parts of the software industry are dominated by multinationals, there are still many opportunities to develop niche products without competing directly with Microsoft, Oracle, SAP, and the other large companies. These can be products developed for local markets that meet the needs of local language, culture,

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Table 2.2 Computer Industry Growth Rates, 1987–97 Industry segment Hardware Software Services

CAGR (%) 8.6 14.0 20.6

CAGR = Compound annual growth rate. Source: McKinsey & Company (1998).

and business environments. The services business offers even more compelling opportunities, as services usually must be provided locally rather than being imported. They also require continuous interaction between local users and providers, and can benefit users as well as providers, helping countries realize the payoffs from IT use. Figure 2.7 shows how information services such as systems integration, network integration, outsourcing, and Internet services can serve as a link between production and use. These linkages can help local users apply the technology more effectively and productively, helping to solve Asia’s productivity paradox in IT use. They also can create new business and employment opportunities for local residents as local companies can start small and grow at a pace that is supportable by their own finances and capabilities. Developing local software, service, and Internet industries would also help diversify Asian IT industries away from the brutally competitive hardware industries in which, as one Asian executive stated, “we’re all killing ourselves to make money for Microsoft and Intel” (Dedrick and Kraemer 1998, p. 261). All of this does not mean that Asian countries will not continue to benefit from their role in the hardware industry. But even those countries should not be so focused on hardware that they ignore the great potential of software and services, and the multiplier effect of these sectors on improving IT use throughout the economy. Other countries that are just trying to enter the industry with limited resources to invest should look carefully at whether efforts to promote hardware production would have the same payoffs as promotion of IT use and production close to use.

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Figure 2.7 Information Services as Link between Production and Use

Discreet, market transactions Computer hardware IT services — professional outsourcing network/internet

Close, two-way interaction IT use

Packaged software

Discreet, market transactions

Som e feedb

ing ack, e.g. beta test

5. Conclusions

There is good reason to believe that a new economy is taking shape in the United States as well as some other developed countries. The chief characteristic of the new economy is sustained economic and productivity growth. That economy is strongly shaped by the rapidly declining costs of IT and huge investments in IT, the Internet and other applications such as e-commerce, accompanied by firm and industry changes which leverage those investments. Despite earlier concerns about the IT productivity paradox, there is now strong scientific evidence that IT investments do increase productivity for companies and countries on average. However, Asian countries have been slow to adopt IT, and have not enjoyed the benefits that other countries have realized. As a consequence, there is a gap between Asian and non-Asian economies in both Internet and ecommerce readiness — two central areas of IT application and increasing returns and positive network effects in the new economy. This digital gap is partly due to uncontrollable factors such as

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Kenneth L. Kraemer and Jason Dedrick

language, but is also due to development strategy, government policy, and corporate management issues. Government policies have raised the cost of computers and telecommunications and promoted hardware production at the expense of IT use. Corporate structures and practices have hampered IT use by making it difficult to restructure companies and reduce employment levels as new IT applications and opportunities to leverage IT are developed. Companies doing business in Asia need to use IT and electronic commerce as tools to tie together their own supply networks and distribution channels. Asian-owned companies need to realize that their continued competitiveness will depend on revamping their own operations around IT, and integrating themselves into the information systems of their major customers. The Asian financial crisis is actually creating both the impetus and opportunity to do so, as companies are acutely aware of the need to change in order to survive. It is also opening the door for U.S. companies to enter markets in Asia that were previously closed, such as banking, insurance, transportation, and telecommunications. As these companies come to Asia, their Asian partners will gain access to the most advanced information systems, and their Asian competitors will be forced to improve their own IT systems and skills to compete. Companies that do not respond risk being driven out of business. Asian governments are likewise looking for new ways to boost productivity and revive their economies. One option is to promote IT use and production close to use. Policies that improve communications and information infrastructure, remove barriers to use, and encourage investments in IT will help, as will efforts to promote the software, services, and Internet-related business sectors. Most importantly, governments and businesses in Asia must change their perspective from one that values hardware over software and production over use. Until this change takes place, Asia is likely to fall behind the rest of the world in productivity growth and in tapping the business opportunities created by the rapid spread of the Internet and electronic commerce.

© 2002 Institute of Southeast Asian Studies, Singapore

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NOTES The authors thank the reviewers and participants of the ASEAN Roundtable 2000 for their critique and helpful comments on an earlier draft of this chapter. This research has been supported by grants from the U.S. National Science Foundation (CISE/IIS/ CSS). 1. Information technology (IT) as used here includes computers, telecommunications, and management science techniques. 2. Solow (1987) remarks that “you can see the computer age everywhere but in the productivity statistics”. 3. It is possible that this same effect is occurring now in some developing countries. However, comparable cross-country data for the period 1993–2000 are not yet available with which to do systematic analyses that would provide an indication of whether this is the case. 4. This does not mean that such impacts are not occurring. They might or might not be occurring. It means that the impacts are not measurable as yet. 5. Measured as compound annual growth rate (CAGR). 6. It is important to note that, although we use “IT investment”, which is a flow variable and Dewan and Kraemer use “IT capital”, which is a stock measure, the results from both analyses are mutually reinforcing. Also, the Dewan and Kraemer analysis is based on a production function model, which provides good evidence of causality. 7. We are aware of production function studies that show positive returns from IT investments at the firm level in Singapore and Korea. These studies do not contradict our country-level results as they are based on a different level of analysis, a sample of firms (usually larger ones), and show only average returns with some firms doing better than others. At the country level, the results can be different because all firms in the economy are included as is the public sector, and because the differences among firms can cancel each other out. 8. We mean this to include activities such as order management, forecasting, production planning, shop floor management, supply chain management, and enterprise resource management. 9. Clearly, this argument does not apply fully to countries that have found their niche and are already successfully engaged as part of global production networks. For example, as pointed out by a conference participant, Japan is very good at game technology, Taiwan at producing PCs, Singapore at disk drives and semiconductors, Korea at producing memory chips, and so on. We argue that these countries would benefit further from policies that promoted both production and use, and production close to use.

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REFERENCES American Electronics Association (AEA). Cybernation 2.0: The U.S. High-Tech Industry and World Markets. Washington, DC: AEA, 2000. Botelho, A.J., J. Dedrick, K.L. Kraemer, and P.B. Tigre. “Brazil Meets the Global Challenge: IT Policy in a Post-Liberalisation Environment”. Mimeographed. Irvine, CA: Centre for Research on Information Technology and Organizations, 1999. Brynjolfsson, E. and L. Hitt. “Paradox Lost? Firm-Level Evidence on the Returns to Information Systems Spending”. Management Science 42, no. 4 (April 1996): 541–58. Council of Economic Advisors. Economic Report of the President — 2000. Washington, DC: Council of Economic Advisors, February 2000. Dedrick, J. and K.L. Kraemer. Asia’s Computer Challenge: Threat or Opportunity for the United States and the World? New York: Oxford University Press, 1998. Dedrick, J., K.L. Kraemer, and J.J. Palacios. “The Effects of Liberalization on Mexico’s Computer Industry”. The Information Society 17, no. 2 (2001). Dewan, S. and K.L. Kraemer. “International Dimensions of the Productivity Paradox”. Communications of the ACM 41, no. 8 (August 1998): 56–62. . “Information Technology and Productivity: Evidence from Country Level Data”. Management Science 46, no. 4 (April 2000): 548–62. Gurbaxani, V., N. Melville, and K.L. Kraemer. “Disaggregating the Return on Investment to IT Capital”. Proceedings of the International Conference on Information Systems, Helsinki, Finland, 1999. International Telecommunication Union (ITU). Internet for Development 1999. Geneva: ITU, 1999. . Yearbook of Statistics 2000. Geneva: ITU, 1999. Jorgenson, D.W. and K.J. Stiroh. “Raising the Speed Limit: U.S. Economic Growth in the Information Age”. Mimeographed. Federal Reserve Bank of New York, May 2000. Kraemer, K.L. and J. Dedrick. “Payoffs from Investment in Information Technology: Lessons from the Asia-Pacific Region”. World Development 22, no. 12 (1994): 1921–31. . “Information Technology and Productivity: Results and Policy Implications of Cross-Country Studies”. In Information Technology and Economic Development, edited by M. Pohjola. Cambridge: Oxford University Press, 2001. Lehr, B. and F.R. Lichtenberg. Information Technology and Its Impact on Firm-Level Productivity: Evidence from Government and Private Data Sources, 1977–1993. Working Paper. New York, NY: Columbia University Graduate School of Business, March 1997.

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McKinsey & Company. 1998 Report on the Computer Industry. New York, NY: McKinsey & Company, 1998. Organization for Economic Co-operation and Development (OECD). The Economic and Social Impact of Electronic Commerce. Paris: OECD, 1999. . A New Economy? The Changing Role of Innovation and Information Technology in Growth. Paris: OECD, 2000. Oliner, S.D. and D.E. Sichel. “The Resurgence of Growth in the Late 1990s: Is Information Technology the Story?” Washington, DC: Federal Reserve Board, May 2000. Roach, S. “America’s Technology Dilemma: A Profile of the Information Economy”. Mimeographed. Paper produced by the Research Division of Morgan Stanley, New York, 1987. Schreyer, P. The Impact of Information and Communication Technology on Output Growth. Paris: OECD, 2000. Solow, R. “We’d Better Watch Out”. New York Times Book Review, 12 July 1987, p. 36. U.S. Department of Commerce. Digital Economy 2000 Report. Washington, DC: U.S. Department of Commerce, 2000. World Bank. World Development Indicators 2000. Washington, DC: World Bank, 2000.

© 2002 Institute of Southeast Asian Studies, Singapore

Reproduced from Information Technology in Asia: New Development Paradigms edited by Chia Siow Y ue and Jamus Jerome Lim (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available from < http://www.iseas.edu.sg/pub.html 48 Wong Poh-Kam and Annette> Amy Singh

The electronics revolution in general — and the information and communications technology (ICT) revolution in particular — has been a major driver in the rapid industrialization of Southeast Asia over the last three decades. However, with the exception of Singapore, the pace of diffusion of ICT adoption in these countries has been less impressive, and appears to have lagged behind the advanced countries. This chapter provides a brief review of the empirical evidence on ICT industry development and diffusion in Southeast Asia, and highlights emerging issues and policy implications. The chapter is organized as follows. Section 1 first provides a conceptual framework for examining the link between ICT and economic development. Using this framework, we review the empirical data on ICT industry development in the five countries of the Association of Southeast Asian Nations (ASEAN) vis-à-vis other East Asian countries

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49

and the world as a whole in Section 2, followed by an examination of the pattern of diffusion of ICT usage in these countries in Section 3. Observations and policy implications are provided in Section 4. 1. Conceptual Framework

Traditional study of the role of information technology (IT) in economic development tends to be compartmentalized into either the supply or the demand side, that is, the analysis of IT production versus the consumption of IT products and services. In recent years, however, policy-makers have increasingly come to recognize the need to integrate 1 policy towards production versus diffusion. Moreover, while traditional studies tend to treat the ICT goods sectors separately from the information content and services sectors, such a perspective is increasingly problematic in view of the growing digital convergence that blurs the boundaries between hardware, software, and IT services. A conceptual framework that integrates both these aspects is provided by Wong (1998). Figure 3.1 gives an updated version of this framework (Wong 2001c). In essence, the role of ICT in an economy can be conceptualized in terms of four main sectors: 1. ICT goods sectors, which create, make, and move physical hardware devices used in the processing and display of information (computers, consumer electronics, telephones, and other information appliances); 2. information content sectors, which create, make, and move information (music, video, news, and entertainment, software, and so on); 3. communications network sectors, which provide the enabling network infrastructures (wired and wireless) to support the transmission of information between ICT devices; 4. informatization sector, which consists of the economic activities of utilizing ICT devices and information contents either for consumption by household users or for production by enterprises in all sectors of the economy. While the development of a dynamic and competitive ICT goods industry (sector 1) has been rightly identified as a key driver for national economic growth (U.S. Department of Commerce 2000), recent research has emphasized the greater importance of high diffusion levels of ICT

© 2002 Institute of Southeast Asian Studies, Singapore

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50

Figure 3.1 Conceptual Framework of the Information Economy External Connectivity

ICT Goods Industry

R&D Create

Make

Content Industry

Content Development

- product - process

- creative - knowledge based

Manufacture

Media Production

- components - final assembly Move

Make

- packaging - replication

Logistics - inbound - outbound

Create

Content

Move

Distribution Network infrastructure

- gather - transmit Export/ import

Export/ import Transaction Processing Transact

- intra-organizational - inter-organizational

Transact

Content Usage

Use

- work - entertainment

Informatization

Productivity and quality impact on all sectors of the economy

© 2002 Institute of Southeast Asian Studies, Singapore

Use

3. ICT Industry Development & Diffusion in Southeast Asia

51

(sector 2) in key economic sectors as an enabler for enhancing productivity and global competitiveness. This has been found to be true not only for advanced countries (Kraemer and Dedrik 1999; OECD 2000; Pohjola 2001) but also for selected developing countries as well (Wong 2001a). The information content development and distribution sector (sector 3) is also expected to be of increasing importance in view of the rapid shift towards knowledge-based industries world-wide, where competitive advantage increasingly derives from ownership of proprietary information and intellectual properties. To enable and facilitate all the above, however, requires that a nation invest in new and more advanced network infrastructures (sector 4). To fully leverage the ICT revolution for economic development, policy-makers are therefore required to consider integrating policies affecting every one of the four sectors. An account for how this was done in the case of Singapore can be seen in Wong (1998), which also provides an estimate of the relative contribution of each of these four sectors at different stages in Singapore’s economic development. As no similar analyses of other ASEAN countries are available, however, we will try to assess the role of ICT in ASEAN’s economic development based on more limited data on ICT production and diffusion, but interpret them within the broader framework outlined above. 2. ICT Production in Southeast Asia

A useful source of information on electronics production and export by countries on a global basis is the Yearbook of World Electronics Data. The use of this common data source, rather than of individual national sources, has the advantage of avoiding the problem of differences in sectoral definitions and currency conversions. Table 3.1 summarizes the information for the five ASEAN countries versus other major countries in Asia (specifically, Japan, the other three Asian newly industrializing economies [NIEs], China, and India), together with the world total over the period 1985–98. We have confined our analysis of Southeast Asia to only the five ASEAN countries of Singapore, Malaysia, Thailand, Indonesia, and Philippines, due to the unavailability of data for the other countries (namely, Vietnam, Laos, Cambodia, Myanmar, and Brunei). Overall, total electronics production by the ASEAN-5 increased from

© 2002 Institute of Southeast Asian Studies, Singapore

© 2002 Institute of Southeast Asian Studies, Singapore

4,458 580 1,851 1,063 626

n.a. 2,012

ASEAN-5 Singapore Indonesia Malaysia Philippines Thailand

China India

n.a. 2,317

5,315 705 2,401 1,271 847

4,224 9,380 7,728

1988

10,436 4,038

10,653 1,011 4,401 1,708 1,733

6,929 18,944 13,764

559,095 644,624

7,588 3,283

7,543 842 3,274 1,474 1,210

5,365 13,612 11,603

149,981 187,422

1987 1990

12,039 4,609

14,992 1,269 7,363 2,049 4,033

8,066 23,031 14,682

658,038 699,098

11,801 4,542

12,518 977 5,841 2,026 2,735

7,714 22,204 14,101

185,094 184,490

1989

738,791

13,663 3,778

16,709 1,653 9,089 2,139 5,403

8,340 25,446 15,779

207,402

1991

748,186

15,954 3,830

20,245 2,169 12,506 2,333 6,185

8,505 26,143 17,851

196,047

1992

778,570

17,797 3,749

23,556 2,782 16,129 2,983 7,349

8,948 28,803 21,116

212,044

1993

28,290 5,005

39,783 4,861 27,727 4,225 12,521

9,596 49,276 29,311

267,461

1995

877,863 1,039,293

23,456 4,344

31,599 3,971 21,035 4,069 9,675

9,157 36,141 23,338

234,129

1994

1,059,496

33,370 5,456

43,597 6,006 29,575 5,527 14,399

8,746 48,136 32,123

244,953

1996

n.a. 4,693

37,850 5,213 27,420 7,280 14,577

8,218 39,275 33,574

196,180

1998

1,051,191 1,085,613

n.a. 5,039

43,554 6,073 30,024 7,310 14,656

8,707 49,406 36,266

234,661

1997

7.6

17.9* 6.7

17.9 18.4 23.0 16.0 27.4

6.4 14.8 14.3

6.2

Average growth rate p.a. 1985–98 (%)

Wong Poh-Kam and Annette Amy Singh

Source: Elsevier, Yearbook of World Electronics Data (1988–98 and 2000).

Note: World figures for 1985 and 1986 are estimated using the 1987–88 growth rate. World figures for 1997 and 1998 are forecasts at 1996 constant values and exchange rates. * 1987–96.

420,575 484,914

3,680 6,501 5,922

World

1986

89,390 124,445

1985

Asian NIEs Hong Kong S. Korea Taiwan

Japan

Country

Year

Table 3.1 Production of Electronics Goods: ASEAN-5 and Selected Asian Countries, 1985–98 (US$ million)

52

3. ICT Industry Development & Diffusion in Southeast Asia

53

less than US$9 billion in 1985 to over US$92 billion in 1998 (at constant 1998 prices), a tenfold increase in thirteen years. The implied average annual growth rate of over 20 per cent per annum for the period is more than three times the global production growth rate. Consequently, the share of the ASEAN-5 in total world production increased from about 2 per cent in 1985 to 8.5 per cent by 1998. Starting from 1995, total electronics production for the ASEAN-5 has overtaken the total output of the other three Asian NIEs (Korea, Taiwan, and Hong Kong) combined; by 1999, it is estimated to have exceeded half of the Japanese production output. The rise of the ASEAN-5 in global production is more spectacular if we focus only on the narrower sub-sector of computer equipment manufacturing, rising from US$1.5 billion in 1985 to nearly US$40 in 1998, a twenty-five-fold increase. From virtually zero in 1985, the share of the ASEAN-5 in total world production has ballooned to over 12 per cent (Table 3.2). Table 3.2 also shows the changing composition of electronics production within the individual ASEAN-5 countries. All five countries 2 exhibited rising importance of computer equipment over the years. Singapore has consistently shown the highest dependence on computer equipment, with its production accounting for close to 60 per cent of total electronics output in 1998, followed by Thailand (51 per cent), Malaysia (26 per cent), the Philippines (25 per cent), and Indonesia (19 per cent). In contrast, electronics components, which represented by far the most important sub-sector in all the five countries in 1985, had steadily declined in relative importance over the years, dropping by 1998 to about 30 per cent or less in Singapore and Thailand, and about 60 per cent in the Philippines. In Malaysia and Indonesia, the components sub-sector steadily declined up to the mid-1990s, but had started to increase again over the last few years. In the case of the consumer electronics sub-sector, all the ASEAN countries with the exception of Singapore experienced a period of moderately increasing production share from mid-1980s to the early 1990s, and have since steadily declined. For example, the share of consumer electronics in Malaysia’s total electronics production rose from 14.7 per cent in 1985 to around 29–31 per cent in the first half of the

© 2002 Institute of Southeast Asian Studies, Singapore

n.a. 164 199

10.0 n.a. 7.6 n.a. 19.8 n.a. 28.3 34.3

n.a. 846 2,029

4,458

30.17 n.a. 2.67 n.a. 2.67

n.a. 18.98 45.51

100.00

Total

EDP Office equipment Control and instrument electronics Medical and industrial electronics Radio communications (including mobiles) and radar Telecommunications Consumer electronics Components

Total

© 2002 Institute of Southeast Asian Studies, Singapore 1,063

n.a. 53 883

18 n.a. 23 n.a. 86

100.0

n.a. 14.7 70.3

2.3 n.a. 1.9 n.a. 10.8

100.0

n.a. 5.0 83.1

1.7 n.a. 2.2 n.a. 8.1

1985* (percentage)

1,851

n.a. 272 1,302

43 n.a. 35 n.a. 199

100.0

n.a. 23.3 55.6

10.2 n.a. 3.7 n.a. 7.2

626

n.a. 146 348

64 n.a. 23 n.a. 45

100.0

10.2 12.1 24.1

25.1 2.9 8.9 3.3 13.4

559,095

57,066 67,428 134,675

140,090 16,324 49,921 18,393 75,198

World

100.00

0.96 5.06 29.83

59.01 0.90 1.14 0.57 2.53

37,850

364 1,914 11,292

22,335 342 431 214 958

100.0

6.7 29.2 31.0

19.2 1.3 1.9 2.3 8.4

5,213

350 1,521 1,616

1,000 66 100 120 440

7,280

200 415 4,361

1,800 31 40 33 400

100.0

5.3 19.1 44.2

25.9 0.4 0.9 0.7 3.4

100.0

2.7 5.7 59.9

24.7 0.4 0.5 0.5 5.5

1998 (percentage)

27,420

1454 5,250 12,126

7,092 115 255 184 944

1998 (US$ million)

100.0

3.5 13.2 25.9

51.4 2.2 0.9 0.4 2.6

14,577

507 1,926 3,772

7,488 323 128 58 374

Singapore Indonesia Malaysia Philippines Thailand

100.0

9.9 7.0 28.6

29.9 1.6 7.7 3.4 11.9

1,087,783

107,173 76,685 311,221

324,803 17,313 83,981 37,020 129,587

World

Source: Elsevier, Yearbook of World Electronics Data (1988–98 and 2000).

Note: “Radio communications (including mobiles) and radar” was previously classified as communications and military electronics and then communications and radar. 1985 figures for EDP include office equipment production. 1985 figures for control and instrument electronics include medical and industrial electronics production. 1985 figures for communications and military electronics include telecommunications production. World figures for 1998 are forecasts at 1996 constant values and exchange rates. * 1987 for world figures.

100.0

580

58 n.a. 44 n.a. 115

1,345 n.a. 119 n.a. 119

EDP Office equipment Control and instrument electronics Medical and industrial electronics Radio communications (including mobiles) and radar Telecommunications Consumer electronics Components

1985* (US$ million)

Singapore Indonesia Malaysia Philippines Thailand

Table 3.2 Composition of Electronics Production: ASEAN-5, 1985, 1998

54

Wong Poh-Kam and Annette Amy Singh

3. ICT Industry Development & Diffusion in Southeast Asia

55

1990s, before declining to less than 20 per cent by 1998. In contrast, Singapore has been steadily phasing out consumer electronics since the early 1980s, and by 1998, the sub-sector accounted for only 5 per cent of total electronics production. In summary, over the last three decades Southeast Asia had emerged as a major regional platform for the production of electronics goods in general, and computer equipment in particular. Singapore emerged first as the production hub in Southeast Asia for multinational corporations (MNCs) from the United States, Japan, and Europe in the early 1970s (Wong 2001b), and was soon followed by Malaysia and Thailand. After a promising start, the Philippines faltered in the 1980s and failed to sustain rapid growth until after the mid-1990s. Similarly, Indonesia did not attract much investment into its electronics industry until the 1990s. The recent financial crisis in 1997–98, coupled with a cyclical downturn of the global electronics industry, has caused ASEAN electronics production to decline over the period 1997–98, though in the longer term, electronics production is expected to continue growing, albeit at a slower pace due to the expected increasing competition. Although its share in total ASEAN electronics production outputs had declined from 52 per cent in 1985 to only 41 per cent by 1998, Singapore has remained by far the leading electronics manufacturing hub in Southeast Asia, greater in importance than the technologically more advanced and dynamic sub-sectors. Its share of computer equipment sub-sector, for example, was more than half (56 per cent) in 1998, and by specific product categories within this sub-sector, Singapore tends to dominate in the more advanced, complex products or in the higher value-adding stages (such as design, process engineering, final assembly, and automated testing). For example, in disk drives, Singapore now concentrates on the designing of drives, assembly of high-end drives, and disk media sputtering, while Thailand and Malaysia handle the slider sub-assembly, assembly of lower-end drives, and disk media stamping/ polishing activities. The same applies to other sub-sectors. For example, in the semiconductor components sub-sector, Singapore dominates in semiconductor wafer-fabrication, a more technologically complex and knowledge-intensive stage than assembly and testing, where Malaysia and Thailand have larger shares. Singapore has recently also embarked

© 2002 Institute of Southeast Asian Studies, Singapore

56

Wong Poh-Kam and Annette Amy Singh

on liquid crystal display (LCD) manufacturing, assembly of precision opto-electronics devices, and flexible circuit board manufacturing, all ahead of the other Southeast Asian countries. Indeed, a not insignificant proportion of the expansion of electronics production in the other ASEAN countries actually came out of outward direct foreign investment (DFI) from Singapore. Since the late 1980s, many global electronics MNCs in Singapore relocated their more labourand land-intensive operations from Singapore to other countries in the ASEAN region, as well as to China. As in the case of Taiwan and Korea, many of the indigenous electronics firms from Singapore have also relocated production outside their home base to not only the region but also further locations like Mexico and Eastern Europe. 3. Diffusion and Adoption of ICT

In contrast to production, information on ICT diffusion and adoption has been less systematically collected. We have therefore compiled information from several different sources in order to piece together a picture of the pattern of ICT diffusion in the ASEAN countries. Although the data may not be entirely compatible due to differences in definition and coverage, collectively they do provide a fairly consistent picture indicating a significant “digital divide” between Singapore and the other four ASEAN countries. Table 3.3 shows the estimated size of the domestic market for ICT goods in the ASEAN-5 for the ten-year period between 1988 and 1998 (data are not available for earlier years). As can be seen, the total market consumption of ICT products by these five countries increased from about US$11 billion in 1988 to US$42 billion in 1998, with its share of total world market increasing from 1.8 to 3.8 per cent. The estimated domestic market size of the ASEAN-5 for electronics goods in 1988 is thus less than half of the total electronics production output from the region itself. However, even this figure is in some sense a gross overestimate of the end-user market size, since a significant proportion of the ICT goods consumed are in the form of intermediate goods used in ICT production itself. Notwithstanding this, figures of the computer equipment market can be used as a proxy of the size of the end-user market for computer

© 2002 Institute of Southeast Asian Studies, Singapore

© 2002 Institute of Southeast Asian Studies, Singapore

5,300 1,427 1,874 599 1,717

ASEAN-5 Singapore Indonesia Malaysia Philippines Thailand

1990

1991 1992 1993 1994

13,486 4,954

7,747 2,259 3,611 944 2,991

5,109 13,929 8,347

14,199 4,230

8,779 2,615 4,817 1,093 3,689

5,975 15,809 8,802

16,522 4,278

10,142 2,945 6,066 1,268 4,574

6,547 15,043 10,181

19,368 4,206

12,156 3,376 7,356 1,735 5,508

6,596 17,570 11,912

23,264 4,888

14,130 3,758 9,196 2,035 7,366

7,390 22,234 13,349

26,820 5,829

18,115 4,424 12,457 2,844 9,438

7,898 29,771 16,069

30,198 5,975

20,211 5,193 12,985 3,554 9,933

8,203 31,736 15,797

188,501

1996

33,838 6,038

20,836 5,360 12,997 4,446 8,799

9,191 30,366 18,591

175,645

1997

37,419 5,906

16,278 3,775 10,842 3,987 7,510

8,113 17,629 18,497

142,460

1998

621,404 636,202 684,841 716,232 727,940 749,254 836,403 1,000,859 1,041,267 1,082,908 1,118,776

12,628 4,858

6,503 1,591 2,715 779 2,285

4,853 13,593 8,279

193,242

1995

Source: Elsevier, Yearbook of World Electronics Data (1990–98, 2000).

Note: China figures and world figures for 1997 and 1998 are forecasts at 1996 constant values and exchange rates.

World

12,220 4,831

4,565 11,054 7,130

China India

1989

126,156 124,027 123,979 140,688 125,377 136,605 154,764

1988

Asian NIEs Hong Kong S. Korea Taiwan

Japan

Country

Year

Table 3.3 Estimated Market Size for Electronics Goods: ASEAN-5 and Selected Asian Countries, 1988 –98 (US$ million)

6.1

11.8 2.0

11.9 10.2 19.2 20.9 15.9

5.9 4.8 10.0

1.2

Average growth rate p.a., 1985–98 (%)

3. ICT Industry Development & Diffusion in Southeast Asia 57

58

Wong Poh-Kam and Annette Amy Singh

equipment in the respective countries, since most of the computer equipment purchased can be regarded as being intended for end-users (this is unlike components, most of which are intermediary goods). From Table 3.4, it can be seen that the total expenditure on computer 3 equipment in the ASEAN-5 increased from US$2.2 billion in 1988 to US$12.3 billion in 1998, or from 1.3 to 3.7 per cent of the world market. Singapore alone accounted for 63.7 per cent of the total computer equipment market in ASEAN in 1998, up from 56.4 per cent in 1988. Thus, the dominance of Singapore in computer usage in the ASEAN-5 far exceeds its dominance in computer equipment production. Besides expenditure on computer hardware, the consumption of software and IT services represents important components of informatization. Unfortunately, there are no comprehensive time-series data sources on the size of the end-user market for software and ICT services for all the ASEAN countries. However, according to a 1995 estimate by the Organization for Economic Co-operation and Development (OECD), software and IT services accounted for as much as 41 per cent of the total IT spending in the case of Singapore, to as low as 19 per cent in the case of Indonesia (Table 3.5). In between were Malaysia (34 per cent), Thailand (30 per cent), and the Philippines (28 per cent). The ranking of the relative importance of software and IT services among the five ASEAN countries is consistent with the general trend (observed elsewhere) that the more advanced a country is, the higher is its share of spending on software and IT services. In addition to the above direct estimates of market size for ICT goods and services, other data sources provide either indicators of adoption of specific ICT or composite indicators combining several individual indicators. The most comprehensive attempt so far at developing a composite informatization indicator for major nations in the world is the recent Information Society Index (ISI) project of the 4 International Data Corporation (IDC) and World Times (2001). Based on the composite ISI index provided by IDC, which covers fifty-five countries, Singapore was ranked ninth in 2001, with an index score of 5,269, the highest in Asia (Japan was ranked just below, in eleventh place, with a score of 5,182), but considerably behind the top two nations, Sweden and Norway, both of which scored above 6,000 points.

© 2002 Institute of Southeast Asian Studies, Singapore

© 2002 Institute of Southeast Asian Studies, Singapore 14.7 17.5 21.0 20.8

23.5 2.4 7.3 1.1

1.9 2.6 11.1 50.1

EDP Office equipment Control and instrument electronics Medical and industrial electronics Radio communications (including mobiles) and radar Telecommunications Consumer electronics Components

100.0

10.6 2.6 7.8 5.0

5,300

Total

Total

210 250 299 297

100 137 587 2,657

100.0

1,427

151 37 112 71

1,244 128 388 59

EDP Office equipment Control and instrument electronics Medical and industrial electronics Radio communications (including mobiles) and radar Telecommunications Consumer electronics Components 599

44 121 96 190

78 12 42 16

100.0

7.3 16.7 9.4 42.5

12.2 1.3 8.9 1.7

100.0

7.3 20.2 16.0 31.7

13.0 2.0 7.0 2.7

1988 (percentage)

1,874

137 313 176 796

229 24 167 32

1988 (US$ million)

100.0

10.9 8.7 16.7 20.0

29.2 1.3 10.2 2.9

1,717

188 150 287 343

502 22 175 50

Singapore Indonesia Malaysia Philippines Thailand

100.0

11.9 10.0 12.2 24.9

26.5 2.9 8.5 3.3

621,404

73,680 61,966 75,504 154,763

164,564 17,711 52,986 20,230

World

100.0

3.6 2.5 4.8 43.6

36.3 1.3 7.0 0.8

21,620

789 547 1,046 9,419

7,847 283 1,512 177

100.0

17.1 12.1 15.5 33.4

9.0 1.4 7.5 4.1

5,550

947 674 860 1,854

499 77 414 225

4,151

804 634 354 1,302

702 48 233 74

100.0

8.5 4.7 4.6 63.3

10.9 0.6 6.2 1.2

100.0

19.4 15.3 8.5 31.4

16.9 1.2 5.6 1.8

1998 (percentage)

13,629

1,159 634 628 8,628

1,486 79 847 168

1998 (US$ million)

100.0

9.6 5.0 8.3 48.0

19.8 1.2 5.4 2.6

8,992

860 453 745 4,319

1,780 112 490 233

Singapore Indonesia Malaysia Philippines Thailand

Table 3.4 Market Composition of Electronics Goods: ASEAN-5, 1988, 1998

100.0

11.0 9.1 8.3 29.0

29.8 1.7 7.7 3.3

1,118,776

123,171 102,180 92,611 324,044

333,530 19,473 86,595 37,172

World

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Table 3.5 Estimated Composition of IT Market in ASEAN and Selected Asian Countries, 1995 (percentages) Percentage of IT expenditure Hardware

Packaged software

Services

NIEs Hong Kong South Korea Taiwan

70.0 79.8 69.9

10.8 5.9 10.7

19.2 14.4 19.4

ASEAN-5 Singapore Indonesia Malaysia Philippines Thailand

59.1 81.0 66.1 72.4 69.8

16.4 7.4 17.1 14.0 12.9

24.5 11.6 16.9 13.6 17.3

Other countries China India

88.1 62.2

4.6 5.7

7.3 32.1

Source: OECD (1997).

The next three Asian countries, the Asian NIEs — Hong Kong, Taiwan, and Korea — were ranked fifteenth, eighteenth, and nineteenth, respectively. The four ASEAN countries were ranked significantly lower, with Malaysia at thirty-second, Thailand at forty-seventh, the Philippines at forty-eighth, and Indonesia at fifty-third. These are reproduced in Table 3.6. Another composite measure, developed by the Korean National Computerization Agency (NCA), similarly ranked Singapore as close to Japan and way ahead of Korea and Taiwan. However, the study did not provide information on the other four ASEAN countries. More specific measures of ICT diffusion and adoption, especially those pertaining to the “new ICT” of the Internet, e-commerce, and wireless technologies, further confirm the contrast between Singapore and the other four ASEAN countries (Table 3.7). For example, in terms of home personal computer (PC) ownership, Singapore’s 39 per cent in 1999 was way ahead of Malaysia, Philippines, Indonesia, and Thailand. It was also ahead of Hong Kong (36 per cent), Japan (33 per cent),

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Table 3.6 Information Society Index: Rankings for Asian Countries, 2001 Rank 9 11 15 18 19 32 47 48 52 53 54

Country

Score

Singapore Japan Hong Kong Taiwan Korea Malaysia Thailand Philippines China Indonesia India

5,269 5,182 4,745 4,296 4,283 2,220 1,563 1,553 1,198 1,172 1,108

Note: There are 23 variables in the Index: Computer infrastructure 1. PCs installed per capita 2. Home PCs shipped per household 3. Government and commercial PCs shipped per non-agricultual work-force 4. Educational PCs shipped per student and faculty 5. Percentage of non-home networked PCs 6. Software versus hardware spending Information infrastructure 7. Telephone lines per household 8. Telephone faults/lines 9. Cost of local phone call 10. Television ownership per capita 11. Radio ownership per capita 12. Fax ownership per capita 13. Cellular phones per capita 14. Cable/satellite TV coverage Internet infrastructure 15. E-commerce spending 16. No. of home Internet users 17. No. of business Internet users 18. No. of educational Internet users Social infrastructure 19. Secondary school enrolment 20. Tertiary school enrolment 21. Newspaper readership 22. Press freedom 23. Civil liberties Source: http://www.worldpaper.com/2001/jan01/ISI/ 2001%20Isi%20Variables.html.

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1.23 1.49 1.16

2.84 .26 1.70 .79 .61

Japan

NIEs Hong Kong South Korea Taiwan

ASEAN-5 Singapore Indonesia Malaysia Philippines Thailand

9.7 5.0

390.9 13.4 94.5 19.5 40.4

360.2 181.3 260.1

325.5

No. of PCs per 1,000 persons (1999)

7 2.2

56.2 2.7 19.8 3.7 8.4

55.8 43.3 52.4

50.3

Wired-line penetration: no. of main phone lines (residential and business) per 100 persons (1998)

3 0.2

43.4 1 13.7 3.7 4.4

57.7 49.9 47.1

43.6

Wireless usage: cellular/PCs penetration (%, 2000)

1.3 0.3

24.1 0.5 5.3 0.8 1.6

26.9 11.2 19.9

19

Internet usage as a % of population (1999)

0.84 0.78

259.84 1.97 30.21 3.00 7.25

356.67 60.47 142.75

133.64

No. of Internet hosts per 10,000 persons (1998)

71,769 23,445

148,249 21,052 59,012 12,394 40,176

114,882 283,459 597,036

2,636,541

No. of Internet hosts per top-level domain (Jan. 2000)

0.0 0.0

5.0 0.0 0.5 0.1 0.2

5.9 15.3 2.3

12.0

E-commerce revenue per capita (US$, 1999)

Wong Poh-Kam and Annette Amy Singh

Sources: AEA, Cybernation 2.0; ITI (1999); IDC and World Times (2001); World Bank (2000); Red Herring (October 2000); IMD International (2000).

.96 .53

2.28

Country

China India

IT investment as a % of GDP (1998)

Table 3.7 ICT Penetration Indicators: ASEAN and Selected Asian Countries

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South Korea (18 per cent), and Taiwan (26 per cent), the other highly informatized economies in the region. In terms of fixed telephone lines and cellular phone penetration, Singapore’s penetration ratios were three times higher than that of Malaysia, and between seven and forty times higher than the other ASEAN countries. In terms of Internet usage intensity among its population, Singapore’s 24 per cent in 1999 far exceeded Malaysia’s 5.3 per cent and the penetration ratio of below 2 per cent of the other countries. In terms of the number of Internet domain hosts registered, Singapore, with close to 150,000 hosts as of 1 January 2000, exceeded the total number of hosts of the other four ASEAN countries combined. Overall, using the aggregate measure of IT investment as a percentage of GDP, Singapore’s 2.8 per cent is significantly above those of the other four ASEAN countries. Indeed, according to another source (WITSA 2000), Singapore was estimated to rank tenth in the world using the measure of IT spending as a percentage of GDP in 1999, and sixth when measured in terms of per capita ICT spending (also in 1999). 4. Concluding Observations and Policy Implications

Although the ASEAN-5 countries have made tremendous strides in leveraging the ICT revolution for economic development, with the exception of Singapore, this has been achieved primarily through engaging in ICT goods production (sector 1), and less so in creating information content (sector 2) and exploiting ICT goods and information content throughout all sectors of the economy to enhance productivity and competitiveness (sector 3). This predominance of ICT goods production over information content production and informatization is said to be characteristic of East Asia in general (Dedrik and Kraemer 1998), but it appears to be particularly marked for the ASEAN countries with the exception of Singapore. While manufacturing ICT goods for the world markets has been a major source of economic growth for the ASEAN-5 in the 1980s and 1990s, the region can expect to face increasing competition from countries such as China, Mexico, and India for labour-intensive manufacturing operations and countries such as Ireland and the former Eastern European countries for skill-intensive manufacturing activities.

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Moreover, many of these ICT production activities are by global MNCs and emerging global firms from Taiwan and Korea, rather than by indigenous firms from within ASEAN. Unless and until the ASEAN countries are able to develop sufficient technological capabilities and higher-skilled manpower supply of their own, their current share of global ICT goods production may not be sustainable in the future. This is particularly so with China’s entry into the World Trade Organization (WTO), the increasing shift of production to Mexico under the North American Free Trade Agreement (NAFTA), and the growing integration of Eastern Europe into the European Union. As such, new industrial policies must emphasize the development of technological capabilities and accelerated investment in education and manpower training. More importantly, ASEAN countries, with the exception of Singapore, have fallen behind in the diffusion and adoption of ICT, particularly in usage of the Internet, e-commerce, and wireless technologies. While the United States and some European countries such as the Scandinavian nations have raced ahead with rapid exploitation of the new ICT, most countries in the ASEAN region have not developed the “e-readiness” to embrace the new ICT. Factors affecting such readiness include a population that is sufficiently educated and receptive to new technology, businesses that have the strategic vision to compete through technological innovation rather than low labour cost, a public-private sector system that encourages investments in network infrastructure, a government regulatory environment that is more conducive to technological innovation, and a more entrepreneurial culture among technical professionals and managers. Many reasons have been suggested for the relatively slow pace of adoption of ICT by Asian economies, including possible language barriers, the slow pace of deregulation of the telecommunications and information content sectors, the adverse impact of the recent financial crisis that has dampened investment in new technologies by firms and reduced consumption by households, and the slow pace of regulatory reforms and continued dominance of established “old” economy players that rely on “crony-capitalist” practices in many protected domestic sectors to extract monopoly rents rather than create new value through investing in innovation and productivity. To this list, one may add the

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possibility of outdated industrial policies that have focused exclusively on the promotion of export-oriented manufacturing industries at the expense of policies that promote information content creation and distribution, together with the absence of market-driven network infrastructure development and informatization activities. The relative contribution of these and other possible factors and their interaction effects will remain the subject of considerable debate, given the paucity of rigorous scholarly work in this area. In the mean time, I suggest that policy-makers in ASEAN should urgently draw useful lessons from studying those nations that have done relatively well in terms of ICT adoption — especially California’s Silicon Valley, but also the Scandinavian countries, Israel, Ireland, as well as Singapore itself — in order to identify common underlying conditions that contribute to high “e-readiness”. This does not mean a blind imitation of the “Silicon Valley model” or other national models, but an intelligent adaptation of some of the more common underlying elements. These elements include active venture capital industry development, a pro-competition policy for and deregulation of the communications infrastructure sector, high investment in education and openness to foreign talent, investment incentives for R&D, and the facilitation of university-industry technology transfer, and a business environment favourable for entrepreneurship among technical professionals. In the case of Singapore, for example, the government has made a significant shift in policy towards promoting technopreneurship after careful examination of the successful models of the Silicon Valley, the Scandinavian countries, and Israel in high-tech industry development and technopreneurship (Wong 2001c). A key issue that policy-makers in the region need to grapple with is the urgent need to change the traditional compartmentalization of policymaking institutions to ensure better integration and co-ordination of policies affecting all the four conceptual sectors of ICT goods production, information content production, network infrastructure development, and informatization. In the new digital economy, where information appliances, content, networks, and services increasingly converge, policymakers need to make sure that policy institutions do not operate along “old” economy lines. Last, but not least, policy-makers in the ASEAN countries need to

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accelerate the integration of ASEAN economies and to develop new forms of ASEAN economic co-operation so as to exploit the impending explosive growth of e-commerce and mobile commerce. The competitiveness of ASEAN as an integrated manufacturing platform can be strengthened by e-commerce when supply chains across ASEAN member countries can be made seamless through the faster reduction of tariffs and other non-tariff barriers, and when high-speed data flows and wireless roaming across ASEAN countries become ubiquitous. NOTES 1. See, for example, Dedrick and Kraemer (1998) and OECD (2000). 2. EDP equipment, as listed on the first row of Table 3.2. 3. EDP equipment, as listed on the first row of Table 3.4. 4. Other indices of technological diffusion include the Technological Achievements Index (UNDP 2001) and the Economic Creativity Index of the Global Competitiveness Report (Porter, Sachs, Warner, and Schwab 2000). REFERENCES American Electronics Association (AEA). Cybernation 2.0: The U.S. High-Tech Industry and World Markets. Washington, DC: AEA, 2000. Dedrick, J. and K.L. Kraemer. Asia’s Computer Challenge: Threat or Opportunity for the United States and the World? New York: Oxford University Press, 1998. Elsevier. Yearbook of World Electronics Data. London: Elsevier, various years. Institute for Management Development (IMD) International. World Competitiveness Yearbook 2000. Lausanne, Switzerland: IMD International, 2000. International Data Corporation (IDC) and World Times. 2001 IDC/World Times Information Society Index. http://www.worldpaper.com/2001/jan01/ISI/2001 Information Society Ranking.html. International Telecommunication Union (ITU). Internet for Development. Geneva: ITU, 1999. Kraemer, K.L. and J. Dedrick. “Information Technology and Productivity: Results and Policy Implications of Cross-Country Studies”. In Information Technology and Economic Development, edited by M. Pohjola. Oxford: Oxford University Press, 1999. Organization for Economic Co-operation and Development (OECD). Information Technology Outlook 1997. Paris: OECD, 1997.

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. Information Technology Outlook 1999. Paris: OECD, 2000. Pohjola, M., ed. Information Technology, Productivity, and Economic Growth: International Evidence. Oxford: Oxford University Press, 2001. Porter, M., J. Sachs, A. Warner, and K. Schwab. World Economic Forum Global Competitiveness Report 2000. New York, NY: Oxford University Press, 2000. Red Herring. “Special Issue on Asia”, no. 83 (October 2000), pp. 114–16. United Nations Development Program (UNDP). Human Development Report 2001. New York, NY: UNDP, 2001. U.S. Department of Commerce. The Emerging Digital Economy II. Washington, DC: U.S. Department of Commerce, 2000. Wong P.-K. “Leveraging the Global Information Revolution for Economic Development: Singapore’s Evolving Information Industry Strategy”. Information Systems Research 9, no. 4 (1998): 323–41. . “The Contribution of IT to the Rapid Economic Development of Singapore”. In Information Technology, Productivity, and Economic G rowth: International Evidence, edited by M. Pohjola. Cambridge: Oxford University Press, 2001a. . “Globalization of American, European and Japanese Production Networks and the Growth of Singapore’s Electronics Industry”. International Journal of Technology Management, 2001b. . “Leveraging Multinational Corporations, Fostering Technopreneurship: The Changing Role of S&T Policy in Singapore”. International Journal of Technology Management, 2001c. World Bank. World Development Indicators 2000. Washington, DC: World Bank, 2000. World Information Technology and Services Alliance (WITSA). Digital Planet 2000: The Global Information Economy. Vienna, Virginia: WITSA, 2000.

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Reproduced from Information Technology in Asia: New Development Paradigms edited by Chia Siow Y ue and Jamus Jerome Lim (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available from < http://www.iseas.edu.sg/pub.html >

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Most ASEAN members can be called “globalizers”. This word can be used to describe countries that have adopted the strategy and policy of globalization, namely, those that are aimed at integrating the country into the global economy. Globalization can be understood as both an evolving structural condition of the world economy together with a conscious national policy, or as both a description of a state of affairs and a prescription for strategy and policy. In ASEAN, globalization as a policy or strategy is largely seen as a response to globalization as a state of affairs (Soesastro 2000). ASEAN’s decision in 1992 to form an ASEAN Free Trade Area (AFTA) was a decision taken by the six members to integrate their economies into the world by acting and working as a group. It was considered wise to do this jointly rather than to follow a “go-it-alone” strategy. Other initiatives, such as the ASEAN Investment Area (AIA), aim at further deepening that co-operation. These decisions

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were driven by the need to enhance efficiency, which will enable them to compete internationally. AFTA and AIA are meant to transform the region into an efficient production and export platform for global producers. ASEAN’s market is the world, and what is required is that ASEAN be an open region that adheres to the principles of open regionalism. ASEAN members may no longer be the enthusiastic globalizers they were a few years ago. For one, the 1997–98 financial crisis has tended to put a brake on their globalization efforts, particularly in the financial field. Second, countries in the region are finding it difficult to cope with volatile movements in the capital account of the balance of payments. The impact of a capital account crisis is far more severe and wide ranging than that of a current account crisis. The financial crisis has shown that contagion can be a very real threat, and that international rescue efforts do not necessarily help the crisis-hit countries overcome it. There has been much discussion surrounding the need for a new international financial architecture as well as the development of regional financial structures to prevent or to deal with future financial crises. ASEAN has instituted a regional surveillance process, but this is still in its infancy and appears to be developing very slowly. Additional initiatives, such as a swap arrangement between central banks, have been undertaken and are believed to be more effective if it were to proceed in the context of the ASEAN+3 co-operation. Much still needs to be worked out before this arrangement has credibility. But even so, various ideas for deeper regional financial co-operation have also been aired, many by ASEAN leaders. These include, inter alia, the idea of a common regional currency. However, this may be the result of great desperation rather than one based on a clear vision. In spite of the financial crisis, ASEAN’s global integration process has not come to a halt. ASEAN governments have decided to continue with the liberalization plan. Nonetheless, this is not going to be a smooth process. The ASEAN Economic Ministers Meeting (AEMM) held in Chiang Mai in early October 2000 clearly shows that this process cannot be taken for granted. But efforts to slow down the process or to seal off particular sectors might not be successful. This is in large part because of the information and communications technology (ICT) revolution.

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ICT forces economies to open up, and as a consequence, the ICT industry itself will also have to open up. The Indonesian government, for instance, had to renounce a presidential ruling to include the multimedia industry in the list of sectors that are closed to foreign investors because of strong domestic protests. There is a growing belief within the Indonesian public that ICT has become too important a matter to be left to the government. The ICT challenge is a challenge faced by all members of the society because ICT has such a pervasive impact. As is the case in many other countries, likewise in Indonesia, there are strong demands to open up the industry for the benefit of the populace. ASEAN leaders have not ignored the ICT challenge. They have launched the e-ASEAN initiative and have formed an e-ASEAN Task Force. In the words of Roberto R. Romulo, the chairman of the Task Force, its aim is that of “expanding digital opportunities and bridging the digital divide” in the region (Romulo 2000). The mandate is to develop a comprehensive plan that will create the necessary infrastructure to foster the widest application of ICT in society, government, and the economy. He also outlined four areas earmarked for co-operation, namely, the development of physical infrastructure, the development of the legal and regulatory environment, improving human capacity, and egovernment, that is, the use of ICT in government. The Task Force met three times, in March 2000 in the Philippines, in April 2000 in Singapore, and in August 2000 in Kuala Lumpur. A report was produced and presented to the ASEAN Informal Summit in Singapore in November 2000. This chapter examines the social and political impacts of ICT on ASEAN. An examination of the impacts is necessary in defining and designing measures to deal with them. When ASEAN members adopted their globalization strategy in the 1980s, they focused their attention on what can be termed “first-order adjustments”, namely, adjustments that involve opening up the society to the forces of globalization. Consequently, insufficient attention was paid to “second-order adjustments”, or measures to cope with domestic social and political changes and challenges that come about as a consequence of opening up (Soesastro 1998). As ICT is one of the main drivers of globalization, its influence on

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society is believed to be pervasive. Consequently, “second-order adjustments” must be incorporated into any policy, plan, or programme at the national as well as the regional levels. ASEAN’s globalization strategy needs to be complemented with a digital strategy. 1. Understanding the Social and Political Impacts of ICT

Developments in ICT surges ahead of our understanding not only of its economic impact but more importantly, in terms of its social and political impacts. The growth of ICT seems unstoppable. But countries and societies can be part of this development only if they have the wherewithal in terms of physical infrastructure and human resources. While the advantages of ICT are tremendous, its consequences may not always be positive. So countries that open themselves up to it should be prepared for its negative consequences and take appropriate measures where necessary, though this can be difficult if not impossible. For example, if individuals are allowed access to the Internet, it becomes difficult to prevent their entry into particular websites. In spite of this, some governments continue to operate firewalls on the Internet in order to block access to websites they find objectionable. Studies of globalization policies in ASEAN countries have shown that although governments open their arms to the economic gains brought about by globalization, they are unwilling to accept its social and political consequences. Some countries even attempt to shield their societies from negative consequences by denying their people full access to international television programmes, and not allowing satellite dishes to be set up in the rural areas. In other countries a revival of ideology and nationalism is thought to be effective in making the society immune to external political, social, and cultural influences. All such attempts have not been particularly successful. The impact of ICT is felt at various levels and with varying consequences at each level. At the individual level, those with access to it believe that there are only gains to be had from ICT. At the community and national levels there is the problem of a disparity between those with access and those without access to ICT. Even within a nation, there are differences between how the government and its people value ICT. In societies that are less open, governments still try to shield the

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population from information flows from elsewhere in the world twentyfour hours a day. Governments also feel threatened by their inability to control the many transactions that take place in cyberspace. Among nations, the growing divide between ICT-rich and ICT-poor nations — the digital divide — is a problem. At the opening of the meeting of the ASEAN information ministers in Hanoi in October 2000, Vietnam’s Deputy Prime Minister Nguyen Manh Cam stated that “information and the right to access to information have become an urgent need for all nations”, but added that this should not come at the expense of either “national sovereignty” or the “will of the people”. The area that has been given the greatest attention with regard to the social and political impacts of ICT thus far is one that results from the digital divide within and among nations. The concern is with the widening of this gap. Minister Moggie of Malaysia has argued that economic disparities in the Information Age are wider than in the Industrial Age (Moggie 2000). Social and political problems have arisen because of the segregation between users and non-users of ICT. He then lists the various prerequisites for nations to overcome this digital divide. These include the existence of the necessary basic infrastructure (electricity and communications), the availability of ICT-skilled manpower, the existence of a strong content industry (supplying content to the Internet), an established regulatory and policy framework, and the necessary mindset and the commitments from society to support and embrace ICT. Malaysia’s policy to bridge the divide is by developing a Universal Service Program (USP), one that is based on availability, accessibility, and affordability. Telekom Malaysia Berhad had been designated the sole Universal Service Provider for the interim period from 1 January 1999 to 31 December 2000. In January 2001 a new USP came into being and all network operators are required to contribute to the Universal Service Fund. One policy objective is to increase the telephone penetration rate, especially in the rural areas. In many other ASEAN countries the concern with access to ICT relates to the interest in continuously transforming the “old economy” into a more efficient and competitive “new economy”. There are different concepts and definitions of the new economy, but the one used here

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refers to an economy, or sectors or segments thereof, that uses ICT to raise productivity to sustain non-inflationary growth. With the exception of perhaps Singapore, in most ASEAN countries the new economy still constitutes only a small part of the economy. In other words, these economies are predominantly still of the old economy type. In the new economy, transactions are undertaken through the Internet, in the form of e-commerce. It is the Internet that manifests the most pervasive effect of ICT on production and society. Information too is coming into the home through the Internet. Internet traffic now doubles perhaps every three to six months. From 1989 to 1995, it doubled every twelve months and in 1997 it did so every six to nine months (Steering Committee on Research Opportunities Relating to Economic and Social Impacts on Computing and Communications, hereafter referred to as Steering Committee 1997). According to the Computer Industry Almanac, by the end of the year 2000, Internet users worldwide were projected to reach 327 million. Of these, 40 per cent would be residing in the United States. The top fifteen countries in terms of Internet users would account for 82 per cent of world-wide Internet users. Amongst these fifteen countries would be the three East Asian countries, namely Japan, China, and Korea. In Japan there would be about 22 million users, in China, approximately 4 million, and in Korea, about 3 million (Computer Industry Almanac Inc. 2000). Estimates and projections concerning Internet users vary greatly and change rapidly. Measurement problems arise due to definitions of “use” and “access”. Most of the data have been generated by market survey organizations and thus appear to have some upward bias in making projections. Early attempts at collecting the relevant data by scholars appear to be unsustainable (see, for example, the data collected under the Asia Web Watch 1998). The International Data Corporation (IDC) projects that the number of Asian Internet users excluding Japan would top 40 million by the end of the year 2000. It projects an annual growth rate of 40.6 per cent, and predicts that by 2004, Internet users in Asia, excluding Japan, would be as high as 141 million. The IDC also projects that e-commerce purchases in the Asia-Pacific region would exceed US$7.3 billion in 2000 and may grow even faster, at 128 per cent annually, until 2004. These fantastic growth rate projections by the IDC

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have taken into account continued falling Internet access rates, the proliferation of free Internet access providers, better telecommunications infrastructure, and the increasing interest of old economy companies in the Internet (Financial Gateway to Asia 2000). Forrester Research predicted that e-commerce in the Asia-Pacific region would reach US$1.6 trillion by 2004 (Asia.Internet.com 2000). The most fantastic projections that have been made are with regard to China, where Internet use “is going nuts” (Financial Gateway to Asia 2000). According to Gateway reports, netizens, or Internet users, in China total about 17 million today and would reach 250 million in 2010. This implies a penetration of only 20 per cent of the population in 2010. Forrester Research estimated China’s online population at 8.9 million in early 2000, and e-commerce transactions amounting to only US$40 million in early 2000; the latter is expected to increase to US$4 billion within a few years (Asia.Internet.com 2000). In Taiwan, the estimated number of Internet users was 6.4 million in 2000, with the young and higher-income groups making up the bulk of the online population (Financial Gateway to Asia 2000). In Japan, every working day nearly 50,000 Japanese sign up for a wireless Internet service provided by the NTT DoCoMo’s i-Mode Internet-capable mobile phone service. NTT DoCoMo already had 9.5 million subscribers and its target was 13 million subscribers by March 2001 (Financial Gateway to Asia 2000). In the ASEAN region, developments appear to be highly uneven. Singapore has the highest Internet penetration rate amongst all East Asian economies and perhaps even world-wide. This is primarily because of Singapore’s small population and its city-state nature. Estimates show that 53 per cent of Singaporean households are connected to the Internet, more than the 50 per cent in the United States. About 46 per cent of Singaporeans are Internet users (this estimate covers individuals aged fifteen and above living in a household connected to the Internet). In Korea, with Internet users increasing rapidly to reach about 15 million in 2000 (highest estimate), Internet users now account for 42 per cent of the population. The figure is 36 per cent for Taiwan (Asia.Internetcom 2000). Studies have shown that income and educational status account for differences in the use of computers and the Internet (Steering Committee 1997).

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Singapore and Hong Kong are potentially e-business leaders in the region. Amongst East Asian countries excluding Japan, both Singapore and Hong Kong belong to the top twenty countries in the world with the highest number of computers and Internet connections per 1,000 people. In terms of Internet connections, Hong Kong ranked twelfth and Singapore nineteenth, but in terms of computers, Singapore ranked eleventh and Hong Kong fourteenth (IMD International 1999). In contrast to Singapore’s heavy penetration, in the Philippines, in 1998 only 1 per cent of households had Internet access (Asia.Internetcom 2000). But the Philippines has made its mark in the cyber world by being associated with the “I Love You” virus. The Philippines is also a step ahead of many ASEAN countries in that it has introduced an eTable 4.1 ICT Infrastructure and Access in ASEAN and East Asia Telephone main lines per 1,000 persons, 1998

Mobile telephones per 1,000 persons, 1998

Personal computers per 1,000 persons, 1998

Internet hosts per 10,000 persons, Jan. 1999

ASEAN-10 Brunei Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam

— 2 27 6 198 5 37 562 84 26

— 6 5 1 99 0 22 346 32 2

— 1 8 1 59 — 15 458 22 6

— 0.06 0.75 0.00 21.36 0.00 1.21 210.20 3.35 0.00

Northeast Asia China Hong Kong Korea

70 558 433

19 475 302

9 254 157

0.14 122.71 40.00

22

1

3

0.13

Country

India — = No data available.

Sources: UNDP, Human Development Report 2000; World Bank, World Development Report (1999, 2000).

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commerce law. Table 4.1 compares access to ICT by the people in ASEAN countries and other East Asian countries. India is also included in the table. The table shows that by far Singapore and Malaysia have the best ICT infrastructure amongst the ASEAN countries, whereas the new members have very poor ICT infrastructure (the data in the table refer to 1998 figures). Since then there could have been significant developments in some, if not all of those, countries. It is likely, however, that the gap within the region may have widened as progress in Singapore and Malaysia tend to be faster than in countries with very underdeveloped ICT infrastructures. Northeast Asia may have progressed much more, and it is also possible that Southeast Asia will be lagging behind Northeast Asia. There may be a greater digital divide developing inside Southeast Asia as well as between Southeast Asia and Northeast Asia. Table 4.2 compares the cost of a local call and an international call Table 4.2 Comparison of the Costs of a Local Call and an International Call (US$ per 3 minutes, 1997) Local

To the USA

ASEAN-10 Brunei Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam

— 0.09 0.04 — 0.03 0.17 0.00 0.03 0.10 0.11

— — 4.69 7.16 5.33 26.86 6.22 2.42 11.56 —

Northeast Asia China Hong Kong Korea

0.01 0.00 0.05

6.66 2.63 3.15

India

0.02

6.10

— = No data available. Source: World Bank, World Development Indicators 1999.

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(to the United States). The cost is lowest in Singapore and Hong Kong and is prohibitively high in new ASEAN members such as Myanmar. Availability, accessibility, and affordability appear to go hand in hand. Physical infrastructure is the basis to creating access to ICT. The Internet boom in Korea had been aided by the availability of an extensive telecommunications network that was built in the 1990s. At the time the adoption of broadband seemed to be wasteful over-investment (Goad 2000). Now the Korean government is undertaking a US$35 billion high-speed telecommunications infrastructure project. When completed in 2005, about 95 per cent of Korean households would have Internet access (Bremner and Ihlwan 2000). Internet revenues, including network services, direct e-commerce, and advertising, are expected to reach US$25 billion in Korea in 2005, about a quarter of the total Internet revenues in developing East Asia (Salomon Smith Barney, cited in Goad 2000). But there are still problems of access due to language problems. Search engines and Internet domain names are all written in English (or at least in the Roman alphabet). This constraint, however, will be removed sooner rather than later as software is being created to overcome the language barrier (Dolven 2000). In countries such as Indonesia, ICT penetration has practically made English a second language in the urban centres. Information about Indonesia coming from within Indonesia itself as well as other information generated in Indonesia is largely written in English and is aimed at “fellow netizens” from all over the world. Former Indonesian President Abdurrahman Wahid seemed to have resented the suggestions made by Prime Minister Mahathir at the Informal Summit in Singapore in November 2000 that the use of English has become a necessity. This negative reaction is rather surprising but may be explained by Mr Abdurrahman’s overall rather nationalistic outburst during the Summit, which in turn may have been caused by political difficulties at home. Whilst the language issue is important and has implications for education policy, it is the problem of content on the web that has aroused many public policy debates. The downside of the Internet has been illustrated by the existence of websites teaching people how to make bombs. There are websites that propagate terrorist causes as well religious fundamentalism. Governments, especially of countries where they still

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have control over the media, are especially nervous about content that discredits governments and endangers “national security”. In today’s information age, information can no longer be monopolized. As such, Internet content can no longer be treated as a public policy issue. With information coming directly into people’s homes, what people read is gradually becoming a private choice. The alternative to allowing this is for a country to stay as an ICT-underdeveloped country. The cost is to be left behind. China is groping for a solution and trying to cope with this issue. The government continues to block some websites that it considers politically “unhealthy”, but it sees ICT as key to China’s future global economic competitiveness. That is why the government actively promotes the awareness and use of the Internet by developing various government-sponsored programmes through the Internet. At the end of 1999 the government held the first Miss Net contest to raise the awareness of women, who currently make up only 15 per cent of Internet users in China (Lawrence 1999). There is a lot of good and useful content on the Internet. The growth of healthcare websites has increased patients’ knowledge about drugs and symptoms in such a way that it could change the way patients and doctors interact (Bickers 1999). A report on the impact of the Internet on the Chinese society concluded that the Internet has subtly changed the way the Chinese interact with each other, their government, and the world. It has unleashed entrepreneurship even in some of the more remote parts of the country, and local governments have become more creative in using the Internet to attract foreign investors. Even the People’s Daily, the mouthpiece of the Communist Party, has a website that has moved out of the world of propaganda into the world of commercial publicity. It has even hosted an online forum, something that is rather revolutionary for an organization “whose role always has been to disseminate the party line in one direction — down” (Lawrence 1999). Significant changes have also begun to take place in Korea. The new dot.com ventures that have recently mushroomed have definitely changed the corporate scene in Korea. The chaebols are losing a lot of people to the new Internet companies. Many of the conglomerates’ trading activities will be replaced by the growing number of trading sites on the Internet. It remains to be seen whether the expansion of the new economy

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in Korea could break through decades of deeply entrenched business practices (Bremner and Ihlwan 2000). The ICT revolution is also changing corporations themselves. The degree of the impact it has on the nature of work and the work-place is as extensive as that of the steam engine and electricity in the days gone by. However, study needs to be done for proper changes to be introduced in the area of work policies and practices. The school and the nature of education will also be influenced greatly by the ICT revolution. This too should be an area of serious study in ASEAN. Changes in Northeast Asia are likely to be more rapid than in Southeast Asia, and the ASEAN countries can learn from the experiences of Northeast Asia. Perhaps this can become an agenda in the recently proposed e-Asia initiative to involve the ASEAN+3 countries. APEC has also added to its agenda various co-operation schemes to expand the digital opportunities and to reduce the digital divide in the region. The meeting in Brunei in November 2000 has produced an APEC Leaders’ Initiative in this field, and ASEAN should play an active role in the implementation of this initiative. In developed societies much of the discussion on the social impact of ICT has focused on issues of privacy, intellectual property rights, freedom of speech, and education. There is also concern about the impact of ICT on wage inequalities and its attendant social and political implications. In developing societies focus should be given to expanding opportunities. The impact of ICT on education and entrepreneurship, especially for small and medium enterprises (SMEs), are believed to be positive if access can be assured. The underprivileged and the poor do not yet have access to ICT, but ICT should also be made available to them. Universal service needs to be introduced in all ASEAN countries. The agenda for ASEAN appears to be already set. The development of physical infrastructure should result in greater access to ICT for the population at large. This should be supported by a conducive legal and regulatory framework as well as the development of social and economic infrastructure. However, as Minister Moggie of Malaysia had argued, a change in mindset and a strong sense of commitment is necessary to bring this about, which may well be the most difficult task to achieve. Perhaps the co-operative spirit within ASEAN can contribute to realizing this.

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2. Concluding Note: Empowerment and Democratization

ICT and the Internet promise to enhance productivity and economic competitiveness. The race for expanding the new economy is visible everywhere. But ICT and the Internet also create and expand the “new polity” as they unleash forces for democratic change in many areas. From an individual perspective, the Internet brings empowerment to its user as it opens up access to knowledge, information, and various services that can no longer be monopolized, particularly by the state. In a way ICT can be seen as an instrument of democratization. In addition, ICT can enhance human security. The government perspective that is inherently state-centric sees in the Internet many potential threats to state security. The security of the state, which is in fact often treated as identical to the security of the regime, remains a powerful argument for protection against the forces of globalization and democratization. Globalization can be used as an excuse to strengthen a country’s political identity and integrity, which often translates into an authoritarian, paternalistic, and essentially nondemocratic system. The promotion of Asian values by some leaders in ASEAN some time ago can be seen as an attempt to justify the adoption of an open economic policy while maintaining heavy state control over political, social, and cultural developments. ASEAN co-operation based on the idea of “sovereignty-enhancing regionalism” is also likely to be affected by globalization. It remains to be seen whether this kind of regionalism can be sustained if it means an extension to the region of the protection of state sovereignty. This is analogous to the extension of national import-substitution or protection policies to the region through the establishment of a discriminatory regional free trade area. It is legitimate for ASEAN countries to resort to regional co-operation arrangements so as to reassert the power of the state in the way it copes with the social and economic impacts of globalization, especially in protecting those unable to help themselves. The state must have the capacity to develop, manage, and secure the financing of social safety net programmes. But this reassertion of power by the state through regional co-operation can be misused to protect the state from the need to open up politically. Regional co-operation must not be allowed to

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reinforce the prevailing structure in the nexus between development and security that tends to justify and sustain authoritarian regimes. The mindset and commitment to support and embrace ICT requires a redefinition of the nexus between development and security, away from its current state-centric nature. ASEAN co-operation can help in the development ICT physical infrastructure, ICT skilled manpower, as well as the legal and regulatory framework. But it has very little to offer in terms of changing the mindset, which is a prerequisite for a successful adoption of ICT and the growth of the new economy. This change in mindset has to begin at home in each of ASEAN member countries. Different ASEAN countries have different capacities to “engineer” and “control” societal developments. Some countries may be able to develop an effective national information infrastructure or “info-structure” that can be used to protect against cyber-pornography or other undesirable influences (Low 2000). A common social policy that fits all is not likely to be attained for the diverse ASEAN members, but ASEAN’s agenda can focus on the sharing of experiences and best practices as well as cooperation in the expansion of basic infrastructure. REFERENCES Asia.Internet.com. News. 2000. http://asia.internet.com/asia-news. Asia Web Watch. Various statistics. 1998. http://www.ciolek.com/Asia-Web Watch (since discontinued). Bickers, Charles. “E-Health Hits Asia”. Far Eastern Economic Review, 25 November 1999, p. 88. Bremner, Brian and Moon Ihlwan. “Korea’s Digital Quest”. Business Week, 25 September 2000, pp. 20–25. Computer Industry Almanac Inc. Various press releases. 2000. http://www.c-i-a.com. Dolven, Ben. “What’s in a Name?” Far Eastern Economic Review, 17 February 2000, p. 53. Financial Gateway to Asia. Various reports. 2000. http://www.financialgatewaytoasia. com/articles. Goad, G. Pierre. “Riding the Net”. Far Eastern Economic Review, 23 March 2000, pp. 8–10. Institute for Management Development (IMD) International. World Competitiveness Yearbook 1999. Lausanne, Switzerland: IMD International, 1999.

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Lawrence, Susan V. “Widening Web”. Far Eastern Economic Review, 18 November 1999, pp. 54–55. Low, Linda. Economics of Information Technology and the Media. Singapore: Singapore University Press, 2000. Moggie, Datuk Amar Reo. Keynote Address by Minister of Energy, Communications and Multimedia of Malaysia at the Third e-Asean Task Force Meeting, Kuala Lumpur, 1–2 August 2000. http://www.e-aseantf.org/docs.html. Romulo, Roberto R. Remarks by the Chairman of e-ASEAN Task Force at the IT Policy Roundtable of Government and Business Leaders in Preparation for the G-8 meeting in Okinawa, Japan, 19 July 2000. http://www.e-aseantf.org/ docs.html. Soesastro, Hadi. “Adjustments in Four ASEAN Economies”. In Domestic Adjustments to Globalisation, edited by Charles E. Morrison and Hadi Soesastro, pp. 24–36. Tokyo: Japan Center for International Exchange (JCIE), 1998. . “Synthesis Report: The Globalisation, Development and Security Task Force”. DSSEA Update (Development and Security in Southeast Asia [DSSEA] project), no. 8 (2000), pp. 6–14. Steering Committee on Research Opportunities Relating to Economic and Social Impacts of Computing and Communications. “Fostering Research on the Economic and Social Impacts of Information Technology”. Report of a workshop organized by the Computer Science and Telecommunications Board (CSTB), National Research Council, United States, 30 June to 1 July 1997. http:// www.nap.edu/readingroom/books/esi/ch1.html. United Nations Development Program (UNDP). Human Development Report 2000. New York, NY: UNDP, 2000. World Bank. World Development Indicators 1999. Washington, DC: World Bank, 1999. . World Development Report. Washington, DC: World Bank, various years.

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Reproduced from Information Technology in Asia: New Development Paradigms edited by Chia Siow Y ue and Jamus Jerome Lim (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individualand articles from and < http://www.iseas.edu.sg/pub.html > 83 5. Human Capital ITare in available Innovation Growth in ASEAN

The advent of the information technology (IT) revolution has raised opportunities as well as concerns over the capacity of the Association of 1 Southeast Asian Nations (ASEAN) to narrow their wealth gap vis-à-vis the developed economies. This concern extends to members that have managed to narrow the per capita gap with the developed economies such as Singapore and Malaysia, as well as those that continue to lag 2 behind, such as the Philippines and Cambodia. There are concerns that the widening gap between the developed and the developing economies and the rich and poor within them will be exacerbated by unequal access to IT. Some supporters argue that the miniaturization process has widened IT access to the world’s population owing to falling prices and greater reach. Critics argue that the creators and controllers of cyber technology have merely expanded their control over the world’s wealth as the increased technological dimensions it has offered is in the

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possession of the developed economies. Neutral technologists argue that IT is an epochal, path-breaking innovation that has revolutionized a wide spectrum of human activities, thereby enhancing greater standards of living. As with technology in general, misuse of IT can expand socially undesirable conduct. For ASEAN, whether viewed collectively — through horizontal division of labour — or individually through vertical intra-industry division of labour or horizontal inter-industry division of labour, IT capacity-building is a sine qua non for ASEAN to sustain economic growth and structural change. Hence, despite the dangers that IT poses, ASEAN members will inevitably have to strengthen their human capital and electronic infrastructure to hasten their developmental process. For three major reasons, Southeast Asia has emerged as a major regional grouping that has begun to seriously examine the significance and the role of electronic infrastructure in the state of innovations. Firstly, Singapore, Malaysia, Thailand, and the Philippines have become important platforms for offshore electronics assembly and test operations for global corporations. In fact, Singapore and, to some extent, Malaysia have made significant strides in encouraging design operations. In addition, Singapore has become the regional hub for market customization. Indeed, the trade structure of Malaysia and Singapore is strongly dominated by electronics. Secondly, Malaysia has launched the Multimedia Super Corridor (MSC) and Singapore, the Infocomm 21 plan, both of which attempt to position their respective economies as an information base with the hope of attracting strong participation by ICT companies as well as its consequent effect on domestic cluster dynamics. Thirdly, Malaysia and Singapore have launched extensive policies to spawn and develop electronic infrastructure for the entire populace, making access to computers and the Internet relatively cheap and easily available. Cybercafes and tariff-free computers are common in both economies. Hence, it will be useful to examine Southeast Asia’s efforts to build its electronic infrastructure, albeit recent efforts may not have translated into innovations and also that the latter still relies on contributions from non-IT sub-sectors. As an enabler that connects every capability across

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the nook and cranny of economies, an electronic infrastructure is believed to facilitate greater innovation. Whilst economies begin by achieving 3 some growth to finance innovation-generating investment, their ability to catch up and reach the technology frontier would depend heavily on their capacity to generate Schumpeterian innovators. This chapter addresses two major issues. It first examines the state of electronic infrastructure development in Southeast Asia. Second, it assesses the relationship between electronic infrastructure, innovations, and per capita incomes in these economies. Given the difficulties encountered in measurement, proxies are used to make the connections. 4 For innovations, the chapter simply uses patents registered. A range of capacity dimensions are used to measure human resource and IT capabilities, for example, scientists and technologists as a share of population, the degree of systems integration, and the penetration rate of the Internet and the personal computer (PC). 1. Conceptual Framework

As an enabler and springboard, it should be interesting to test the relationship between IT endowments and economic performance. The engine of growth argument posits a dynamic influence of the growth of 5 particular sectors on the sector itself and on other sectors. However, because of the miniaturization process and the leftward movement of isoquants involving IT inputs, statistical results involving IT and economic performance are likely to be affected by irregularities. Also, it is increasingly becoming difficult for economies to raise competitiveness — either through product or process improvements — without capability-building in IT. What is important here is to crystallize a framework for examining IT human capital. Three key categories of human capital formation can be identified in IT building (Figure 5.1). First, IT capital is embodied in its users, who acquire IT know-how through learning by doing. This is arguably a good measure of IT literacy, although it does not offer information on its qualitative dimensions. The proxies used in this chapter are PC penetration and Internet penetration. Both instruments also facilitate strong interactive learning — enabling the exchange and understanding of explicit knowledge more easily than the alternative of accessing published works.6 Also included

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Figure 5.1 Human Capital, IT, Innovations, and per Capita Incomes: A Systemic Model

New firms

IT utilization

Innovation GDP per capita

In-firm entrepreneur development

Schooling

in the chapter is telephone registration, which is not a good measure of IT. Second, because a certain level of literacy is essential for absorbing and using IT know-how, measures of schooling — primary, secondary, and tertiary — become useful proxies for classifying the IT preparedness of economies. Of course, economies can show high levels of educational enrolment without significant participation in IT. This measure only shows the readiness of particular economies for IT penetration. Another measure used here is the streaming of graduates between science and non-science, which is problematic as it cannot be proven a priori that science graduates create or use IT more than non-science graduates. Third, participation in innovative activities — especially IT-related ones — becomes critical as a measure of the potential for IT-related process and product innovations. It is extremely difficult to measure capabilities that generate innovations. Whilst not exhaustive, this chapter uses scientists and engineers (S&Es), and technicians in research and development (R&D) as two measures of the potential supply-side measure of latent innovation capabilities. Fourth, rapid innovations and cluster dynamics are also determined

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by the structure embedding individuals, firms, and institutions. Entrepreneurs and new firm creation are a vital component of systems efficiency. Organizational systems — intra- and inter-firm systems embedding regional dynamics — often determine the structural dynamics of firms’ competitiveness. Entrepreneurs are not typically trained through formal schooling processes. Instead, they emerge in structural settings, firms, and institutions. The generation and transfer of entrepreneurs to begin new firms is vital for new firm creation and expanding systems synergies. When entrepreneurs blend with rapid product and process innovation then the spillovers associated with innovations generate strong synergies. However, not all entrepreneurs stimulate innovations. Whereas noninnovating entrepreneurs are important, innovators are essential to stretch the technology frontier and to spur new growth, that is, the Schumpeterian (1987) innovator is critical to sustain long-term growth. The Silicon Valley and Route 128 are good examples of open systems networks where individuals enter existing firms or start new ones, gain experience and rise in rank, and where necessary freely exit to join firms or start more new firms. The reconstitution of the intra-firm division of labour — as dissimilar activities continuously get relocated out — stimulates differentiation and the division of labour. This continuous expansion and outflow of entrepreneurs supports new firm creation to 7 sustain the growth of dynamic industrial districts. This fourth dimension is not examined in this chapter owing to problems of data. Singapore and, to some extent, Penang have generated considerable new firm creation capabilities from an open systems framework (Rasiah 2000). 2. Human Capital and IT Endowments

A whole range of proxies can be used to assess the level of IT human capital development across the ASEAN economies. For brevity, data accessibility reasons, and simplicity, this chapter limits the discussion to three critical variables, namely, Internet penetration, PC penetration, and S&Es and technicians per 1,000 persons. Internet and PCs are good proxies for measuring IT human capital as its incidence of penetration demonstrate embodied know-how, which denotes learning by doing and interactive learning. The stock of engineers, scientists, and technicians

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show high-level human capital necessary for stimulating innovative activities. 2.1. Primary and Secondary Schooling

Basic educational achievements in all five economies — using data of primary school enrolment — are not significantly different (Figure 5.2). Considerable dissimilarities emerge in secondary school enrolment (Figure 5.3) and these become stark in tertiary enrolment (Figure 5.4). All ASEAN economies enjoy almost total participation rates in primary schooling — equivalent to the developed economies — demonstrating that basic education is virtually universal in these economies. Their participation rates as compared with the developed economies fall significantly in secondary school enrolment. In 1980, Laos, Myanmar, and Thailand enjoyed only 21, 22, and 29 per cent in participation rates, respectively. Vietnam and Malaysia had 42 and 48 per cent, whereas Singapore and the Philippines had 60 and 64 per cent, respectively. These figures were all higher for 1996, although only Malaysia, Singapore, and the Philippines exceeded 60 per cent. In contrast, secondary school participation rates in South Korea, Japan, United States, and Germany in 1996 was almost total. The Philippines, with the highest secondary educational enrolment rates in both 1980 and 1996, is clearly marked out as the country with the biggest supplier of secondary education in ASEAN. 2.2. Tertiary Education

Tertiary school enrolment in ASEAN in 1996 was highest in Singapore (39 per cent) followed by the Philippines (35 per cent) and Thailand (21 per cent) (Figure 5.4). Indonesia and Malaysia had tertiary enrolment rates of only 11 per cent each. The corresponding rates in Cambodia, Laos, Myanmar, and Vietnam were only between 1 and 6 per cent. The commensurate rates for South Korea and the United States were 60 and 81 per cent respectively, though Japan’s and Germany’s were only 43 and 45 per cent respectively — a consequence of most students entering the technical and vocational skills base in order to enter industry earlier. Despite the relatively high enrolment rates, Singapore continues to import substantial numbers of skilled and professional personnel, owing

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0

20

40

60

80

100

120

140

Indonesia

1996

Vietnam

Source: Computed from World Bank (1999).

Malaysia Philippines Singapore Thailand

1980

Laos

Figure 5.2 Primary School Enrolment in ASEAN, 1980 and 1996

Cambodia Myanmar

5. Human Capital and IT in Innovation and Growth in ASEAN 89

Percentage

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10

20

30

40

50

60

70

80

90

Vietnam

Source: Computed from World Bank (1999).

Indonesia Malaysia Philippines Singapore Thailand

Laos

Figure 5.3 Secondary School Enrolment in ASEAN, 1980 and 1996

1996

Cambodia Myanmar

1980

90

Rajah Rasiah

Percentage

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0

5

10

15

20

25

30

35

40

45

Vietnam

Source: Computed from World Bank (1999).

Indonesia Malaysia Philippines Singapore Thailand

Laos

Figure 5.4 Tertiary Education Enrolment in ASEAN, 1980 and 1996

1996

Cambodia Myanmar

1980

5. Human Capital and IT in Innovation and Growth in ASEAN 91

Percentage

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Rajah Rasiah

mainly to its small size. The Philippines continues to remain as a major exporter of its professional and skilled personnel. Hence, whereas foreigners participate strongly in the growth dynamics and innovations generated in Singapore, Filipinos migrate to contribute strongly to similar effects abroad. The remaining ASEAN economies need substantial expansion in secondary and tertiary education. Amongst them, only Malaysia has embarked — from the late 1990s — on a programme to strongly expand tertiary enrolment rates. In addition to expansion in public universities’ enrolments, private universities were approved to overcome the growing discrepancies between supply and demand. 2.3. Science and Technology (S&T)

However, whilst schooling is a necessary social investment for development, extensive participation in innovative activities require a different set of endowments. While IT infrastructure has become a major enabler, S&Es in R&D are also increasingly becoming important. Because the statistics on S&Es refer to the entire range of scientists and engineers, and owing to the lack of statistics on IT, data on aggregate S&E personnel and technicians are used in the R&D figures in this chapter. Singapore is the only ASEAN economy with significant endowments in S&E human capital comparable to the developed economies (Table 5.1). Vietnam had a higher share of S&Es in R&D per million persons than the Philippines, Thailand, and Malaysia. Similarly, Malaysia enjoyed a higher number of technicians in R&D per million persons than 8 Thailand and the Philippines. Malaysia’s percentage of 24-year-olds with science and engineering degrees was only 0.8 per cent compared with 7.6 per cent for Singapore. The larger higher-order human capital enjoyed by Singapore obviously places it close to the developed economies in its capacity to generate innovations and hence raise per capita income levels. Figure 5.5 shows that only Singapore enjoys significant participation by R&D S&Es, reaching 73.1 per cent vis-à-vis the proportion per million persons of the United States in 1996. The corresponding figures for Indonesia, Malaysia, the Philippines, and Thailand were 4.8, 2.3, 9 4.2, and 3.2 respectively, which were extremely low. A critical mass of

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Table 5.1 High-Tech Human Capital Indicators of Selected Economies

S&E in R&D per million persons (1985–95)

Technicians in R&D per million persons (1985–95)

% of 24-year-olds with science and engineering degree (1985–95)

ASEAN Malaysia Philippines Singapore Thailand Vietnam

87 157 2,728 119 308

88 22 353 40 —

0.8 — 7.6 — —

Northeast Asia Japan South Korea China Hong Kong

6,309 2,636 350 98

828 317 201 105

6.4 7.6 — —

Western hemisphere USA Germany

3,732 2,843

1,472

5.4 5.8

— = No data available. Source: World Bank Institute (1999).

human capital is necessary to stimulate concerted innovation activities. The enormous gap between the developed economies and Indonesia, Malaysia, the Philippines, and Thailand make catching up difficult. 2.4. IT Penetration

IT human capital in Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam have evolved unevenly. Singapore and, to a lesser extent, Malaysia show a steady rise in the expansion of their electronics infrastructure and technical personnel. Indonesia, the Philippines, and Thailand have shown a relative stagnation in this sphere. The Internet hosts per million persons gap between Singapore and the other Southeast Asian economies has also widened (Figure 5.6). When compared with the United States, which is the global leader in Internet penetration, Singapore enjoyed strong incidence with 65.2

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20

30

40

50

60

70

80

Indonesia

Philippines

Singapore

Source: Computed from World Bank (1999).

Malaysia

Figure 5.5 Scientists and Engineers in R&D in ASEAN-5, 1985–95

Thailand

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Percentage of U.S. figures

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10

15

20

25

30

35

1998

1999

Malaysia Singapore Philippines Thailand Indonesia

2001

Source: Goldman Sachs (2000).

2000

Figure 5.6 Internet Penetration in ASEAN-5, 1998–2003

2002

2003

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Percentage of population

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per cent in 1998, although this fell to 56.7 per cent in 1999. The corresponding figures for Malaysia, Thailand, the Philippines, and Indonesia were extremely low: 1.0, 3.3, 0.0, and 0.0 per cent respectively 10 in 1999. With the exception of Malaysia, which is aggressively pursuing efforts to expand Internet access to its population, the remaining three economies have not demonstrated a similar level of emphasis. Table 5.2 offers wider information on the distribution of Internet hosts in ASEAN. The scenario is similar with PC penetration. Singapore and, to a lesser extent, Malaysia, lead Indonesia, the Philippines, and Thailand. The gap between Singapore and Malaysia and the remaining three has continued to widen as well (Figure 5.7). PC penetration in Indonesia, the Philippines, and Thailand have somewhat stagnated. Singapore remains strongly serviced by PCs with its percentage penetration rising from 43 per cent in 1998 to a projected level of 80 per cent in 2003 (Figure 5.7). Compared with the world’s leading user of computers, the United States, the percentage share ratio of Singapore was 92.5 per cent in 1999. The corresponding ratios for Malaysia, Thailand, the Philippines, and 11 Indonesia were 15.2, 4.3, 4.3, and 2.2 per cent respectively. Assuming similar distribution levels in all these economies, that is, a uniform 12 distribution for the utilization of computers per head, the figures show a wide variance in PC access for the Southeast Asian economies. Singapore’s level of participation is almost similar to that of the United States, whilst the others lag far behind. Table 5.2 offers wider information on the distribution of PCs in ASEAN. The late 1990s became difficult for Indonesia, the Philippines, and Thailand. Economic turmoil, external debt, and social chaos have demanded greater diversion of their limited economic resources to ITrelated activities. The financial rupture that began with the baht crisis in 1997 quickly spread to the other economies, bringing ruin to their economic fundamentals (Rasiah 2000; Stiglitz 1999). Despite its own catastrophic experience, strong international reserves offered Malaysia the option of avoiding a forced recourse to the International Monetary Fund (IMF) and hence the ability to avoid the bitter contractionary policies it advocated for Indonesia, the Philippines, and Thailand — at least initially. Malaysia has managed to avoid mandatory IMF pressures

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Malaysia Singapore Philippines Thailand Indonesia

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Source: Goldman Sachs (2000).

2000

Figure 5.7 PC Penetration in ASEAN-5, 1998–2003

2002

2003

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Percentage of population

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98

and hence resume expansionary policies that have included a renewal of IT infrastructure development. Given the social and political upheaval in Indonesia, the Philippines, and Thailand, it is unclear if these economies are economically ready to invest heavily in building their IT human capital. The transitional ASEAN economies of Vietnam, Cambodia, Laos, and Myanmar still suffer from serious demand constraints and poor infrastructure. As such, government budgetary constraints make rapid IT investment difficult. Singapore and Malaysia have ventured aggressively to build their IT infrastructure (Wong 2001; Rasiah 1999). In addition to generous financial incentives, Malaysia and Singapore also offer superior infrastructure and political stability. Malaysia has also waived tough immigration controls on skilled labour and professionals for firms Table 5.2 IT and Telecommunication Indicators of Selected Economies Telephones per 1,000 persons (1997)

PCs per 1,000 persons (1997)

Internet hosts per 10,000 persons (July 1998)

ASEAN Indonesia Malaysia Philippines Singapore Thailand Vietnam Laos Cambodia Myanmar

25 195 29 543 80 21 5 2 5

2.1 46.1 13.6 399.5 19.8 4.6 1.1 0.9 —

0.11 18.38 1.01 187.98 4.17 0.00 0.00 0.05 0.00

Northeast Asia Japan South Korea China Hong Kong

479 444 56 565

202.4 150.7 6 230.8

107.05 37.66 0.16 108.02

Western hemisphere USA Germany

644 550

406.7 255.5

975.94 140.58

— = No data available. Source: World Bank Institute (1999).

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locating in the MSC. Professionals have long enjoyed preferential access to employment opportunities in Singapore. However, Malaysia’s engineering and scientific endowments in R&D activities are extremely shallow. Malaysia will have to step up the supply of S&Es, especially in IT- and electronics-related activities. With the exception of Singapore, the remaining ASEAN economies face serious demand-supply gaps in human capital endowments. In the long term, domestic human resource supply institutions such as universities should be transformed to narrow the widening demand-supply human resource gap. In the short term, Malaysia must streamline and improve its immigration policies to import qualified S&Es from abroad. This way, human resource capabilities developed abroad can contribute to IT development in Malaysia. Given the dynamic role of IT, the remaining market economies and transitional economies of ASEAN must also increasingly emphasize IT capacitybuilding. 3. Innovation, High-Technology Exports, and Long-Term Growth

While it is easy to define innovation and distinguish it from inventions (Rosenberg 1982; Rasiah 1996), it is extremely difficult to identify and measure the former as what is considered new to individuals, firms, institutions, and economies need not be new to the universe. Much of the measurement only entails what is legally defined and recorded. Even legally registered innovations often pose problems with parameter definitions, especially with regard to the range in which the variable is appropriate. Hence, this section offers no exhaustive assessment of the relationship between electronic infrastructure and human capital endowments in innovations in the Southeast Asian economies. Furthermore, the relationship between IT and human capital infrastructure, as well as innovations and long-term growth is not linear. As Svennilson (1954) has argued, growth precedes innovation and only when sufficient growth has been achieved will reserves and synergies stimulate innovation — successfully contesting the Schumpeterian (1934) thesis on innovations and growth. A somewhat similar relationship exists between IT infrastructure development and gross domestic product (GDP) growth. What is clear is that Southeast Asian

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economies have enjoyed considerable growth and structural change prior to the advent of IT, which has facilitated growth-enhancing investments in the latter. This chapter avoids attempting to test the relationship between the variables for two main reasons. First, data limitations exist and second, the IT and human capital proxies used here are themselves part of broader variables. Hence, this section restricts itself to examining the relationship between human capital endowments and patent registrations, hightechnology exports and GDP growth with explications of the plausible reasons for discrepancies and deviations from expected patterns. Also, given the central role played by human capital and IT in driving technological change today, the section will explore mechanisms for enhancing their development in these economies. Table 5.3 High-Tech Endowments of Selected Economies % R&D % High-tech expenditure export in mfg. in GNP export (1985–95) (1997)

Patents filed (1996) Local

Foreign

Total

3,957 3,911* 2,634 38,403 4,355 22,206

3,997 4,052* 2,797 38,618 4,558 22,243

ASEAN Indonesia Malaysia Philippines Singapore Thailand Vietnam

0.1 0.4 0.2 1.1 0.1 0.4

20 67 56 71 43 —

Northeast Asia Japan S. Korea China Hong Kong

2.9 2.8 0.5 0.3

38 39 21 29

340,861 68,446 11,698 41

60,390 45,548 41,016 2,059

401,251 113,994 52,714 2,100

Western hemisphere USA Germany

2.5 2.4

44 26

111,883 56,757

111,536 98,338

223,419 155,095

40 141* 163 215 203 37

* 1995 figures. — = No data available. Source: World Bank Institute (1999).

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The ASEAN market economies demonstrate strong participation in high-technology exports, primarily constituted of electronics devices. There were no data to make similar assessments for the ASEAN transitional economies. Nevertheless, Vietnam showed an R&D expenditure as a share of gross national product (GNP) that was equivalent to Malaysia’s in 1985–95 and its patent registrations filed ranked third behind Singapore and Malaysia in 1996 (Table 5.3). The expansion in high-technology exports in Singapore, Malaysia, the Philippines, Thailand, and Indonesia have been driven by foreign direct investment — particularly from the United States and Japan. Despite the emergence of local firms, Singapore and Malaysia still enjoy considerable foreign investment in related industries. Whether marketbased or transitional, most patents in the ASEAN economies have been filed by foreigners. Only Singapore demonstrates strong human capital endowments and hence has managed to upgrade to high value-added activities such as designing and regional customization. Malaysia remains second on this scale in Southeast Asia but, due to weak science and engineering human capital endowments, lags far behind Singapore despite its IT infrastructure advancing reasonably well. Hence, firms in Malaysia, Thailand, the Philippines, and Indonesia have managed to generate considerable high-technology exports only in relatively low value-added activities. Access to innovations in parent locations and a decentralized production network with offshore locations in many of the ASEAN economies specializing in low value-added activities explain the dominance of such exports. With the exception of the Philippines, which has faced severe deindustrialization and stagnation from the early 1980s until a resurgence in growth in the 1990s (Ofreneo 1998), overall GDP growth in these economies have been relatively high among developing economies. Indonesia, Malaysia, and Thailand recorded strong growth rates since 1987 until the financial crisis struck in 1997 (Jomo 1996; Rasiah 1998). Expansion in the early phase of structural change within resource-based and low value-added export-processing industrial activities has helped 13 generate strong GDP growth. Deficits in institutional development to support structural change towards higher value-added activities

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threatened to stall growth in these economies so much so that even without the speculative attack and regional contagion, it can be argued that shortfalls in institutional development would have slowed down growth. Only Singapore has managed to avoid being trapped in this loop, with strong human capital endowments driving high value-added growth, albeit the regional contagion affected its economy as well. Singapore’s per capita income is now higher than those of a number of developed economies. While the ASEAN economies performed remarkably well when compared with Latin American, African, and West and South Asian economies, long-term growth will depend on institutional build-up to stimulate innovations. North America, the European Union, and Northeast Asia remain considerably ahead of Indonesia, Malaysia, the Philippines, and Thailand. Only Singapore has closed the gap considerably, and has even overtaken some of the developed economies. The low levels of technological infrastructure in Indonesia, Malaysia, the Philippines, and Thailand are reflected aptly in the low level of patents registered. The figures fall even lower if registration of patents by foreigners is removed (World Bank 2000). As a percentage of U.S. figures, patents filed in Singapore reached 17.3 per cent. The corresponding figures for Indonesia, Malaysia, the Philippines, and Thailand were 1.8, 1.8, 1.3, and 2.0 per cent respectively (Figure 5.8). While the low-technology endowment percentages are common with nascent developmental states, improvements are necessary for firms to make the transition to higher value-added activities. The sequence of structural change follows different technological requirements as firms negotiate the daunting currents of growth to import, adapt, assimilate, and innovate technology. Singapore appears to be moving from leveraging to benchmarking while Malaysia is still attempting to create the conditions conducive for greater R&D. Malaysia has retained strong promise because of its good infrastructure, political stability, and long experience with hightechnology export-oriented multinationals. However, for the country to move into higher value-added operations — including IT-related operations — better co-ordination mechanisms are necessary to transform its massive investments into high-performing instruments. Indonesia,

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0

20

40

60

80

100

120

140

160

180

Indonesia

Philippines

Source: World Bank (1999).

Malaysia

Singapore

Figure 5.8 High-Tech Exports and Patents of ASEAN-5

Thailand

Patents (1996)

High-tech exports (1997)

5. Human Capital and IT in Innovation and Growth in ASEAN 103

Percentage of U.S. figures

–2

–1

2

4

6

8

10

0

© 2002 Institute of Southeast Asian Studies, Singapore 2

3

Ln(PCs per 1,000 persons)

4

Source: Computed from World Bank (1999).

1

Y = 5.64 + 0.75X

Figure 5.9 Gross National Product and Personal Computers

5

6

7

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Ln(GNP per capita, in US$)

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the Philippines, and Thailand seem to enjoy higher human capital endowments than Malaysia, but fall seriously short in terms of the necessary IT infrastructure that can initiate and propel the utilization of electronic infrastructure. Vietnam enjoys high human capital endowments but its IT infrastructure is still extremely weak. IT and human capital endowments in the remaining three ASEAN transitional economies are extremely underdeveloped. While making no causation link, the relationship between PC penetration and GNP per capita was examined statistically using 1997 cross-sectional data. The results show strong statistical correlation 14 between PC penetration and GNP per capita (see Figure 5.9). Intuitively, it can be argued that high per capita incomes offer economies the financial capacity to acquire personal computers, which when deployed in production and services — including productive household consumption — stimulates further growth in GNP per capita incomes. A statistical interpretation of the regression results was deliberately 15 avoided for the following reasons: first, the model is not specified fully and second, the dynamism of IT is not captured by the number of PCs as unit costs continue to fall progressively. A more complex model — introducing the variables that contribute to GNP growth — can help establish causation, but that is beyond the scope of this chapter. Within ASEAN economies, it is also quite clear that there is a direct proportional relationship between GNP per capita and PC use. The order begins Table 5.4 PC Penetration and GNP per Capita in ASEAN, 1998 PCs per 1,000 persons

GNP per capita (US$)

0.9 8.0 1.1 46.1 13.6 399.5 19.8 4.6

280 680 330 3,600 1,050 30,060 2,200 330

Cambodia Indonesia Laos Malaysia Philippines Singapore Thailand Vietnam Source: World Bank (2000).

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with Singapore at the apex, followed by Malaysia, and supported at the 16 bottom by Cambodia and Laos (Table 5.4). The message here is clear: ASEAN economies — in addition to other salient factors such as physical infrastructure — have to strengthen IT infrastructure in order to quicken economic growth. While there is an increasing emphasis in policy documents of the 17 need to raise IT infrastructure in all the ASEAN economies, the financial commitment is only strong in Singapore and Malaysia, which is understandable given the impact of the financial crisis and the status of development in the other economies. Malaysia is still strongly pursuing efforts to bulwark the MSC as a premier global IT base, while Singapore is attempting to turn into an IT-based technoplex island. A range of incentives and institutions has emerged to promote such developments in the two economies. However, unlike Singapore, Malaysia is still seriously disadvantaged by the lack of S&E human capital to drive the plan. As for the transitional economies, movement towards the technology frontier is still severely hampered by weak infrastructure and political uncertainty. Myanmar still suffers from an economic embargo from developed economies. Overall, only Singapore seems to be enjoying the pace of capacity-building in IT human capital that can propel it towards sustaining its competitive edge in the international division of labour. The remaining ASEAN economies — both market and transitional — must focus on expanding and improving better coordination of its IT-related institutional support. 4. Conclusions

This chapter has examined the state of IT infrastructure and human capital endowments in the ASEAN market economies of Indonesia, Malaysia, the Philippines, Singapore, and Thailand and transitional economies of Vietnam, Laos, Cambodia, and Myanmar using specific proxies. Whilst clear-cut assessments are difficult because of data limitations, some assessments were made on the relative endowments enjoyed by these economies. In general, the economies show mixed patterns. Singapore clearly stands out as a newly industrialized economy. Malaysia was generally ranked second, although it should be noted that its S&E human capital endowments have been smaller than that of

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Vietnam, Indonesia, the Philippines, and Thailand. It can be seen that Singapore dominates ASEAN in both human capital as well as IT infrastructure endowments, albeit the country lacks a sizeable population and a large employment pool necessary to benefit from scale economies. The relationship between PC penetration and GNP per capita — involving ASEAN economies and global economies — is both directly proportional and strong. Singapore’s high human capital and IT endowments have helped the country strengthen its role as the regional design and customization hub. Despite achieving both a per capita income ranked ninth in the world in 1998 — just ahead of the United States — and its high-wage levels, Singapore’s capacity to strengthen its S&T infrastructure has enabled the country to sustain rapid growth. Malaysia’s IT infrastructure has improved considerably in the 1990s. Both Internet and PC utilization in the country have risen. However, its S&E endowment remains low, which is reflected in its low record for patent registration. For Malaysia to achieve a critical mass of world-class IT operations, even in the MSC alone, the requisite IT-related S&E human capital deficits must be overcome. In the short run it can improve its already generous professional and technical human resource import conditions involving firms locating in the MSC. In the long run, however, it must raise domestic supply capacities of S&E human capital. Indonesia, the Philippines, and Thailand are languishing at the bottom of the IT trajectory among the five ASEAN market economies. While their S&E human capital endowments rank better than Malaysia’s, IT infrastructure has evolved far less in these economies. The situation is even worse among the ASEAN transitional economies. Internet and PC penetration in these economies are relatively weak. This is unsurprising, as their prime concerns for now are to re-establish economic stability and to ensure adequate consumption levels for the masses. However, given the importance of IT infrastructure as an enabler and S&E human capital as the vehicle to spur growth and technical change, ASEAN economies — both market and transitional — must make them central to their instrumental goals. Indeed, increased liberalization expected from the World Trade Organization (WTO), Asia-Pacific Economic Co-operation (APEC), and ASEAN Free Trade Area (AFTA)

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processes would magnify the differences in competitiveness with the current underdeveloped IT structure. Liberalization would help these economies access opportunities in global markets only when strong institutions facilitate domestic capability-building in order to assist firms in appropriating the opportunities. While IT infrastructure has become a necessary condition, human capital is a critical factor that drives technological change and international competitiveness. NOTES 1. ASEAN was formed in 1967 by Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Brunei was added in 1986, followed by Vietnam in 1997, Laos and Myanmar in 1998, and Cambodia in 2000. 2. Brunei was excluded from the discussion owing to scant data. 3. See Svennilson’s (1954) critique of Schumpeter (1934). 4. Clearly, patents do not sufficiently explain the amount of innovations generated in particular economies — especially when a considerable amount of innovations are unavoidably not patentable, for example, minor improvements and trademarks that are better kept as trade secrets. 5. The early arguments were dominated by the Verdoorn law that argued that manufacturing would have dynamic effects on economic growth, made famous by Kaldor (1967). 6. See Lundvall (1988) for a lucid exposition of learning as an interactive process. 7. See Young’s (1928) argument on the importance of differentiation and division of labour to expand markets. Indeed, Young contended that Smith’s (1776) famous dictum, that the division of labour is dependent on the size of market, works both ways — that the latter is also dependent on the former. Best (2001) offers a lucid application of these principles in explaining cutting edge organizational frameworks. 8. Data for the remaining ASEAN economies were not available. 9. The period for Indonesia was from 1981 to 1995. All figures computed from World Bank (2000), World Bank Institute (1999). 10. Computed from Goldman Sachs (2000). 11. All percentages were computed from Goldman Sachs (2000). 12. This assumption is of course problematic, but given data limitations, it appears to be the most plausible one available. 13. The exception to this is Singapore. 14. Running the following partial regression equation, Ln(GNP per capita) = α +

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βLn(PC/’000) + µ where α and µ refer to a constant and error terms, respectively. The following results were obtained: Ln(GNP per capita) = 5.64 + 0.75 (LnPC/’000) (54.76)* (25.58)* 2

F = 654.16*; Obs= 94, Adjusted R = 0.88 Figures within parentheses refer to t-ratios; asterisks indicate significance at the 1 per cent level. 15. With reference to note 14, the high constant and its strongly significant t-ratio clearly demonstrates the importance of other variables. The strong and positive constant also shows that GNP growth precedes growth in PC use, and that it is only after a certain per capita income level has been attained that PC growth stimulates GNP growth. 16. The lack of data prevented the inclusion of Myanmar. 17. Evidenced, most recently, by the e-ASEAN agreement. REFERENCES Best, M. The New Competitive Advantage. London: Oxford University Press, 2001. Goldman Sachs. B2B E-Commerce/Internet Asia Pacific. Hong Kong: Goldman Sachs Global Equity Research, 2000. Jomo, K.S. Southeast Asia’s Misunderstood Miracle. Westwiew: Boulder, 1996. Kaldor, N. Strategic Factors in Economic Growth. Ithaca: Cornell University Press, 1967. Lundvall B.A. “Innovation as an Interactive Process: From User-Producer Interaction to the National System of Innovation”. In Technical Change and Economic Theory, edited by G. Dosi, C. Freeman, R. Nelson, F. Silverberg, and L. Soete. London: Pinter Publishers, 1988. Ofreneo R. “Employment and Labor Policy in the Philippines”. In Employment and Development, edited by R. Rasiah and N. von Hofmann. Singapore: FriedrichEbert Stiftung, 1998. Rasiah, R. “Institutions and Innovations: Moving towards the Technology Frontier in the Electronics Industry in Malaysia”. Industry and Innovation 3, no. 2 (1996). . “The Export Manufacturing Experience of Indonesia, Malaysia and Thailand: Lessons for Africa”. UNCTAD Discussion Paper no. 137. Geneva: UNCTAD, 1998. . “Malaysia’s National Innovation System”. In Technology, Competitiveness and the State, edited by K.S. Jomo and G. Felker. London: Routledge, 1999. . “From Dragons to Dwarfs: Causes of the Southeast Asian Financial Crisis”.

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Aolborg Working Paper no. 84. Denmark: Aolborg University, 2000. Rosenberg, N. Inside the Black Box. Cambridge: Cambridge University Press, 1982. Schumpeter, J. Theory of Economic Development. Oxford: Oxford University Press, 1934. . Capitalism, Socialism and Democracy. London: Unwin, 1987. Smith, A. The Wealth of Nations. London: Pelican Books, 1776. Stiglitz, J. “Social Issues Involving Public Policy”. Mimeographed. 1999. Svennilson, I. Growth and Stagnation in the E uropean Economy. Geneva: U.N. Economic Commission for Europe, 1954. Wong P.-K. “The Contribution of IT to the Rapid Economic Development of Singapore”. In Information Technology, Productivity, and Economic Growth: International Evidence and Implications for E conomic Development, edited by Matti Pohjola. Oxford: Oxford University Press, 2001. World Bank. World Development Report. New York: Oxford University Press, 2000. World Bank Institute. World Development Indicators. Washington, DC: Oxford University Press, 1999. Young, A. “Increasing Returns and Economic Progress”. Economic Journal 38, no. 152 (1928): 527–42.

© 2002 Institute of Southeast Asian Studies, Singapore

Reproduced from Information Technology in Asia: New Development Paradigms edited by Chia Siow Y ue and Jamus Jerome Lim (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles areAsia: available from < http://www.iseas.edu.sg/pub.html > 111 6. E-Commerce in Southeast Developments, Challenges, and Issues

In 1998 Andy Grove, the chairman of Intel Corp, was quoted as saying that “in 5 years all companies would be Internet companies or they won’t be companies at all” (“The Net Imperative”, The Economist, 26 June 1999). While this may be an optimistic forecast, it is very difficult to ignore the fact that the growth of the Internet is exceeding forecasts. For example, the International Data Corporation (IDC) predicted a few years ago that the number of Internet users would reach 320 million by 2002 (IDC 1997). The last count by the Nua Internet Surveys in July 2000, however, 1 revealed that the number of those online was already 359.8 million. With this explosive growth, it is no longer possible to ignore the Internet. In fact, some commentators even hold the opinion that the Internet has the capacity to change anything (“The Net Imperative”, The Economist, 26 June 1999). Considering its explosive growth, it has become a very

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attractive platform for conducting business. Accompanying these real opportunities, however, are serious challenges and risks. This chapter reviews the developments, challenges, and issues in e-commerce using the Internet and with particular focus on its implications for the ASEAN countries. Up to the present, there is no universally accepted definition of ecommerce (Mann, Eckert, and Knight 2000). Two works by the Organization for Economic Co-operation and Development (OECD 1997a, 1999) provide a list of the various definitions. The most practical definition is given by Mesenbourg (1999), who defines e-commerce as “transactions completed over a computer-mediated network that involves the transfer of ownership or rights of use of goods and services”. This definition is comprehensive as well as restrictive. It is comprehensive because it will include transactions such as those using the auto2 mated teller machine (ATM) and electronic data interchange (EDI) using proprietary protocols and private lines. But it is also restrictive because it requires a change in ownership or rights of use excluding many partially computer-mediated transactions. As such, doing online transactions is not very new. What is new is the use of the Internet, a public network, as a platform where customers directly deal with producers/sellers and/or intermediaries offering a wide range of goods and services. The widespread use of the Internet came with the introduction of the browser in 1994. With the introduction of the browser, the Internet, which used to be a limited network for research institutions mainly in 3 the United States, became the infrastructure for user-friendly communication for a very fast-growing number of people world-wide. The Internet became effectively available to anybody who could point 4 and click and not only to geeks. This led to the phenomenal growth of interconnected servers, and individuals connected through those servers. With this growth, the value of being connected to the Internet surged following Metcalfe’s Law which says that the “value of a network increases 5 exponentially with each additional node”. With its growth, the Internet became a viable platform for doing e-commerce as well. Given the widespread use of the Internet, not only are businesses looking to it as a platform for electronic transactions, but governments

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are also starting to use it for delivering services or for engaging in electronic procurement. This results in three primary groups of actors that will be doing transactions over the Internet, namely, business (B), consumers (C), and government (G). This would mean nine buying and selling transactions cells between these actors. Table 6.1 shows this matrix with some examples of applications using the Internet. As pointed out by the Sacher Report, however, business transactions are only conducted after a certain level of threshold of trust has been crossed (OECD 1997b). For e-commerce to flourish, it has been argued that players should have achieved the level of confidence accorded to over-the-counter transactions. Achieving this level of trust on e-commerce using the Internet as a platform poses considerable challenge to governments and societies. EDI transactions, using proprietary protocols over private lines and involving a limited number of players, are relatively easier to handle. By keeping the network “closed”, EDI has removed much of the problem that the Internet spawns when used as a platform for business transactions. ATMs are basically in the same network class. The chapter is organized as follows. Section 1 presents developments and initiatives in the area of e-commerce world-wide and in ASEAN in particular. Section 2 will outline the impacts of e-commerce, through its costs and benefits. Section 3 deals with issues and challenges. The last section provides a summary. 1. Developments and Initiatives

The description of developments and initiatives in e-commerce will be organized into four areas: those pertaining to transaction value, infrastructure, the socio-economic, cultural, and legal environment, and initiatives undertaken by governments. 1.1. Trends in Transaction Value6 7

Forrester Research (2000) predicted that world e-commerce revenues will grow to US$6.7 trillion in 2004 or about 8.6 per cent of total sales (Table 6.2). In the Asia-Pacific this will be US$1.6 trillion or 8 per cent of total sales in 2004. In addition, the Asia-Pacific is expected to exhibit a higher growth rate of 86.5 per cent compared with the world average of 58.4 per cent. There are several patterns that can be gleaned from these figures.

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Buyer Seller

Business

Consumer

Government

Business

B2B (businesses offering to sell or buy goods and services to other businesses)

B2C (businesses offering to sell goods and services to consumers)

B2G (businesses offering to sell goods and services to government)

GM/Ford (with suppliers and dealers)

Amazon (retail bookselling) Dell (direct computer selling)

Singapore: — GeBiz (one-stop, roundthe-clock centre for government business dealings)

National Transportation Exchange (buyers and sellers of trucking space)

Philippines: — Estore-Exchange (retail, various items)

Philippines: — SVINet/Macro (shopping mall and suppliers) — PhilBX Consumer

C2B (consumers offering to sell goods and services to business) Priceline (consumers bid for airline tickets) JobsDB (businesses posting job vacancies)

C2C (consumers offering to buy and sell goods and services to other consumers)

C2G (consumers offering to sell goods and services to government)

Ebay (consumer auctions)

Consultants’ web pages Government

G2B (government offering to sell goods and services to businesses)

G2C (government offering to sell goods and services to consumers)

Philippines: — customs (importation) — PhilJobNet (employment facilitation)

USA: — ServiceArizona (renew motor vehicle registrations, ordering personalized plates to replacing lost ID cards, etc.) Singapore: — eCitizen Centre (integrated government service delivery)

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G2G (government offering to buy or sell goods and services to other government agencies)

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One aspect is that the geographic distribution of transaction value is U.S.-centric, with the United States accounting for almost threequarters of transactions (74 per cent) in 2000. This dominance, however, 8 is expected to decline to less than half (47 per cent) by 2004. Another feature that has been pointed out by the OECD (1999), as evident from trends in the immediate past, is that even if e-commerce is growing very rapidly it is still in its embryonic stage. For example, in 1996/97 ecommerce accounted for only 3 per cent of all credit card purchases and 2 per cent of all direct purchases. For the OECD countries as a whole, this is just 0.5 per cent of total retail sales. By 2003–2005 this proportion will increase to 54 per cent of U.S. credit card sales and 42 per cent of direct purchases and 15 per cent of total retail sales in the OECD countries (Table 6.3). These results highlight the fact that even in developed countries where large online transaction values are expected, these values are still relatively small when compared with common benchmarks. In addition, Table 6.2 shows that even by 2004 e-commerce will only amount to only 13.3 per cent of total sales in the United States and 8.6 per cent in the world. Still another feature of current e-commerce is that even though B2C is growing at a phenomenal rate, currently, it is still heavily dominated by B2B transactions (OECD 1999). Table 6.4 shows the estimated relative size of B2B relative to B2C transactions in 1995–97. Almost all of the B2B transactions are still conducted using proprietary protocols and private-line EDI. The Economist predicted that once these big players are convinced that the Internet has become a secure and reliable alternative, and large businesses transfer their transactions to the Internet, a tsunami effect would be generated on transaction values flowing through the public Internet (“The Real Revolution”, The Economist, 26 June 1999). There exists almost no estimates of the transaction values for the ASEAN countries except for the estimate given by Goldman Sachs Research and the IDC for 2005, which puts the value at US$11 billion for Singapore, Thailand, and Indonesia, US$10 billion for Malaysia, and US$7 billion for the Philippines (“Settling Accounts”, Far Eastern Economic Review, 24 April 2000). Of course, there is no indication that the pattern of transactions mentioned earlier will be any different for the ASEAN countries.

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116 Table 6.2 World-Wide E-Commerce Growth (US$ billion) 2000

2004

% of total sales in 2004

Level

%

Level

%

CAGR (%) 2000–2004

Total

657.0

100.0

6,789.8

100.0

58.4

8.6

North America United States Canada Mexico

509.3 488.7 17.4 3.2

77.5 74.4 2.6 0.5

3,456.4 3,189.0 160.3 107.0

50.9 47.0 2.4 1.6

47.9 46.9 55.5 87.7

12.8 13.3 9.2 8.4

Asia-Pacific Japan Australia Korea, Republic of Taiwan All others

53.7 31.9 5.6 5.6 4.1 6.5

8.2 4.9 0.9 0.9 0.6 1.0

1,649.8 880.3 207.6 205.7 175.8 197.1

24.3 13.0 3.1 3.0 2.6 2.9

85.6 82.9 90.3 90.1 94.0 85.3

8.0 8.4 16.4 16.4 16.4 2.7

Western Europe Germany United Kingdom France Italy Netherlands All others

87.4 20.6 17.2 9.9 7.2 6.5 25.9

13.3 3.1 2.6 1.5 1.1 1.0 3.9

1,533.2 386.5 288.8 206.4 142.4 98.3 410.8

22.6 5.7 4.3 3.0 2.1 1.4 6.1

71.6 73.3 70.5 75.9 74.6 67.9 69.1

6.0 6.5 7.1 5.0 4.3 9.2 6.0

Latin America

3.6

0.5

81.8

1.2

78.1

2.4

Rest of the world

3.2

0.5

68.6

1.0

76.6

2.4

Note: Totals may not equal sum of rows due to rounding. CAGR = Compound annual growth rate. Source: Forrester Research (April 2000).

Table 6.3 Estimates of E-Commerce Sales Compared with Various Benchmarks

Current (1996/97) Near term (2001/2002) Future (2003/2005)

E-commerce estimates (US$ billion)

U.S. catalogue sales (US$ billion)

U.S. credit card purchases (%)

Direct marketing (%)

OECD and total retail sales (%)

26 330 1,000

37 309 780

3 24 54

2 18 42

0.5 5 15

Source: OECD (1999, table 1.3).

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Finally, it should be mentioned that a substantial proportion of websites are currently not yet equipped with online payment systems but only provide information on products which can then be purchased using orders via telephone or fax or normal over-the-counter transactions. This can be inferred from the low proportion of hosts that employ 9 encrypted transactions. 1.2. Infrastructure Trends

Mann, Eckert, and Knight (2000) identify three infrastructure systems on which the growth of e-commerce depends. These are communications systems, financial payment systems, and distribution and delivery systems. Only when these systems are dependable and safe will ecommerce flourish.

1.2.1. Communications Infrastructure The ease of online ordering depends on the state of the communications infrastructure. In examining developments in the communication infrastructure for e-commerce, it is useful to organize this from both the sellers’ and buyers’ points of view. From the sellers’ point of view, one would look at servers from where goods and services can be offered. It is often argued that the number of secure servers — those that use encrypted transactions over the web — is a much better indicator of e-commerce activity because these are more likely to be used for business purposes. Of course, it must be noted that this underestimates the actual number of servers used for e-commerce because this does not include the hosts engaging in EDI that use proprietary protocols and private lines. Estimates have shown an unprecedented growth of hosts throughout the world, in general, and ASEAN, in particular. In July 2000, the Software Consortium’s Internet Domain Survey (http://www.isc.org/ds/) 10 put the world-wide hosts count at more than 93 million. This number had been growing at a compound annual rate of more than 50 per cent between 1995 and 2000. In Southeast Asia, these growth rates were even higher than the average world growth rate (Table 6.5). Within ASEAN, Singapore, Malaysia, and Brunei led the other ASEAN countries in terms of the number of hosts per 10,000 of the population (Table 6.6). In terms of secure servers, Netcraft’s (http://www.netcraft.com/)

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Table 6.4 E-Commerce Revenues by Activity, of Selected Firms Activity E-commerce: business-to-business CSX GE NEC Cisco (e-commerce sales) Computers: Dell Computers: Gateway Computers: NECX Images: Photodisc Total business-to-business E-commerce: business-to-consumer Autos: Auto-By-Tel Flowers: 1-800-Flowers Books: Amazon Books: Barnes & Noble Groceries: Peapod Groceries: NetGrocer Gardening: Garden Escape Miscellaneous merchandise: AOL Miscellaneous merchandise: Onsale.com Miscellaneous merchandise: NetMarket.com (Cendant [CUC]) Miscellaneous merchandise: Internet Shopping Network Miscellaneous merchandise: eBay Toys: eToys Newspapers: Wall Street Journal Travel: Expedia Travel: Preview Travel: EasySABRE and Travelocity Ticket sales by Ticketmaster Pornography: Virtual Dreams Pornography: Internet Entertainment Group Pornography: Persian Kitty Pornography: CyberErotica Pornography: Playboy Online gambling: Sports International Online gambling: Interactive Gambling and Communications Music: CDnow Music: Tower Records Music: N2K Consumer stock brokerage: E*Trade Total business-to-consumer Total Source: OECD (1999, table 1.2).

© 2002 Institute of Southeast Asian Studies, Singapore

% of total

1995–97

90.12

3,000 1,000 16,528 2,496 730 150 35 4 23,943

9.88

14 48 148 14 60 78 1 464 100 1,000 15 100 10 7 104 12 100 60 8 20 1 9 4 6 58 15 8 12 148 2,624

100.00

26,567

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Secure Socket Layer (SSL) Survey — a regular survey of secure servers 11 — shows that in 1998, the proportion of servers was the highest in the United States (72 per cent). In ASEAN, Singapore had the highest rate of 0.33 per cent, followed by Malaysia with 0.12 per cent (Table 6.7). Consumers have several platform options for accessing the Internet. These can be either personal computers (PCs) connected via fixed lines, such as dial-up connections or cable connections, web-enabled television (TV), web-enabled game consoles, or mobile phones using the wireless application protocol (WAP). Infrastructure indicators, then, from the consumer side would include measures of PC ownership, telephone connection, TV ownership, cable connection, and mobile phone usage. In addition, the number of Internet users would also provide an indication of infrastructure availability. Of course, the number of PCs connected to the Internet would be a better measure than the total number of PCs in use. Similarly, the number of Internet users would be a better indicator compared with the total number of computer users. In terms of the online population, the best measure would obviously be the proportion that actually engages in buying or selling on the Internet. Unfortunately, data on this aspect are much harder to obtain. While a software agent can probe hosts connected to the Internet, estimating the number of such users would require well-designed surveys. According to the Nua Internet Surveys (http://www.nua.com/ surveys/how_many_online/index.html), in July 2000 the size of the online population was 359.8 million or 5.9 per cent of the world population. Again, the Asia-Pacific online population is the fastest growing, with a compound annual growth rate (CAGR) between 1998 and 2000 of about 46 per cent, whereas the average growth for the world was only approximately 31 per cent (Table 6.8). PC density in ASEAN countries is also growing faster than the world average. Leading the pack is Singapore, which had about forty-six PCs per 100 inhabitants as of 1999 (Table 6.6). In terms of dial-up accounts, Singapore again leads the five countries that have been forecast by Pyramid Research (Table 6.9). Singapore is expected to have 3.2 million dial-up accounts (or 86 per cent of the population) by 2004 from 992,000 accounts (or 28 per cent of the population) in 2000. This is the highest density among ASEAN countries.

© 2002 Institute of Southeast Asian Studies, Singapore

© 2002 Institute of Southeast Asian Studies, Singapore

Singapore Brunei Darussalam Malaysia Thailand Philippines Indonesia Cambodia Vietnam Myanmar

World

Country

5,252 — 1,606 1,728 334 177 — — —

4,851,843

1995

148,249 1,398 59,012 40,176 12,394 21,052 155 126 4

72,398,092

2000

66.81 54.82 72.08 62.93 72.28 95.57 58.61 107.56 138.63

54.06

1995–2000* CAGR (%)

15.815 0.000 0.799 0.295 0.049 0.009 0.000 0.000 0.000

8.56

1995

415.613 42.622 26.529 6.543 1.631 0.993 0.139 0.016 0.001

119.566

2000

65.38 52.63 70.06 62.00 70.16 94.14 56.37 106.01 137.39

52.73

1995–2000* CAGR (%)

No. of hosts per 10,000 people**

Sources: Network Wizards, Internet Domain Survey; Department of Economic and Social Affairs (1999).

CAGR = Compound annual growth rate. — = No data available. * Cambodia figure refers to growth rate for 1998–2000; Vietnam growth rate for 1997–2000; Myanmar growth rate for 1999–2000. ** Based on the medium assumption of the population projection.

sg my th id ph bn kh vn mm

Domain

No. of hosts

Table 6.5 Distribution by Top-Level Domain by Host Count, January 1995 to January 2000

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Table 6.6 Internet Hosts, Users, and Personal Computers

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Number of Internet hosts Total Country/region

1996

Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam Asia World

1999

Per 10,000 people Growth rate (%)

1996

1999

Growth rate (%)

206 — 9,591 — 25,200 — 3,628 28,892 9,245 5

1,399 155 21,052 — 59,012 4 12,394 148,249 40,176 126

— — 26.21 — 28.36 — 40.95 54.51 48.97 —

6.87 — 0.49 — 12.24 — 0.50 94.91 1.54 —

43.49 0.14 1.01 — 27.03 — 1.66 459.72 6.60 0.02

— — 24.11 — 26.41 — 40.00 52.59 48.51 —

1,042,738 16,252,758

4,212,758 71,825,360

46.54 49.53

3.04 28.14

11.74 119.70

45.04 48.26

Number of users Total Country/region

1996 (’000)

Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam Asia World

1999 (’000)

3.4 — 80.0 — 63.9 — 40.0 150.0 80.0 0.1

10.0 0.7 300.0 — 800.0 — 150.0 950.0 200.0 10.0

9,209.7 50,089.3

36,954.9 243,817.8

[98] [97] [98] [98] [98] [98] [98]

Per 10,000 people Growth rate (%)

1996

1999

Growth rate (%)

54.07 — 66.09 — 126.33 — 66.09 61.53 45.81 230.26

113.03 — 4.06 — 31.07 — 5.56 492.72 13.33 0.01

317.46 0.67 14.54 — 367.82 — 20.56 2,945.92 33.17 1.29

34.42 — 42.52 — 82.38 — 43.59 59.61 30.39 161.99

46.31 52.75

29.08 91.89

107.47 418.62

43.57 50.55

Number of personal computers (estimated) Total Country/region

1996 (’000)

Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam Asia World

1999 (’000)

8 — 940 5 880 — 670 660 1,000 250

— 9 1,700 — 1,300 — 1,100 1,450 1,300 500

38,608 234,200

67,909 345,053

[97] [98] [98] [98] [98] [98] [98]

Per 100 people Growth rate (%)

1996

1999

Growth rate (%)

— — 29.63 — 19.51 — 24.79 39.35 13.12 34.66

2.87 — 0.48 0.11 4.28 — 0.93 21.68 1.67 0.33

— 0.09 0.82 — 5.98 — 1.51 45.54 2.16 0.64

— — 17.85 — 11.15 — 16.16 24.96 8.58 22.08

18.82 12.92

1.26 4.65

2.07 6.26

16.55 9.91

— = No data available. Source: International Telecommunication Union (Internet host data: Internet Software Consortium, Réseaux IP Européens).

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Table 6.7 SSL Server Survey,* July 1998 Location United States (us) Japan (jp) Singapore (sg) Malaysia (my) Indonesia (id) Thailand (th) Philippines (ph) Cambodia (kh)

Sites

Percentage

14,674 429 67 24 11 6 3 1

71.74 2.10 0.33 0.12 0.05 0.03 0.01 0.00

* The Netcraft Secure Server Survey examines the use of encrypted transactions on the web through extensive automated exploration of the Internet. Source: Netcraft (http://www.netcraft.com/).

In terms of telephone connection, the highest connection density per 100 of the population in 1999 was also found in Singapore (58 per cent), followed by Brunei (25 per cent) and Malaysia (20 per cent) (Table 6.10). A similar pattern exists in terms of cellular phones, with the highest density per 100 of the population also exhibited by the same three countries. Table 6.11 shows TV densities in the ASEAN countries. Since cable wiring is currently used to web-enable the TV, cable subscription is an indicator for potential Internet access. Table 6.12 provides the pattern for cable subscription. Singapore shows the highest proportion (21 per cent) of those who have cable connection among TV owners. Ultimately, it is the number of users who have used the Internet to make a purchase that counts. A recent survey done by ACNielsen NetWatch shows that this proportion does not go beyond 12 per cent (for Hong Kong and the Philippines) and can be as low as 6 per cent (for Taiwan and the People’s Republic of China) (Figure 6.1). This low percentage reflects the current level of mistrust users have with regard to online transactions. The trends discussed above point to a large disparity in communication infrastructure among the ASEAN countries. Obviously, the disparity is largely dependent on the level of per capita income.

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Table 6.8 Estimated Number of People Who Are Online* (millions) March 1998 World Africa Asia-Pacific** Europe Middle East North America South America

119 1 17.27 23 0.75 70 7

March 1999 171.3 1.1 27 40 0.9 97 5.3

March 2000

CAGR (%)

304

31.3

2.6 68.9 83.4 1.9 136.9 10.7

31.9 46.1 42.9 31.0 22.4 14.1

CAGR = Compound annual growth rate. * Figures represent both adults and children who have accessed the Internet at least once during the three months prior to being surveyed. ** Includes Australia and New Zealand. Source: Nua Internet Surveys.

Once consumers have decided to buy, the next hurdle is whether payments can be made in an orderly, timely, and secure manner. The absence of a reliable and secure payments system will render the servers as mere information booths rather than venues where business transactions are consummated. Online sales are usually paid for through simple credit cards or with the more advanced — but far less common — “smart” cards. Thus credit card usage rate is an indicator of the potential for growth of e-commerce. It should be noted, however, that this is a weak indicator since credit cards are also used in over-the-counter transactions. The more fragmented the relationship between consumers, their bills, and the banks that clear the payments, the slower the uptake of e-commerce (Mann, Eckert, and Knight 2000). Bettoni (1999) has identified four requirements of business in a payment system: • • •

confidentiality — to ensure that card and payment information cannot be read by others; integrity — to ensure that information cannot be altered; authentication — to allow the cardholder to know if the merchant

© 2002 Institute of Southeast Asian Studies, Singapore

© 2002 Institute of Southeast Asian Studies, Singapore 14.14 299.41 65.16 2,781.05 9.34

300,000 666,000 495,000 992,000 74,600

2000

58.37 588.31 354.10 8,611.80 25.29

1,300,000 1,400,000 2,900,000 3,200,000 210,100

2004

54.8 68.1 89.8 79.3 154.1

56.3 70.1 91.9 80.8 155.6

1995–2000

35.9 15.0 41.2 32.4 33.2

36.7 18.6 44.2 29.3 34.5

2000–2004

CAGR (%)

Sources: For dial-up accounts: Pyramid Research (http://www.pyramidresearch.com/); for population: Department of Economic and Social Affairs (1999).

CAGR = Compound annual growth rate. — = No data available. * The 2004 values are in fact those of 2003.

Indonesia Malaysia Philippines Singapore Vietnam*

Per 10,000 of the population 0.91 9.95 0.73 52.69 —

18,000 20,000 5,000 17,500

Indonesia Malaysia Philippines Singapore Vietnam*

Number

1995

Country

Year

Table 6.9 Internet Dial-Up Accounts Forecast

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Table 6.10 Telephone Lines and Cellular Subscribers Main telephone lines Total Country/region

1996 (’000)

Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam

78.8 8.1 4,186.0 26.3 3,771.3 178.6 1,787.0 1,562.7 4,200.2 1,186.4

77.7 27.7 6,080.2 28.5 4,433.0 229.3 2,700.0 1,860.6 5,037.5 2,000.0

Asia

206,647.2

World

743,661.7

Per 100 persons

1999 (’000)

Growth rate (%)

1996

1999

Growth rate (%)

–0.70 40.99 12.44 4.02 5.39 12.49 20.64 5.82 9.09 26.11

26.26 0.08 2.13 0.56 18.32 0.39 2.49 51.33 7.00 1.58

24.68 0.25 2.91 0.55 20.31 0.52 3.70 57.70 8.35 2.58

–2.07 37.98 10.40 –0.60 3.44 9.59 13.20 3.90 5.88 16.35

279,151.5

10.02

6.02

7.83

8.76

878,037.3

5.54

12.88

14.73

4.47

[98]

[98] [98] [98] [98] [98]

Cellular mobile subscribers Total Country/region Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam Asia World

1996 (’000) 36 [95] 20 513 4 1,520 7 959 306 [95] 924 69

Per 100 persons

1999 (’000) 49 89 2,221 7 2,200 9 1,734 1,532 1,957 187

Growth rate (%) [98]

[98] [98] [98] [98] [98] [98]

1996

1999

Growth rate (%)

10.44 49.63 48.85 26.84 18.48 7.61 29.61 53.68 37.51 49.92

12.63 0.20 0.26 0.08 7.39 0.02 1.33 10.25 1.54 0.09

15.60 0.81 1.06 0.12 10.11 0.02 2.38 47.50 3.25 0.24

7.04 46.62 46.84 13.52 10.45 0.00 19.40 51.12 24.90 32.69

46,659

156,020

40.24

1.36

4.38

38.99

139,529

472,683

40.67

2.41

8.02

40.08

Source: International Telecommunication Union.

© 2002 Institute of Southeast Asian Studies, Singapore

Table 6.11 Television Households

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As a % of total no. of households

Total Country/region

1996 (’000)

1998 (’000)

Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Vietnam

50 75 25,500 33 3,100 237 7,600 671 9,000 11,500

— 90 26,000 — 3,200 261 6,850 695 12,300 11,850

410,959 856,799

478,399 937,771

Asia World

Growth rate (%)

Growth rate (%)

1996

1998

1.59 4.82 –5.19 1.76 15.62 1.50

98.0 4.5 57.9 4.1 75.8 2.6 56.7 89.4 62.9 75.7

— 5.0 55.3 — 72.7 2.8 47.2 85.8 85.4 75.5

–2.09 3.71 –9.17 –2.06 15.29 –0.13

7.60 4.52

53.8 66.0

65.0 73.1

9.46 5.11

9.12 0.97

5.27 –2.30

Note: “Television households” refers to the number of households that have television receivers. Source: International Telecommunication Union (http://www.itu.int/ITU-D/ict/statistics/).

Table 6.12 Households in Asia with Cable, 1998 (millions)

Country Singapore Philippines Malaysia Thailand Indonesia

Television households

Cable subscribers

Percentage

0.83 7.95 3.73 13.69 28.09

0.18 0.68 0.19 0.28 0.04

21.6 8.6 5.1 2.0 0.1

Taiwan India New Zealand Hong Kong China Japan Australia South Korea

5.89 59.55 1.25 1.85 309.80 42.59 6.22 14.13

4.40 18.25 0.35 0.48 68.80 6.34 0.90 0.75

74.7 30.6 28.0 26.0 22.2 14.9 14.5 5.3

Total

495.57

101.63

20.5

Source: Baskerville Communications Corp, cited in The eAsia report (Emarketer 2000).

© 2002 Institute of Southeast Asian Studies, Singapore

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•

127

is valid and to allow the merchant to know if the cardholder has a valid card; interoperability — that transactions can be conducted between vendors, between borders and between brands.

It has been claimed that the above are addressed by the Visa/MasterCard 12 Secure Electronic Transaction (SET) protocol. From surveys conducted, there are clear indications that there still exists a considerable fear in engaging in online transactions. A Yahoo! survey points to a very low percentage (5 per cent) of people who trust sending credit card information over the Internet, in contrast to 57 per cent who will agree to sending the same information using a public phone (as cited in Bettoni 1999). The China Internet Network Information Centre reports that the lack of transaction security bothered 30 per cent of the survey respondents and only less than 10 per cent engage in e-commerce-related transactions over the Internet (eMarketer 2000). Considering the low degree of credit card ownership in Asia, it has been argued that there might be a need to develop a different mode of payment besides a credit card–based system (EIU eBusiness Forum, 17 April 1999). Several initiatives are under way in ASEAN countries to provide solutions to electronic payment. The emerging model involves a foreign electronic payment company teaming up with a local service provider. For example, PT eSecure Indonesia was launched in April 2000 (Paul Budde Communication 2000). eSecure uses the SET standard designed by Visa and MasterCard, and provides services that include secure applications for credit cards and merchants, a merchant and payment gateway, and security applications for banks and financial institutions handling payment and financial transactions. In 1998, Telekom Malaysia signed an agreement with Orion Technologies, Inc. (Canada) to provide e-commerce services. The services include web-based electronic trading. In Singapore, National Computer Systems Pte Ltd. — the IT services arm of Singapore Telecoms — teamed up with Internet payments solution company Netlife (Germany) in September 1999 to provide a combined e-commerce and Internet payment solution. Another initiative in Singapore is Commerce Exchange, which is a product of the

© 2002 Institute of Southeast Asian Studies, Singapore

0

© 2002 Institute of Southeast Asian Studies, Singapore 4

6

8

10

Source: AC Nielsen NetWatch (1999), as cited in Far Eastern Economic Review, 24 August 2000.

12

12

Hong Kong

8

12

7

Philippines

Malaysia

2

6

Taiwan

Indonesia

6

China

Figure 6.1 Percentage of Users in Major Asian Economies Who Reported Ever Using the Internet to Make a Purchase

14

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Aniceto C. Orbeta, Jr.

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129

collaboration between the National Computer Board and Visa International. The exchange links companies, suppliers, and financial institutions. Still another initiative in Singapore is Internet-based echeques. These are online transactions exchanged by e-mail which allow secure direct transfer of payments. Behind the facility is the Network for Electronic Transfers (NETS) composed of Singapore’s five largest banks. Together with SingTel, NETS has also launched CashCards based 13 on the SmartCard technology. In Thailand, online payment is provided by the Bank of Asia to an online trading website initiated by the Department of Business Economics of the Commerce Ministry.

1.2.3. Distribution and Delivery Infrastructure Once the payments are cleared, the next concern is whether the goods are delivered promptly and that they arrive in good shape. The speed of electronic ordering and payment systems will be negated by an inefficient and unreliable delivery system. Of central importance, therefore, is the delivery system. The Economist (“Distribution Dilemmas”, 26 February 2000) has even argued that the tell-tale sign that e-commerce has taken off is not the number of PC users clicking at their desk but “automated warehouses and thousands of little vans delivering little packets to households”. Thus, e-commerce increases the importance of an efficient delivery system. It has been argued that the dominance of the United States in e-commerce, as mentioned earlier, is largely because of a welldeveloped catalogue sales delivery system (OECD 1999). Of course, this hurdle does not exist for goods that can be digitally delivered, such as stock trading, software, electronic books, or music in electronic format. It can be argued that this type of goods will dominate e-commerce until distribution systems become sufficiently reliable and efficient. This is evident in the OECD estimate of the proportion of the trading that will be done online between 2000 and 2005 (Figure 6.2). The clear winners are goods that can be delivered electronically such as stock trading, bill payment, software, and adult entertainment (OECD 1999). Boston Research Group also estimates that the biggest proportion of U.S. online transactions involves computer hardware and software, travel, and financial transactions (“Survey: E-Commerce”, The Economist, February 2000). Forrester has further predicted that digital delivery will

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be as much as 25 per cent of Internet purchases (E-Commerce Times, 24 January 2000, cited in Mann 2000). One of the distinct contributions of the Internet to the delivery system is the facility to track in real time the movement of ordered goods from source to destination. This has advanced by several notches supplier and consumer confidence that goods that have been paid for online are moving towards the intended destination. In addition, it is not only the major international carriers (such as FedEx, UPS, and DHL) that have this facility on their websites; small operators have as well. In another vein, the National Transportation Exchange (NTE; http://www.nte.net/) of the United States exemplifies what the Internet can do to transportation systems. Using the Internet, it connects buyers and sellers of transportation capacity. It handles both contracting and payments. By moving it from a proprietary network to the Internet, it has extended its reach down to individual lorry drivers who can use wireless Internet access devices to tap into the NTE (“The Rise of Infomediaries”, The Economist, 26 June 1999). Such is the rate of growth of e-commerce delivery systems that, even at this early juncture, Forrester Research has expressed doubts that the current delivery system will be able to handle the more than the US$6.8 trillion expected to be traded online by 2004 (Traffic World, 2 October 2000). To the author’s knowledge, this is the area where there is little information on the ASEAN countries. Of course, ASEAN businessmen can use major international carriers like UPS, FedEx, and DHL for international and — to a limited extent — local deliveries. It has also been argued that delivery of goods direct to households is a Western model of e-fulfilment. A more Asian way would be to use the ubiquitous corner convenience store, such as Seven-Elevens, as e-fulfilment centres for goods ordered and paid for online.14 1.3. Socio-Economic, Cultural, and Legal Environment

Over and above the three infrastructure systems is the social and legal environment within which these activities occur. The Sacher Report (OECD 1997b) argues that commercial transactions are to a large extent shaped by social and cultural attitudes.

© 2002 Institute of Southeast Asian Studies, Singapore

© 2002 Institute of Southeast Asian Studies, Singapore

Percentage

tra

60

38

33 33 25 25 20

20 20 20 20 16 15 10 10 10

8

7

5

5

5

5

) ) ) de ing are ent 2B rds oks pes ling iles ail ing 2B ines nce dio ting usic 2B ony sion tion a e k (B z y tw m (B ca i b m a o a b a B n r a t ( R o M a B o ph lev uc u m m l/e Ba el k ll p of ain ail ck g y g e s i a l c i e t d n n e a S i o v t m n i e T o B a I G t r t E o d t t a e e e s tr r/m Vi in Au M ph et nt l/e re il irl le ern G ne ape ta i A t e ai e l l e t r t u M R In Ai sp et Ad rn ew e t N In Source: OECD (1999).

0

10

20

30

40

50

60

70

Figure 6.2 Impact of E-Commerce on a Product Basis, 2000–2005: Estimates of Online Shares (percentages)

6. E-Commerce in Southeast Asia: Developments, Challenges, and Issues 131

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Aniceto C. Orbeta, Jr.

One way of characterizing the socio-economic and cultural dimension of e-commerce is through the level of access and acceptance of electronic transactions by the population. There are several aspects to this. One aspect is affordability, and this is related to the cost of getting online relative to per capita income. It is obvious that connectivity, however defined, is a positive function of the level of income. Another aspect is the level of comfort in doing electronic transactions, which is associated with the level of education and level of diffusion in the use of the Internet amongst the population. The state of the communications infrastructure in the ASEAN countries described above reflects the extent of connectivity. It is obvious that there are large disparities in access, which understandably emanate from disparities in level of development. Cultural acceptability, however, is much more difficult to measure. To a large extent, this is dependent on the introduction of information and communications technology (ICT) in the educational system as well as the leadership the government is providing in the use of ICT in its operations. It has been mentioned that Asians, in general, prefer face-to-face transactions and that there is lower credit-card ownership as well (EIU eBusiness Forum, 17 April 1999). In several countries there are many corner convenience stores. Finally, there is the legal environment governing electronic transactions. The ASEAN countries that have enacted e-commercerelated laws include Singapore, Malaysia, the Philippines, and Thailand. Indonesia is also currently working on an e-commerce legislation. The e-ASEAN Task Force predicts that by 2003 all member countries will have an e-commerce legislation based on the United Nations Commission on International Trade Law (UNCITRAL) model law on e-commerce. 1.4. Regional Initiatives

In ASEAN, a regional co-ordinated effort had been launched with the creation of the e-ASEAN Task Force in November 1999 (http://www.easeantf.org). The Task Force is a joint public-private sector advisory body composed of representatives from the ten ASEAN member countries. The overall mandate of the Task Force is to develop a comprehensive action plan for ASEAN to plug into the global e-space. The elements of the plan include:

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• • • • •

133

the evolution of a regional ASEAN Information Infrastructure (AII); the creation of an e-commerce-friendly legal environment; the facilitation of freer flows of trade and investment in ICT goods and services within ASEAN; the addressing of societal concerns; the leadership of government by example.

The pilot projects proposed by the Task Force include projects to support e-commerce initiatives, such as a dot.com incubator, an industry/ business exchange, an ASEANWorld master portal, and a regional trade network; an ASEAN School Network; and an e-entrepreneurship seminar (Romulo 2000). Important milestones for 2001 are the following: steps to enhance interconnectivity and interoperability; initiation of steps to apply Mutual Recognition Agreements (MRA) on telecommunications equipment; and the mutual recognition of digital signatures and electronic documents. For 2002, the major milestone involves the establishment of a regional payments mechanism. By 2003, the Task Force expects the region to have implemented a common ICT marketplace as well as have enacted an UNCITRAL-based e-commerce legislation for all members. A recent development is the signing of the e-ASEAN Framework Agreement during the Fourth ASEAN Informal Summit in November 2000 in Singapore. The agreement formalizes the agreement on the proposals developed by the e-ASEAN Task Force presented earlier. 1.5. National Initiatives

Several significant national initiatives in the ASEAN countries have been launched in recent years. Expectedly, some are much more advanced that others. In Singapore, the almost fully implemented IT2000 Masterplan is the existing blueprint for using IT in all government departments. It has spawned Singapore ONE (http://www.s-one.gov.sg), which was formally launched in June 1996. Singapore ONE aims to deliver a new level of interactive multimedia applications and services to homes, business, and schools throughout Singapore. It promises to go beyond what the Internet can deliver. The plan was to deliver two distinct but integrated levels of information services. The first is the broadband

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infrastructure of high-capacity networks and switches. The second is the advanced applications and services that use these high-capacity networks. The government has recently put together an ICT21 Masterplan, which has the objective of “transforming Singapore into a vibrant and dynamic global ICT capital with a thriving and prosperous net economy by the year 2010” (IDA 2000). In terms of applications, the popular eCitizen Centre (http://www.ecitizen.gov.sg) has been recognized as the “most developed integrated service delivery in the world” by America’s General Services Administration (The Economist, 24 June 2000). Another application is the GeBIZ website (http:// www.gebiz.gov.sg), which aims to be a one-stop shop for all government dealings. This is expected to be fully operational by the end of the year 2000. Figure 6.3 Rebuilding the Value Chain

Internet enables

Manufacturer/ publisher

EDI

Wholesaler/ distributor

E-retailer Reintermediation Portal/aggregator

Disintermediation

Consumer

Sources: Adapted from “Survey: E-Commerce”, The Economist, February 2000; Benchmark Capital.

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Malaysia, on its part, launched the Multimedia Super Corridor 15 (MSC) on 27 June 1998. It has envisioned the creation of a “perfect global multimedia climate” in a fifteen-kilometre by fifty-kilometre strip between Kuala Lumpur city centre and the Kuala Lumpur International Airport. The initial applications include: electronic government, smart schools, telemedicine, an R&D cluster, world-wide manufacturing webs, and borderless marketing. The Philippine IT21 seeks to position the country as the IT human resource centre in the region. The poor state of telecommunications infrastructure will continue to be a challenge. The recently passed ECommerce Act (RA8792), among others, mandates government agencies to use e-commerce solutions in their operations by asking them to prepare implementation plans. In July 2000, the government launched the Government Information System Plan (GISP), dubbed as the Philippine Government Online. It provides a framework for the utilization of IT 16 in government operations. Thailand is about to finish its e-commerce plan by the end of October 17 2000. The existing monopoly held by the Communications Authority of Thailand (CAT) has been cited as a major roadblock in the progress of diffusion of Internet use in Thailand (Far Eastern Economic Review, 21 September 2000). The CAT’s response to these criticisms is published on their website (http://www.cat.or.th). Vietnam appears to have similar problems as Thailand. Vietnam Posts and Telecommunications (VNPT) holds a monopoly over vital international gateways. Table 6.13 E-Commerce Impact on Various Distribution Costs (US$ per transaction) Airline tickets Traditional system Telephone-based Internet-based Savings (%)

8 1 87

Banking 1.08 0.54 0.13 89

Bill payment

Term-life insurance policy

Software distribution

2.22 to 3.32

400 to 700

0.65 to 1.10 71 to 67

200 to 350 50

15 5 0.20 to .50 97 to 99

Source: OECD (1999, table 2).

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2. Benefits/Impacts

It is useful to organize the discussion of the benefits of e-commerce from three points of view, namely, that of the supplier/producer, consumer, and society. 2.1. Suppliers/Producers

From the suppliers’ point of view, the benefits include: first, world-wide reach; second, a 24-hour × 7-day presence; third, the potential to eliminate intermediaries; fourth, the ability to update catalogues in real time and the potential for personalized offerings; fifth, lower transaction costs; and sixth, improved customer support in the form of order tracking, self-service information retrieval, and individualized dialogue (Goelzer 1999). The elimination of intermediaries is not that clear, at least not yet. Figure 6.3 shows that the Internet enables all players in the supply chain to deal directly with final consumers, which can lead to disintermediation. Dealing directly with the final consumer is the key revolution that the Internet brings to business transactions. Note that the EDI using proprietary protocols and private lines have all the facilities except that it stops short of dealing directly with consumers. The flipside of this, however, is that consumers will be inundated with information, thus increasing their willingness to pay for sorting services. This is what The Economist (26 June 1999) has dubbed as the rise in “infomediaries”. The popularity of portals such as Yahoo is testimony to this tendency. It should be noted that this also means greater access to information about the preferences of consumers at every node in the supply chain. The lowering of transaction costs is well established. Mann, Eckert, and Knight (2000, p. 59), for example, cites a 1997 study done by Booz and Allen, which finds that transactions over the teller window cost US$1.07; with an ATM, US$0.27; and with Internet banking, US$0.01. This result was subsequently corroborated by Andersen in 2000. For securities trading, the full-brokerage service charge is US$150, while E*Trade only charges US$10. Finally, OECD (1999) reports a substantial impact on distribution costs of e-commerce in the United States. For instance, the savings between traditional and Internet-based sales for

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airline tickets will be as much as 87 to 89 per cent for banking, 67 to 71 per cent for bills payment, 60 per cent for life insurance, and 97 to 99 per cent for software distribution (Table 6.13). Given direct contact with consumers, customer relations management is also revolutionized by the Internet. Orders can be tracked in real time, so inquiries can be answered accurately with very little effort. Consumers’ questions can be answered individually even without human intervention with well-designed online help systems. Finally, the potential for individualized dialogue with customers is greatly enhanced. The rise of offshore call centres (for example, America Online in Clark, Philippines) where costs are lower is testimony to this trend (Far Eastern Economic Review, “At Your Service”, 2 September 1999). Electronic commerce through the Internet provides both lower costs of market entry and transaction costs as well as the ability to extend geographic reach to a much larger market (Alliance of Global Business 1999). This makes it available to small and medium enterprises (SMEs). Since set-up costs are low, large volumes are not required to justify putting up a website for even modest-size firms. The usual model is availing the services of the rapidly proliferating applications service providers (ASPs) for a very small fee. 2.2. Consumers

The benefits for consumers include the following: (1) shopping from the comfort of the home, (2) the ability to shop anytime, (3) access to world-wide choices, (4) access to cost competition, (5) access to marketing information, (6) the opportunity to test digital products (for example, music), (7) the immediate download of digital products, (8) personalized service, (9) no waiting line, (10) no salesperson, and (11) intelligent agents to facilitate the sale. It has been argued that the “the bargaining power is shifting from sellers to buyers” (Goelzer 1999). The virtual shop facilities with intelligent software agents enhance the ability of consumers to browse and choose from a wide range of goods and services, thereby facilitating price comparison. It also facilitates personalized ordering for those who are not very much concerned about prices. Finally, innovative ways of product delivery have also emerged, enhancing the ability of consumers to test the product before buying.

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2.3. Society

OECD (1999) summarizes the economic and social impact of ecommerce into five broad themes, namely (1) it transforms the marketplace, (2) it has a catalytic effect, (3) it vastly increases interactivity in the economy, (4) it is based on openness, and (5) it alters the relative importance of time. These themes reveal the vastness of the impact of ecommerce. Underlying these themes is the increase in interactivity between producers, intermediaries, and final consumers brought about by allowing these three to interact with each other directly. With the aid of intelligent software agents, e-commerce increases the interactivity between producers, intermediaries, and final consumers. It is now easier to ask as well as provide information about products and preferences. Servers can also be programmed to record click streams and transactions conducted on its premises. This constitutes a system that is capable of generating important transactions data at low cost, one that will contribute to understanding consumer preferences. This is expected to enable suppliers to address directly specific market segments that were previously uneconomical. In addition, this will likely spawn new activities that will not only lead to new job creation, but will also result in the increased demand for new skills (Alliance of Global Business 1999). Furthermore, this means increasing the participation of consumers in the process of designing new products. This represents opportunities for customization to better suit consumer preferences, as against standardization, which is the trademark of the old economy. Finally, this is expected to breed a culture of openness that is the basic feature of the Internet. Unfortunately, using a public network also opens up the proverbial Pandora’s box because the transactors are no longer limited to a small number of producers, suppliers, and distributors but now include numerous final consumers as well. For one, without proper security systems, transactions also become vulnerable to being captured by parties beyond the ones participating in the transactions. In addition, since consumers’ surfing behaviour can be recorded, some privacy may be lost in the process. There is the concern that e-commerce will usher in a new source of

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inequity which is popularly called the “digital divide” . From the production side, the Internet provides opportunity for SMEs to sell their products online, something that was only available to players dealing in large volumes before. This will mitigate inequalities. From the consumer side, however, the reality is that only those who can afford to own a PC and a telephone line can tap into the Internet, unless extensive arrays of public Internet kiosks are installed. In addition, countries with better telecommunication facilities would have the distinct advantage of exploiting the benefits of online transactions. Another benefit is e-government. There are at least two areas where society can benefit from the use of the Internet in government operations. One such is in the delivery of services electronically. Another is through an electronic procurement system. On both aspects, Singapore is the trailblazer not only in this part of the globe but world-wide. For ASEAN, all of these effects should also apply. However, considering the low PC densities and low levels of Internet access, direct consumer benefits may take some time to be realized. What may be distinctly important for ASEAN today are the opportunities that ecommerce via the Internet provides to SMEs, which abound in this part of the globe. One business model is being started in the Philippines. The International Finance Corporation, together with the Planters Development Bank (a local development bank), eVicor (a Silicon Valley engineering and consultancy firm), the Philippine Chamber of Commerce and Industry, and the Asian Institute of Management have collaborated to set up a portal for SMEs called ePlanters (http:// www.plantersbankecommerce.com). Services include web hosting and payments systems. The service is being paid for on a commission basis. ASEAN as a whole has also seen its share of business exchanges. The governments only has to support the establishment of business exchanges between large corporations and their suppliers with an appropriate legal environment. It is only when these exchanges are expected to include SMEs that require capability-building investments that the government need to go beyond the provision of a proper business environment. On a regional scale, there might be a case for using the Internet to support a cross-country production network to exploit differences in comparative advantage between ASEAN countries.19

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3. Challenges and Issues

The challenges and issues brought about by e-commerce can be organized into two groups: first, infrastructure, including communications, payments, and distribution; and second, the socio-economic, cultural, and legal environment. On the infrastructural aspect of e-commerce, the business side is less of a problem compared with the consumer side of the communication infrastructure. Businesses will put up more e-commerce servers as necessary when they feel they can benefit from them. Consumers, however, will be limited by their capacity to pay. It should be noted that, except for Singapore, the PC penetration rates among ASEAN countries are still low, and an even much lower proportion have access to the Internet. Since this is directly related to the level of development, nothing much can be done other than to promote rapid growth and development. It should be mentioned, however, that one of the recognized ways of promoting access, given the level of development, is by the provision of public Internet kiosks so that those who cannot afford their own connection at home can have Internet access as well. Another aspect of the access issue is affordability. The high cost of Internet access is one of the biggest obstacles to expanding access. See, for example, Mann, Eckert, and Knight (2000). It is well known that competition brings down the cost of access rates to consumers. As noted earlier, some of the member countries are still saddled with restrictions on ownership and other barriers to entry in the ICT sectors. Measures to promote competition should be put in place to lower the cost of access rates to users. All over the world, surveys show that there is still a lot of anxiety over the extent of protection e-commerce players have with the existing legal environment. The Sacher Report (OECD 1997b) argues that in order for e-commerce to flourish, the level of confidence must approximate those accorded to over-the-counter transactions. As mentioned, there is already a consistent move towards enacting so-called cyber laws. At least three countries in ASEAN have already enacted ecommerce laws protecting various aspects of transactions. The e-ASEAN Task Force has predicted that by 2003, all ASEAN member countries will have e-commerce laws in place. Given that e-commerce facilitates

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trans-border transactions, cross-country harmonization will be a continuing challenge. Doubtful cultural acceptance of electronic transactions should be added to the high costs and anxiety due to the lack of protection as a challenge to the widespread acceptance of e-commerce. A large proportion of people in ASEAN may not have done or even witnessed business transactions other than those done over the counter. Even catalogue selling is not that popular in this part of the globe. This represents a substantial cultural hurdle to overcome. Again, governments can do a lot to improve the acceptance of electronic transactions in peoples’ lives by introducing ICT in their operations. Credit card ownership, which is the prevailing form of payment for electronic transactions, is said to be low in Asia. If credit card ownership cannot be increased, other forms of electronic payment need to be developed. Without electronic payment, much of e-commerce will be difficult to consummate. Without electronic payment facilities, websites will remain mere information booths instead of venues where business transactions are consummated. There is not much information on the reliability and efficiency of the distribution and delivery systems in many of the ASEAN countries. Even if trans-border shipments can be handled by big international carriers, this has to be complemented by reliable and efficient domestic distribution systems in each of the countries. It cannot be overemphasized that the benefits accruing to the speed of electronic transactions will be negated by unreliable and inefficient distribution systems. As mentioned earlier, the use of the ubiquitous corner convenience stores as pick-up points for goods ordered and paid for online may prove to be the Asian way of e-fulfilment. Taxation poses another formidable challenge. Since tariffs are going down with liberalization, governments are looking for new forms of tax bases. E-commerce poses the challenge of rapidly growing but largely “invisible” transactions. This is particularly true for goods that are “digitally” delivered. Confusion that may arise due to the nature of ecommerce transactions may lead to inappropriate taxation that can inadvertently stifle the growth of e-commerce. A preview of what this means is shown in the example given in Lallana, Quimbo, and Salazaar

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(undated), which goes like this: Suppose a piece of music is composed by a German-citizen artist residing in the United States. The music is then produced and copyrighted in France. That particular music now sits on a server/seller in Japan. A copy of that particular music is subsequently purchased by a Filipino in Manila using his credit card, which he has sent to the server. After the credit card has been verified, the music is now downloaded into the Filipino’s computer. The sale is then completed. Which jurisdiction has the right to collect sales taxes for this and other similar transactions?

Governments have a significant leadership role to play in the promotion of e-commerce. Unfortunately, as the e-ASEAN Task Force has pointed out, they are failing in their most elementary role, with the low utilization of ICT in government operations. The Task Force has called on ASEAN governments to lead by example. Just as big corporations can encourage their suppliers to go electronic through online exchanges using EDI, governments can also encourage thousands of small businesses to go electronic by setting up electronic procurement systems. In addition, governments can also lead in the use of the Internet to deliver services, such as Singapore’s eCitizen website. Finally, while e-commerce through the Internet provides opportunities for both large corporations as well as SMEs to be connected to the global supply chain, it also exposes them to global competition. While this may mean the eradication of inefficient firms that, undoubtedly, is good for society over the long term, it also implies short-term dislocations and adjustments. A new challenge thus is to redirect inefficient firms into more profitable areas. 4. Summary

There are ample opportunities created by e-commerce through the Internet. However, being a public network, there are also accompanying risks that need to be understood and dealt with properly. For many of the ASEAN countries, where the PC penetration rate is low and credit card ownership is thin, consumer benefits will continue to be limited for some time. This will go on, at least, until the average level of access has improved, the means of electronic payments are installed and widely accepted, and delivery systems become more reliable. It has been pointed

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out that one efficient way of dealing with low consumer access rates is by providing public Internet kiosks. There are real opportunities, however, that are attainable right away, even under these poor infrastructural conditions. One way is through the provision of platforms for connecting SMEs, which abound in ASEAN, to the Internet and to the global supply chain. This does not need the extensive infrastructure required for more diffused consumer benefits. It must be noted, however, that this presumes that production efficiencies exist. If SMEs cannot sell over the counter, they also cannot expect to sell electronically. A second initiative would be for governments not only to provide leadership in the use of ICT but also improve the efficiency of their operations. There are two possible ways of doing this. One is using the Internet to provide many basic public services. Another is the setting up of an electronic procurement system, again using the Internet. Governments should also support the establishment of big business exchanges using the Internet, rather than proprietary protocols and private lines, so that even small players can participate. Finally, it is clear from the foregoing that promoting e-commerce cannot be done on a piecemeal basis. Even if ICT is the primary catalyst of its development, the infrastructure requirements clearly go beyond the sector. In addition, beyond the infrastructural aspect, it calls for building confidence in doing 20 electronic transactions. This is in the socio-cultural realm. NOTES This is a revised version of the paper presented at the “ASEAN Roundtable 2000. New Development Paradigms in Southeast Asia: The Challenge of Information Technology”, 11–12 October 2000, Institute of Southeast Asian Studies, Singapore. 1. The latest figures are available online (http://www.nua.com/surveys/ how_many_online/index.html). 2. It has been argued (by, for example, OECD 1999) that these transactions should not be included because they are transactions between businesses using proprietary protocols and private lines and therefore are of limited public concern. 3. A good introduction to the history of the growth of the Internet is given in Shapiro and Varian (1997). 4. Subject, of course, to access considerations, as discussed elsewhere in the volume.

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5. After Bob Metcalfe, former Chief Executive Officer of 3Com and inventor of the “Ethernet” networking technology. Paul Krugman (“Networks and Increasing Returns: A Cautionary Tale”, http://web.mit.edu/krugman/www/metcalfe.htm) argues that this explosive growth will not continue forever because the profitability of connecting each node will not be the same, a consideration which Metcalfe’s Law implicitly assumes. He then argues that Metcalfe’s Law must be set against DeLong’s Law, which states that in building a network the more profitable nodes will most likely be connected first. 6. The OECD (1999, Box 1.2) admonishes that estimates provided by private market research and consulting firms have to be taken with caution because these firms may have the incentive to give over-optimistic values. 7. It must be noted that revenue is not a very good indicator of the financial importance of a sector because it is prone to double counting. Value added is less prone to double counting (Haltiwanger and Jarmin 1999). 8. Another similar projection is given by the International Data Corporation (IDC), which predicts that the U.S. share will go down to 44 per cent by 2003 from 62 per cent in 1999. 9. This issue of encrypted transactions will be addressed again in a later section. 10. It must be noted that this represents a conservative estimate, as it does not include hosts behind firewalls. 11. This is a free sample of the survey results. One has to be a subscriber to the service to obtain current survey results. 12. The SET operates in three steps. First, credit card data and a digital certificate (for authentication) is stored in a plug-in to the user’s Web browser. Second, the order is received by a SET-enabled merchant server, which then passes payment information in an encrypted form to the bank. Finally, approval is electronically sent to the merchant (TechEncyclopedia, http://www.techweb.com/encyclopedia/). 13. A SmartCard is a “credit card with a built-in microprocessor and memory used for identification or financial transactions. When inserted into a reader, it transfers data to and from a central computer. It is more secure than a magnetic stripe card and can be programmed to self-destruct if the wrong password is entered too many times. As a financial transaction card, it can be loaded with digital money and used like a travelers check, except that variable amounts of money can be spent until the balance is zero” (TechEncyclopedia, http://www.techweb.com/encyclopedia/). 14. This was pointed out by Professor Wong Poh-Kam, Director, Centre for Management of Innovation and Technopreneurship, National University of Singapore. 15. More information about the MSC can be obtained from the official MSC website (http://www.mdc.com.my/msc/index.html).

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16. The IT21 Plan is more fully expounded in the official website (http:// www.neda.gov.ph/IT21/). More about the GISP can be obtained from http:// www.neda.gov.ph/GISP/. 17. The website of the E-Commerce Resource Center is http://www.ecommerce.or.th. Most of the documents, however, are in Thai, including the “Thailand Framework for Electronic Commerce Development”. 18. See, in particular, the chapter by Kraemer and Dedrick in this volume. 19. This was pointed out by Professor Chia Siow Yue, Director, Institute of Southeast Asian Studies, Singapore. 20. This final point on the social impacts of ICT is addressed by Soesastro in Chapter 4 of this volume. REFERENCES Alliance of Global Business (AGB). “The AGB Global Action Plan for Electronic Commerce”. Washington, DC: AGB, 1999. Bettoni, G. “Visa Presentation at the 1999 ITU”. Presentation at the 1999 ITU Electronic Commerce Seminar, May 1999. Department of Economic and Social Affairs. U.N. World Population Prospects. 1998 revision. New York: Population Division, United Nations, 1999. EIU eBusiness Forum. “E-Commerce: Asia Online”, 17 April 1999. http:// www.ebusinessforum.com/. eMarketer. The eAsia Report. New York, NY: eMarketer, May 2000. Forrester Research. “Global E-Commerce Approaches Hypergrowth”. Forrester Brief, 18 April 2000. http://www.forrester.com/ER/Research/Brief/0,317,9229,FF. html. Goelzer, A. “Consumer Electronic Commerce Introduction”. Presentation at the 1999 ITU Electronic Commerce Seminar, May 1999. Haltiwanger, J. and R. Jarmin. “Measuring the Digital Economy”. Paper presented at the Understanding the Digital Economy: Data, Tools and Research Conference, 25–26 May 1999. Infocomm Development Authority (IDA), Singapore. ICT 21 Masterplan. Singapore: IDA, 2000. International Data Corporation (IDC). “IDC’s Internet Commerce Market Model Predicts Buyers on the Web Will Increase Nearly Tenfold by 2002”. Framingham, MA: IDC, 1997. http://www.idcresearch.com/F/HNR/08179ahnr.htm. Lallana, E., R. Quimbo, and L. Salazaar. “[email protected]”. Mimeographed. Carlos P. Romulo Foundation for Peace and Development, undated.

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Mann, C., S. Eckert, and S.C. Knight. Global Electronic Commerce: A Policy Primer. Washington, DC: International Institute of Economics, 2000. Mesenbourg, T. “Measuring Electronic Business Definitions, Underlying Concepts, and Measurement Plans”. Washington, DC: U.S. Bureau of Census, 1999. http://www.ecommerce.gov/ecomnews/e-def.html. Organization for Economic Co-operation and Development (OECD). Measuring Electronic Commerce. Paris: Committee for Information, Computer and Communications Policy, OECD, 1997a. . Electronic Commerce: Opportunities and Challenges for G overnment. The Sacher Report. Paris: OECD, 1997b. http://www.oecd.org/dsti/sti/it/ec/act/ sacher.htm. . The Social and Economic Impacts of Electronic Commerce: Preliminary Findings and R esearch Agenda. Paris: OECD, 1999. http://www.oecd.org/subject/ e_commerce/summary.htm. Paul Budde Communication. Information Highways and Telecommunications in Asia, volume 3. Bucketty, NSW: Paul Budde Communication, 2000. Romulo, R. “e-ASEAN: A Blueprint for Wired ASEAN in the 21st Century”. Paper presented at the ASEAN Ministerial Investment Mission to the U.S., New York, Minneapolis, Silicon Valley, 15–20 May 2000. Shapiro, C. and H. Varian. “Economic FAQs about the Internet”. In Internet Economics, edited by L. McKnight and J. Bailey. Cambridge, MA: MIT Press, 1997. Traffic World. “Forrester Sees E-Commerce Threat", 10 March 2000. http:// www.trafficworld.com/news/dailynews/05.html, accessed 10 March 2000.

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Reproduced from Information Technology in Asia: New Development Paradigms edited by Chia Siow Y ue and Jamus Jerome Lim (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. articles are available from < http://www.iseas.edu.sg/pub.html > 147 7. SingaporeIndividual as a Regional Information Technology Hub

If the first industrial revolution can be characterized by a focus on steam, iron, and railways in national firms and the second by electricity, chemistry, automobiles, and consumer durables in increasingly multinational firms, the third centres on microelectronics, biological engineering, and new materials in internationally networked firms (Scherer 1984; Teece 1993). The transforming power of the third revolution lies in the impact of information technology (IT) in integrating related technologies, reducing transactions and processing costs, increasing information content of products, and changing industrial structure. As a small economy, the continued growth and viability of Singapore depends much on its nimbleness to adapt to international technical and economic forces of change. Singapore has made credible effort to leverage IT resources in industry, government, and the universities to become a

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global hub for high-value IT production and use. In the subsequent sections, we shall discuss the role of Singapore as a regional IT hub that will foster growth and development in the ASEAN region. 1. What Is Important about IT?

The IT revolution has contributed to the creation of integrated global organizational networks that are changing the structure of international corporations, shifting patterns of research and development (R&D), and altering the nature of national economic competition. The elements of the productivity cycle — innovation, factor creation, and the industry composition of competitive advantage — all have important international dimensions, because R&D, input-output, and finance networks link organizations across borders. Similarly, policy networks span overlapping levels of jurisdiction within a nation and across national boundaries, and connect government agencies, policy analysts, and corporations in a web of activities that influence macroeconomic, commercial, industrial, and research policies. Productivity growth now depends on access to and competition within global networks that have become engines of technological change, adaptation, and diffusion. 1.1. Productivity Enhancement

Long-term growth depends on an expansion in capital and labour resources and efficiency in using them to provide valued products. Output can grow faster than increases in the quantity of available capital and labour because of improvements in their quality, changes in technologies for combining inputs into outputs, organizational adaptation, and economies of scale. National characteristics and public policies influence innovation networks, factor creation, and industry structure of competitive advantage, which interact in a “productivity cycle” that determines productivity growth (Figure 7.1). The concept of a cycle suggests a pattern of delayed interactions that feed on each other. Innovations must be adapted to new capital, training, and procedures and subsequently tailored to become commercially profitable products. The full impact of innovation frequently depends on related innovations in other fields, and the pace of diffusion can be erratic, as independent pockets of innovation become more inte-

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Figure 7.1 The Productivity Cycle

Innovation networks

Factor creation

National attributes

Productivity Industry competitive advantage

Public policies

Source: Golden (1994).

grated into new production systems. It is important to recognize that the investment, training, and adaptation required to create new factors of production take time. The lags between technical innovation and observed productivity improvement often stretch into decades because of the slow rate of diffusion and problems in measuring the full impact of new products and processes. Proper use of information technologies does help to raise productivity. Hence the urgency to acquire technical competence and innovative capability cannot be underestimated. The 1 lagging productivity paradox can be solved for latecomers. Three aspects of the productivity cycle warrant special emphasis: First, there is considerable evidence that industrial concentration and competitive advantage are path-dependent. For example, the location of a factory producing electronic peripherals in a locality with an abundant educated work-force might be the product of a chance decision, but once the factory is established, the network of suppliers and customers that grows up around that factory may provide the incentive to locate other factories in the same region. In short, history matters, and patterns of international specialization are surprisingly persistent, even in the age of integrated global markets.

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Second, differences in national attributes do persist over time. Each community has its own ego and pride. Attainment of better performance by self-help is often considered superior to that achieved with outside assistance. There is a need for a more open mindset that imitation is a first step in learning and innovation. Co-operation and contact with members of other communities will broaden the scope of activities that bring about productivity improvements. Exchanging ideas is as important and gainful as exchanging goods. Third, while path-dependence and persistence in national attributes do create strong arguments for national approaches to productivity development, the emergence of integrated global organizational networks that co-ordinate the process of innovation across regions limits the effectiveness of strictly national approaches. The IT revolution has repercussions for productivity enhancement strategy at many levels. One of the most significant has been in the changing structure of industrial organizations and corporate organizational networks. The growing access to and importance of information flows is transforming traditional hierarchical firms into more horizontal organizations that emphasize flexibility, co-ordination, on-time production, long-term relationships with suppliers and customers. In the IT industry in particular, R&D relationships extend across firms through horizontal organizational networks that have redefined traditional corporate boundaries. Perhaps ironically, the same firms that co-operate in R&D activities subsequently compete aggressively in product markets. Corporate strategy now requires “co-operative competition”, a framework that simultaneously enhances mutual performance and shapes the 2 form of competition. That insight — that competitors must also cooperate in research networks in order to compete effectively in product markets — captures the essential impact of the information revolution for other levels of strategy as well. The evolution of global organizational networks, in which firms in related industries develop long-term R&D as well as trade relationships, means that the three already converging industrial regions (North America, Europe, and Northeast Asia) will be tied more and more closely together, further enhancing convergence. That does not mean that regional policies will become less effective in the future. On the contrary,

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regional factors that determine the concentration of niches of particular industries may well become more, not less, important. The combination of convergence and global networks suggests new patterns of specialization that will alter the nature of regional co-operation and competition. 2. What Is a Hub?

Effective transmission of information will enable efficient allocation and utilization of resources to materialize. The flow of information, subsequently followed by goods and services, is enabled and facilitated by a network of communication channels as in roads and rail as well as in the virtual form of electromagnetic wave connections. Destinations and origins, simply called nodes, together with their linking mechanism are basic components of a network. The more nodes there are in a 3 network, the more valuable will that network be, as network externalities will be engendered. A pivotal node in the network is a hub. A hub is a resource centre, a supermarket well equipped with hardware, software, and wetware. A hub will play a headquarter role to other nodes in the network. Hubs allow the enjoyment of agglomeration economies and facilitate speedy collation and diffusion of information. The Singapore IT Hub will foster the growth and development of other IT hubs in Southeast Asia if countries in the region are willing to share a common understanding that the emergence of global organizational networks underscore the importance of co-operative competition. Convergence in the economic performance of the leading economic regions and economies is not an accident but a reflection of a ubiquitous force driven by technological change. There are strategic interests in embracing co-operative competition centred on technology policy in ASEAN in order to raise economic performance, and the following are some points to note in this regard: •

•

The level and industry structure of productivity growth are the best measures of long-term economic performance and international influence. One very important factor explaining the expansion and convergence of economic performance in the major economies of North America,

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•

•

•

•

Europe, and Japan while the less-developed regions are lagging further behind is productivity differences arising from technological competence and know-how. Productivity growth in the advanced economies depends on a productivity cycle based on the interaction — within and across national borders — of factor creation, innovation, and the industry structure of competitive advantage. The revolution in IT has created new physical communication networks that have generated global input-output, R&D, finance, and policy organizational networks, which create powerful forces for integrating standardized processes. Despite the growing pressures for standardization in global networks, regional network nodes — produced by divergent national attributes, subtle distinctions in economic systems, unique technologies and skills, and synergies from external economies of scale and scope — still persist, thereby holding back progress in developing countries. Commercial policies and traditional industrial policies for picking the winners of the future are far less effective than technology policies in influencing productivity growth, because they do not provide the dynamic incentives for innovation, factor creation, and competitive advantage in high-value industries needed to sustain high-growth levels. The role of the private sector in economic development is more important than before.

3. Singapore Is Well Placed to Be a Hub

Singapore is not naturally endowed to be an IT hub. It has made many concerted efforts to be one. The development of IT in Singapore started early. As an IT hub, it has the potential to complement other burgeoning hubbing activities — those of transportation, education, convention centre, logistics, and finance — that exist in Singapore. 3.1. Overview of Singapore’s IT Development

The various stages of development in which Singapore is being transformed into a vibrant informatized nation are depicted in Figures 7.2 and 7.3. This can be roughly divided into four phases. The first phase lasted from 1980 to 1985, where Singapore’s national IT drive

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began with the National Computerization Plan in 1981. Its first achievement was the establishment of a statutory board in charge of IT, the National Computer Board (NCB). The NCB and its committees on national IT, policy research, standards and applications, and R&D involved the private sector and outlined three objectives: computerization of the Civil Service, training of software professionals, and building the Figure 7.2 Evolution of Singapore’s IT Strategy Phase I: 1980–85 Government computerization • • • •

Plan civil service computerization Develop government users and initials IT professional Develop public applications Develop initial base for local production (through MNCs)

Phase II: 1986–90 National computerization and informatization of society • • • • • • • • • •

Develop national plan Develop common business applications Develop skilled IT workforce and business users Consultation for SMEs Develop production capabilities for local use Develop global plan Develop IT entrepreneurs, advanced users, and professional Develop strategic IT applications, e.g. TradeNet and PortNet Develop networked communities Develop export capabilities in IT

Phase III: 1991–99 “Intelligent” Island Vision and IT hub • Develop advanced NII • Creation of Singapore ONE to provide a wide range of new infrastructure services, linking government, business, and the people. Phase IV: from 2000 Developing as a global hub, linking NII to GII • • • •

Infocomm 21 Use of the Internet E-commerce Global perspectives: cyberlaws, international standards, etc.

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National Computer Board Co-ordination and collaboration Public and private organization

IT culture • National IT Week • Establish and assist user and trade association • Exhibitions and awards

Recruiting IT MNCs • Foreign software development centres — USA, Japan, Europe

R&D incentives for software package development

Software industry development • Soft loans • Foreign market development subsidy • Software industry partnership programme • Shared facilities/demo centres: CAD/CAM, FMS

IT education and literacy • University programmes for IT specialists • IT user training • Accreditation schemes for IT professionals • Computer literacy in schools

Figure 7.3 IT Infrastructure

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Economic Development Board Industrial Policy: Recruiting IT MNCs

IT policies • Institutional property rights • Information, EDI, and software standards • Government procurement practices

IT extension to SMEs • Low-cost training in IT • Subsidized consultancy assistance • Standardized software for selected industries • Low-cost loans for IT acquisition

IT innovation centres • Resource centres for user industries • Prototype development • R&D incentives

Government computerization • Civil Service computerization • Common databases • e-government • e-citizen

Networked communities of users (EDI) • Trade Net • Medical Net • Education Net • Law Net • Port Net

Modernization of telecommunication • Deregulation of telecoms

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local IT industry to expand software and services (NCB, Annual Report 1991). In establishing Singapore as a software centre, it also helps in developing the supply side of the IT sector. The Civil Service Computerization Programme (CSCP) has helped in raising government productivity, thus developing the demand side. In 1986 the NCB, Singapore Telecom (the then state telecommunications company), the Economic Development Board (EDB), and the National University of Singapore jointly wrote the National IT Plan (NITP). The plan suggested an acceleration in the use of IT in the country, and urged the expansion of the Civil Service computerization, the diffusion of IT in selected industries to raise productivity, the improvement of alliances with international software firms to build engineering skills and local IT segments, the installation of fibre optics and integrated services digital network (ISDN) capabilities, and the promotion of IT culture through events such as the IT Week. In particular, this second phase (1986–90) made remarkable achievements, including the following: •

•

•

increased public services through one-stop, non-stop, IT applicationbased services; some of the award-winning applications include School Links, Integrated Land Use (ILUS), One-Stop Change of Address Reporting Services (OSCARS), and the various electronic data interchange (EDI) networks such as TradeNET, LawNet, MediNet, and PortNet;4 the development of a substantial national IT capability; IT manpower grew from 850 in 1981/82 to 23,000 in 1995/96; the IT end-user market has also grown from S$0.26 billion in 1981/82 to S$9 billion in 1995/96; the creation of a broad and pervasive IT culture and infrastructure.

The opportunity for further improvements might be limited if the policies are confined to the small size of the domestic Singapore IT market. As a result, the government faces challenges to project Singapore’s IT capability into the region and beyond while continuing the efforts to exploit IT for improving quality of life, boosting the economic engine, linking communities locally and globally, as well as enhancing the potential of individuals. The next phase of IT development in Singapore began with

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Figure 7.4 IT2000: Singapore’s Goals • • • • • •

Create an IT Culture Plan IT human resource development Nurture the IT industry Evolve an Information Infrastructure Deploy IT2000 flagship projects Exploit IT in government Source: NCB (1992).

the release of the IT2000 report by the NCB in April 1992. The IT2000 plan was adopted to transform the nation into an Intelligent Island. The vision called for the creation of a National Information Infrastructure (NII) that would facilitate information flows within the country and connect Singapore to the rest of the world. It strove for computer links for all in fifteen years (NCB 1992) to weave IT into the fabric of the social life of Singaporeans. Homes, offices, schools, and factories were to be linked by a broadband network built, owned, and operated by an industry consortium. The Singapore ONE (One Network for Everyone) network, when fully operational, will provide access to public sector services and facilitate inter-government transactions. The NCB is responsible for implementing more than sixty sectoral applications, and the key goals of the strategy are summarized in Figure 7.4. In 1996 the government made use of the existing Local Industry Upgrading Programme (LIUP) to involve multinational corporations (MNCs) and local companies in nurturing the local information and communications technology (ICT) industry, and to encourage industry collaboration. The NCB provides a “one-stop shop” to assist in the identification of local collaborators and projects and in formulating the terms of collaboration. The achievements made during the third phase include: •

the creation of an advanced NII. The NII comprises the infrastructure level of networks and the value-added applications such as National Contact Information Services (NCIS), Electronic Commerce (EC) applications, Infrastructure for Electronic Identification (IEI), and content hosting;

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the creation of Singapore ONE, a multimedia broadband infrastructure that provides a wide range of new infrastructure services, linking government, business, and the people.

Leading Singapore into the twenty-first century amidst ever more technological change in IT, the NCB was merged with the Telecommunication Authority of Singapore to establish the Infocomm Development 5 Authority (IDA) by the end of 1999. In championing the Infocomm 21 master plan, the IDA’s intention is to to position Singapore as a dynamic and vibrant Infocomm Capital. It aims to develop the infocomm industry into the next major sector of growth, thus making Singapore a leading infocomm hub for the global economy. In summary, the past challenges in national IT initiatives have grown from exploiting IT within a sector (for example, government) to across sectors (for example, government and businesses), and then across countries. Information technology (IT) is a key pillar of growth for Singapore’s economic and social development. Over the past twenty years of national computerization, Singapore had made great strides in establishing a world-class IT infrastructure supporting an increasingly sophisticated economy, including: • • •

•

• •

•

a highly efficient Civil Service, one that is a result of heavy government investment in computerization for the public sector; a strong, IT-focused education system that has created a pool of about 35,000 highly trained IT professionals; an IT industry in Singapore that had achieved a compounded annual growth rate of about 30 per cent per year over the past decade, with revenues reaching a record S$14 billion in 1999; an increasing number of companies that are using Singapore as a base for their regional headquarters, software R&D activities, data hubs, and network management centres; the existence of several well-established IT R&D institutes; a ranking by the World Competitiveness Report6 that has consistently rated Singapore among the top countries in the world in computer density, IT literacy, and strategic exploitation of IT by companies; the International Data Corporation’s 2001 Information Society Index (ISI) ranks Singapore as the ninth most information-driven economy in the world. In terms of computer infrastructure, Singapore ranks

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•

•

second behind the United States. The ISI also credited Singapore together with Sweden and Australia with the highest Internet infrastructure scores; personal computer (PC) penetration rates in homes that are over 59 per cent, which is comparable with leading nations in the world such as the United States and Australia; Singapore, with its knowledge-based economy, will be a global centre of excellence for science and technology, a high-value location for production, and a critical, a strategic node in global networks for commerce, communications, and information. Singapore ONE presents companies with tremendous opportunities to develop new and unique capabilities, as well as products and services for an increasingly sophisticated local, regional, and global market.

With many Asian economies still in the process of recovery from the adverse impacts of the financial crisis, Singapore has stepped up its effort in looking outside the country for new growth opportunities. One avenue to future prosperity is to expand Singapore IT production overseas. Certainly, there will be new obstacles and difficulties faced in attempting to launch Singapore as a global IT hub. 3.2. What Other Efforts Are Being Made?

3.2.1. Government Role in “Electronizing” the Society Government participation, regulation, intervention, and influence can be seen as the driving force behind the success of Singapore’s IT industry. Although the intervention of the government may seem to be intrusive and over-regulatory at times, Singaporeans have accepted the need for a strong government-led economy. Many projects and schemes are initiated with substantial private-sector inputs, to provide a strong foundation for Singapore to be an IT hub. Singapore as a “developmental state” possesses a variety of institutionalized channels wherein the state apparatus and the private sector continually interact in a constructive 7 manner via a “joint project” fostering economic growth. The acceptance of government intervention, coupled with the government’s ability to deliver results, is critical in explaining the success of Singapore’s economic and social programmes. The government plays an active role in creating

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the institutional framework that supports and implements IT, telecommunications, and broadcasting initiatives.

3.2.2. E-Government Following the success of the CSCP, the government initiated the eGovernment Action Plan. A sum of S$1.5 billion has been set aside to support the programmes over a period of three years, from 1999 to 2002. E-government is an important pillar of the Infocomm 21 plan alluded to earlier, that would help Singapore make the transition to the new knowledge-based economy. More important than the funding for the Action Plan is the mindset change that is needed to propel Singapore forward in the new economy. To be a leading e-government serving the nation in the digital economy, the Singapore government is prepared to do things differently. The government and the Civil Service is prepared to challenge tried and tested ways of doing things to continually innovate and adapt business and operational processes. E-government is an important pillar of the Infocomm 21 plan to help Singapore make the transition to the new knowledge-based economy. E-government wiped out long waiting lines and razed mountains of paperwork for Singaporeans. It is also changing the way they do business with their government, and changing the way the government views its relationship with citizens. For example, the Inland Revenue Authority of Singapore (IRAS) form for e-filing one’s income tax is a page long. The IRAS website is the most effective and popular of Singapore’s e-government interactive sites. It has also been widely regarded as one of the most successful websites of countries that use IT to improve the revenue productivity and efficiency of their tax agencies. Another example is the eCitizen website (http://www.ecitizen.gov.sg), which is “citizen-centric” and interactive — and not merely a listing of agencies and regulations. Information relating to every phase of life, from interactive applications to online searches, to purchases involving the government have all been incorporated into the website. By the end of 2001, Singapore would have doubled the 130 government services it offers online. The website is constructed to resemble a main thoroughfare

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through life. There are currently eight towns lining the thoroughfare. They are simply named: Business, Defence, Education, Employment, Family, Health, Housing, Law and Order, Transportation. Singapore is among the early leaders in providing online government services. Relatively little e-government business is transacted in ITadvanced countries despite the financial and competitive advantages offering government services via the Internet. Anderson Consulting estimates that savings of up to US$400 can be realized for each government transaction placed online. Security issues, system development costs, and the inevitable difficulties involved in shifting from the traditional way in which governments do business are huge hurdles that are currently being overcome. Five countries paving the way are the United States, Singapore, Australia, Canada, and France.

3.2.3. Cyber Laws and E-Commerce The government reviews existing laws and regulations to cater to the needs of the new economy. There is a need to distinguish between content and applications providers, and those who merely host content on behalf of others so as to promote growth of “data hubbing centres”. Already one of the world’s most e-commerce-ready countries, Singapore is continuously striving to strengthen the institutional infrastructure for transactions using the Internet. The Ministry of Communication and Information Technology (MCIT) has formulated four new strategies that will lay a robust foundation of e-businesses; catalyse the digital transformation of the economy; spur consumer demand; and brand Singapore as a trusted global dot.com hub and an e-business thought leadership centre. The MCIT also announced initiatives to “dot.com” the private sector and help businesses adopt e-commerce by continual revision of pricing regulations to make telecommunications affordable; the publication of a booklet, “How to Identify E-commerce Opportunities”, along with other educational efforts to help businesses go online; the building of a clear regulatory and policy framework so that companies will feel more 8 comfortable with Internet transactions; and ensuring co-operation between the government and other agencies to encourage e-finance programmes such as e-banking and e-insurance.

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3.2.4. Another Area of Development — Applications Service Providers This e-business transformation can only take place in an environment that facilitates change. Vendors play a major role in reducing cost of entry and lowering the risk for interested businesses. More and more ebusiness applications are now available as hosted services on the web. With computing technologies and solution evolving rapidly, it does not make sense for businesses to go into long-term licensing arrangements with vendors. With hosted services, a business can access the latest technologies and pay according to what it uses. Singapore encourages applications service providers (ASPs) to use Singapore as a base to service the region. With ASPs, any business can enjoy the power of customized application services over the Internet on a subscription basis. The onslaught of ASPs is a natural phenomenon as it proves the pervasiveness of the Internet in all aspects of life through constant delivery of services. The birth of the ASP concept was conceived by the relationship between the software and IT infrastructure in an Internet-centric environment. ASPs promise to speed up technology implementation, minimize expenses and risks, and help overcome manpower shortages. The IDA has prepared a wide host of initiatives for the ASP industry. One of them is the S$9 million Local Enterprise e-Commerce Programme scheme, which can grant up to 50 per cent of the total project cost (subject to a maximum of S$20,000). IDA’s Application Services team will work with the fledging ASP industry to encourage partnership aimed at lowering costs for both ASP providers and end-users. ASPs have the support of big electronic companies such as Hewlett Packard, which has committed S$2 million in a recently launched GO-ASP Partner Programme (Go-APP), which is meant to support Singapore ASPs with subsidized hardware, financing, technology training, and possibly more. These initiatives mark the final phase of the ministry’s Infocomm 21 programme. Infocomm 21 articulates the vision, goals, and strategies that will facilitate the development of the local infocomm industry over the next five years and propel Singapore into the ranks of the First World economies of the Internet Age.

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3.2.5. Science and Technology To sustain an IT-led strategy of market development and expansion, a strong educational and research environment steeped in innovation and commercialization is necessary. Singapore is actively encouraging the use of science and technology, the conduct of R&D, and the development of technopreneurship. A ministerial committee has been established to oversee the development of technopreneurship and a plan known as the Technopreneurship 21 (T21) plan has been formulated. Currently, there are about seventy venture capital funds in Singapore including the NSTB’s S$150 million Technology Development Fund. To further develop the venture capital industry, the government will establish a S$1billion Technopreneurship Investment Fund (TIF). The TIF is intended to draw more venture capital activities into Singapore. In terms of infrastructure, the current science parks are to be further developed into a S$5 billion Science Hub, where ideas born within a scientific community are cradled, nurtured, and developed into commercial ventures. The aim is to assist the development of high-tech entrepreneurial business in Singapore, to develop Singaporean talent, and to attract talent to Singapore. These efforts have led to significant growth in R&D, as shown in Table 7.1. 4. What Are the Benefits of Being a Hub to Singapore and ASEAN?

As an IT hub, Singapore’s economic lifeline and sources of growth and income is expanded. It will plug the national economy into the grid of the international economy, keeping it relevant so that it is able to sustain its standard of living. Singapore’s IT development can serve as a model for economies in the region, which can develop their nascent IT industries by shortening their learning curve and thereby leapfrog the development stages. Singapore as an IT hub can help to ignite the IT fervour and enthusiasm in ASEAN. An informatized ASEAN region is consistent with the aim of creating an attractive ASEAN Investment Area. It will help nudge the region into deregulation and further liberalization of trade, especially in the service sector. Network externalities is a large potential benefit that can be reaped by regional economies. Singapore, a

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Table 7.1 R&D Expenditure and Manpower in Singapore, 1999

Gross expenditure on R&D (GERD) GERD/GDP Research scientists and engineers (S&Es) RSEs per 10,000 labour force Private-sector GERD Number of patents awarded Sales revenue derived from commercialized products/processes attributed to R&D performed in Singapore and launched within the last two years

1990

1999

S$0.57 billion 0.84% 4,329 28 S$0.20 billion

S$2.66 billion 1.84% 13,817 70 S$1.67 billion

—

S$9.61 billion

— = No data available. Source: National Science and Technology Board (2000).

nodal point for productivity improvement, will like to play a catalytic role in the development of IT hubs in the region. As such, hubs in Kuala Lumpur or Jakarta or Hanoi or any of the ASEAN capitals can grow and flourish. They will exhibit their own characteristics by capitalizing on their comparative advantages and niches. In contrast to the current experience of the Latin American region, there appears to be a much stronger focus on telecommunication, information technologies, broadcasting, and multimedia as components of the global information infrastructure (GII) in the Asia region. ASEAN embraced integration into the GII as early as 1995 under the auspices of the Asia-Pacific Economic Co-operation (APEC) forum and the Seoul Declaration on the Asia-Pacific Information Infrastructure. The telecommunications and information industry is believed to have a critical role in strengthening market linkages and enhancing trade and investment liberalization. The Seoul Declaration aims to facilitate the expansion of an interconnected and interoperable information infrastructure in the region and to promote the exchange and development of human resources within a favourable policy and regulatory framework (APEC 1996). The ASEAN region is characterized by relatively high literacy rates

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but they vary significantly in terms of the distribution of the urban and rural populations, as well as the density of telephones, computers, and television equipment that have been achieved by the mid-1990s (Table 7.2). Accessibility is further boosted by the rapid penetration of cellular (mobile) telephony in all these countries. Mobile phones together with satellite telecommunications have, in many senses, broken the “tyranny of space and time”, and have extended the coverage of fixed line telephones in some places while diminishing the need for them in others. 4.1. E-ASEAN

More than market integration, ASEAN has to recognize that its future competitiveness depends on its ability to develop and use technology. ASEAN countries have to pool their resources. As such, a working group comprising members from the public and private sectors was formed for the purpose of developing a programme to build an e-ASEAN framework. Its objective was to arrive at a set of recommendations that would help to establish a legal and economic environment for ICT, developing human resources, and identifying ways in which e-ASEAN can be used not only for business but also for education, healthcare, and rural development. Following the ASEAN Economic Ministers (AEM) meeting in September 1999, the e-ASEAN Task Force was created to develop a broad and comprehensive action plan for an ASEAN e-space and to develop competencies within ASEAN to compete in the global information economy. In developing the plan, the Task Force has been asked to examine the physical, legal, logistical, social, and economic infrastructure needed to create the basis for ASEAN’s competitiveness in the twenty-first century. The e-ASEAN Agreement, prepared diligently by the Task Force, was endorsed by the ASEAN Economic Ministers during the AEM meeting in May 2000. The final document, entitled the “e-ASEAN Framework Agreement”, was endorsed by the ASEAN Heads of State during the ASEAN Summit in November 2000. The eASEAN Framework Agreement has the following objectives: •

to promote co-operation to develop, strengthen, and enhance the competitiveness of the ICT sector in ASEAN;

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515.9

ASEAN-10 38

100 56 36 57 38 21 22 67 27 22

Urban population (%)

87.1

94.0 93.7 93.8 94.0 84.4 91.9 37.8 89.2 82.0 56.6

Literacy rate (%)

44.3

500.0 200.0 82.6 37.0 29.1 25.8 2.5 263.2 5.2 6.5 —

458.4 58.6 21.6 15.1 8.2 6.4 — — — —

No. of PCs per 1,000 persons (1988)

143.5

384.6 212.8 227.3 126.6 147.1 163.9 8.7 322.6 7.0 9.9

No. of TV sets per 1,000 persons

Source: Asiaweek (2000b, 2000c); World Bank (2000); Asian Development Bank (2000).

— = No data available.

3.9 22.7 62.1 74.7 207.7 79.4 10.9 0.3 48.8 5.4

Singapore Malaysia Thailand Philippines Indonesia Vietnam Cambodia Brunei Myanmar Laos

Country

Population (million)

No. of telephone lines per 1,000 persons

Table 7.2 ASEAN-10: Basic Statistics on Social and Economic Variables, 1999

—

322.3 23.5 4.5 1.3 0.8 0.08 — — — —

No. of Internet hosts per 10,000 persons

—

71 67 43 56 20 — — — — —

High-tech export as a % of total mfg. export (1998)

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• • •

to promote co-operation to reduce the digital divide within individual ASEAN member states and amongst ASEAN member states; to promote co-operation between the public and private sectors in realizing e-ASEAN; to promote the liberalization of trade in ICT products, ICT services, and investments to support the e-ASEAN initiative.

The Agreement also highlighted the importance of the establishment of the ASEAN Information Infrastructure (AII). Member states would enhance the design and standards of their NII so as to facilitate interconnectivity and ensure technical interoperability. This is crucial for many of the objectives to be achievable. Although the Agreement is an important first step, there are still several issues to be dealt with. These include the need to: • •

• • • • • •

determine the policy, legal, and regulatory environment that will encourage the development of the AII; assess the infrastructure and human resource needs of ASEAN member countries and recommend ways of achieving full participation in the most cost-efficient and expeditious way; recommend ways of including the social and cultural dimensions of ASEAN into e-space; identify projects and project paradigms that can jump-start the AII and show immediate benefits; prepare best practice tools for human resources development and education to support the e-space; promote e-ASEAN to the communities in ASEAN, including corporations, governments and the people, as well as externally; evaluate measures and policies that can be undertaken to promote e-commerce in ASEAN; evaluate measures and policies that can be undertaken to promote e-government in ASEAN.

Nonetheless, the e-ASEAN Framework Agreement will boost IT development in the region. It will “wire-up” the region in several fields, ranging from economic-based activities like tourism and commerce to individual upgrading opportunities in education, career and recruitment, and entrepreneurship (Figure 7.5).

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4.2. Electronic Commerce

The earlier the ASEAN Information Infrastructure (AII) is in place, the faster will ASEAN economies be plugged into the global cyber market. It will be a boost to ASEAN regional e-commerce. Electronic commerce is regarded in the United States, and increasingly in Europe and the newly industrialized economies (NIEs), as a pre-requisite for the conduct of business in the “knowledge societies” of the future. Countries that do not implement electronic business networks will almost certainly find themselves disadvantaged in the conduct of trade and in their financial affairs. Electronic commerce refers to a very wide variety of ways of doing business over networks. It is defined generally as all forms of commercial transactions involving both organizations and individuals, which are based upon electronic processing of data, including text, sound, and visual images. Electronic commerce is the start of a completely virtual market. To enable such an environment to work there is a need for a governance regime, just as there is in the case of commercial activity in physical goods. There is also a need to build a technical and service infrastructure that can sustain the volume of commercial transactions that will move into cyberspace. Thus there is a need for a GII and an internationally recognized transaction framework involving cyber law, rules of taxation, security, trust, and confidentiality of information. Singapore took its first step to secure electronic commerce in April 1997. The world’s first Visa card purchase on the Internet using the Secure Electronic Transaction (SET) protocol was held in Singapore. Such transactions involve cardholders and merchants using “digital 9 certificates” (NCB, Annual Report 1997 ). 5. Regional and International Initiatives and Issues

It is in the interest of ASEAN members to keep pace with global trends so as not to be left behind in the Electronic Age. It is vital that ASEAN remains an attractive region for global capital and investment. Foreign capital and technology still play a useful role for economic development in all member states of ASEAN. Whether it is for self-interest or the

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Figure 7.5 Potential Benefits of e-ASEAN in Selective Areas

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In the ASEAN Summit in Singapore, held on 24–25 November 2000, ten ASEAN leaders endorsed the e-ASEAN Framework Agreement, which will plug ASEAN’s 500 million population into the global economy. The e-ASEAN initiative will wire up the region in several fields. Tourism • Main provider is ASEAN e-Tourism Portal: eASEANtravel.com. • Travel information from all ASEAN countries will be made available to the world via this website. Commerce • Several key providers including ASEANworld.com, EastASEANbiz.net, SESAMi.com, and WEASEAN.com. • Aim to conduct business online and act as a data bank for investment opportunities. Could also include buying, selling, and auctioning of goods. • Application of “automart” and “reverse auctioning”, which are new transaction methods introduced by electronic commerce. Real estate • Mainly through Brunei’s Real Estate in Cyberspace. • Aims to provide online house selling and buying. People can post property details at a fraction of the cost of using a housing agent. Culture • Done through LifeASEAN, a multilingual online regional magazine on society and culture. • Will feature essays and commentaries in all ASEAN languages on cultural aspects. Award winning Indonesian poet, for example, will be able to reach audiences in other ASEAN countries with translation of his works. Information • ASEAN Information Network is the lead provider. • Will allow people to access 40 million titles available at national libraries in ASEAN countries, web-based and multimedia resources. Education • Through the ASEAN Educators Online and ASEAN SchoolNet. • Connecting schools in region by developing hardware, software, and technical support. Training teachers in information technology. Entrepreneurship development • Main provider is e-Entrepreneurship Training Programme. • Aims to train businessmen in Cambodia, Laos, Myanmar, and Vietnam. Also has training programme to develop Java-based applications throughout universities in ASEAN. Career and recruitment • Key provider is KWX: Knowledge Worker Exchange. • Register job seekers online and match them with career opportunities. Also provide career guidance.

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interest of the region, Singapore has to act as a conduit and beacon for the ASEAN region to sustain international interest in the economic potential of the region. As such, development schemes and initiatives undertaken by regional and international agencies such as the Asian Development Bank, United Nations, and World Bank will be pertinent. Singapore’s hub position and its contribution will be much enhanced if it can work with such regional and international agencies in achieving the intended development targets. The United Nations Economics and Social Commission for Asia and the Pacific (UNESCAP) has taken steps to use regional economic co-operation as a platform to develop and promote advances in ICT for industrial and technological applications (UNESCAP 1997). The UNESCAP action programme in investment-related technology transfer is focusing on IT because “no country today can escape the ever growing influence of IT … [i]t also expands educational opportunities, improves the quality of life and create jobs” (UNESCAP 1997, p. 1). ASEAN has an IT market that is as big as that of China and Korea. However, the market is dominated by hardware (54 per cent) and services (29 per cent), suggesting that it is dominated by a few large corporations. It is believed that many countries in the Asian region still have difficulty building up the absorptive capacity for ICT because of pricing, restrictive terms and conditions on technology transfer, low technical capabilities of users, and the continuing dependence on a narrow set of suppliers. Initiatives in the ICT field are leading to various forms of regional and sub-regional initiatives. In the computer field, the South East Asia Regional Computer Confederation (SEARCC) has been formed, and the Asia and Pacific Centre for Transfer of Technology (APCTT) and the Centre for International Co-operation in Computerization (CICC) have been set up. The regional group is able to distribute information about the benefits of ICT applications, although many of the examples 10 are taken from the developed economies. 5.1. Trade and the World Trade Organization

By the end of the 1990s, world leaders had recognized that the GII (very much represented by the popularity of the Internet and the growing intensity of cross-border flows of multimedia services and e-commerce)

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had become a cornerstone for economic and social development and was becoming a central element of trade policy. Therefore, they are now giving higher priority to telecommunications and information technologies, and more funds are being directed to applications such as education and medicine. Furthermore, national initiatives are being pushed to the international level. The World Bank has aggressively promoted telecommunications liberalization and the privatization of national operators. National governments are encouraged to reform their telecommunications markets. In the Singapore Round held in December 1996, twenty-eight governments signed a Ministerial Declaration on Trade in Information Technology Products. The Information Technology Agreement (ITA) provides for the elimination of custom duties and other charges on IT products through equal reductions annually, beginning in July 1997 and concluding in January 2000. The goal was to achieve commitments representing 90 per cent of world trade in IT, and this goal was met. The relatively rapid preparation and acceptance of the ITA, which commits countries to zero tariffs for computers and component imports is an example of the breadth and scope of changes in the international governance regime. The implications of privatization and market liberalization for the less developed countries, many of which have not joined the World Trade Organization (WTO), with regard to inward investment and the construction of their NIIs are considerable. These countries are advised to adopt the same policies as wealthier countries for three main reasons. First, liberalization and privatization have been successful elsewhere, although most of the evidence is from advanced countries with longestablished universal services. Second, investment in telecommunications networks enables greater use of ICT in support of competitive economic activities. Third, national monopoly operators tend to perform very poorly and this provides strong incentives for major changes in their ownership and operation. 5.2. Digital Divide

In order for ASEAN as a regional organization to achieve common goals of attaining competency in IT development and usage, its members will

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have to design common programmes and initiatives to attain that goal. Singapore, being relatively more advanced, can act as a training centre that offers programmes to train and upgrade IT personnel in the region. It can also act as a conduit for new advances in IT innovations and applications to be efficiently diffused to the region. The digital divide cannot be assumed to be absent in ASEAN, although it may not be as severe as in other parts of the world (Table 7.3). With Singapore as an IT hub, it can help to facilitate the implementation of strategies recommended by the G-8 during its last 11 meeting in Japan. During the meeting, two significant ideas for narrowing the digital divide were proposed. First, Japan offered US$18 billion to upgrade and expand IT in the Third World. Second, leading global companies and governments, under the auspices of the World Economic Forum (WEF) of Switzerland, proposed that key measures to address the global digital divide be drawn up. The WEF obliged with nineteen broad initiatives for world leaders to ponder. In particular, they recommended several strategies that are of relevance to ASEAN and the region. The first strategy is the need to keep the technology, media, and telecommunications sectors powering the Internet free from undue state interference. Such freedom will allow an open, competitive environTable 7.3 International Digital Divide: Individuals with PC Internet Access (excluding wireless access) Region North America Western Europe Eastern Europe Latin America Asia and Pacific Middle East Africa World-wide

Percentage 41 19 3 3 2 1 0 5

Source: Jupiter Communications, cited in Asiaweek (2000a).

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ment to flourish and promote the spread of IT. Second, bringing ICT to the unwired masses is giving IT to them in the form of computers, webphones, satellites, fibre-optic links, the works — all at low cost, if not for free. The third strategy is to establish a special initiative for the least developed countries, one that includes financial assistance and gives emphasis to infrastructure development as well as creative applications of technology in the field of education, public health, community development, cultural enrichment, and so on. Fourth is to start a programme to channel used but still functioning computers to poor nations, which would be a good start to allocating Tokyo’s proposed US$18 billion fund. 6. Conclusion

It has become fashionable for national leaders to embrace the production and application of IT as a key to global competitiveness. IT is increasingly recognized as a vital vehicle for high economic growth, and as a pillar of government efficiency and effectiveness. Also, many national leaders seek to establish and expand indigenous IT industries to meet local needs as well as for export. IT is now woven into the fabric of the social and economic life of developed countries and is a major focus of national investment in the NIEs. Unlike Taiwan, Singapore favours local ownership of IT infrastructure rather than the means of production. The government does not spare any effort in creating the required infrastructure for economic development. The creation of the information infrastructure will depend on attracting leading-edge service and technology providers and getting them to share frontier technologies, often before they are even tried in Western markets. Singapore has an international network of university and industry research advisers, corporate information system and financial management executives, and access (through an EDB joint venture) to technology investment houses, such as Advent International. The concept of a vanguard information infrastructure might have less to do with serving domestic infrastructure needs than with offering up a powerful organizing tool to such foreigners to lure technology. Up and down the value chain — from new carrier network software and

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data transmission/compression technologies, to user friendly applications for school and home — Singapore will try to internalize the production of innovative product lines from abroad and develop wholly new regional export platforms for the information age. Regional competition for IT leadership is keen. Hong Kong has better communication links and a longer history of gateway activities in Asia and is poised to be a formal IT hub to spur greater trade and investment in China. Taiwan, with its energetic pool of SMEs, is making a determined effort to become a regional IT test-bed, as big companies such as Motorola and AT&T have set up designing and testing facilities in the economy. Singapore is a growing regional industrial financier and production system co-ordinator. Singapore has created a sound business climate to nurture the inward transfer of advanced information industry activities by MNCs. It will also strive hard to become an IT hub for the region and beyond. More importantly, a key aim of Singapore as an IT hub is to foster IT application in the ASEAN region. As alluded to earlier, Singapore can and will play a catalytic role in the development of other IT hubs in the region. In fact, co-operative competition will suggest that hubs working in tandem with one another will create far more network externalities than otherwise. It is simplistic thinking to believe that IT activities, unlike those related to transport and logistics where strategic geographical location is paramount, are limited in terms of spatial location or regional market size. Whereas regional economies can very well bypass Singapore as an IT hub and establish their own hubs, the gains in using Singapore as the central hub are significant. Singapore is not just a model for the regional economies to emulate, but is also a source for collating the resources of the region and presenting ASEAN to the world market. Furthermore, as regional economies develop their own hubs, these will co-operate as well as compete with Singapore, thus pushing each other to greater heights of excellence. In the final analysis, a highly informatized, IT-intensive ASEAN region will enable countries within the region to compete with economies from afar. It will further and strengthen the aims and purpose behind pertinent initiatives such as the ASEAN Free Trade Area (AFTA) and the ASEAN Investment Area (AIA).

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NOTES 1. Furthermore, it should be noted that it does take time for productivity improvements to filter through into the economy, due to various reasons, including the need for technologies to be adequately diffused before there can be gains from network externalities, and measurement problems that arise from the inability to properly account for quality improvements. This is often known as the IT productivity paradox. For further discussion, see Brooke (1992), Brynjolfsson (1993), David (1990), David and Steinmueller (1996), Lucas (1999), and Willcocks and Lester (1999). 2. For instance, IBM and Dell Computer, two giant computer companies, may collaborate on R&D to build a new generation of microchips and yet both compete fiercely in the PC market. 3. A simple example can be made of a telephone network. A net of ten phone terminals will have forty-five possible bilateral connections (trading opportunities). A net of one hundred phone terminals will generate 4,950 bilateral connections. This is a hundred-fold increase in bilateral connections given a ten-fold increase in the number of phone terminals. 4. Some of these are elaborated in the paper by Teo and Lim (1998). 5. Concurrently, the Ministry of Communication and Information Technology has also announced the preparation of Infocomm 21, a ten-year master plan to drive the country to become the world’s second most information-driven economy after the United States within three years. The plan combines traditional IT with telecommunications, largely in response to the rise in importance of the Internet. It will map out strategies for Singapore to become a leader in the use of ICT, as well as act as a gateway to the Asia-Pacific region and a key node in the global information infrastructure. An official report of the plan was recently published, and comprehensive details can be found on the IDA website (http://www.ida.gov.sg). 6. Published by the World Economic Forum. The 2000 release of the report includes an Economic Creativity Index (ECI), which accounts for competitiveness in innovation, using benchmarks such as economic creativity, a technology index, and a start-up index. The ECI places Singapore in third position, after the United States and Finland (Porter, Sachs, Warner, and Schwab 2000). 7. According to Peter Evans (1995), there are three archetypes of the state: a predatory state, where rent-seeking and vested interest is endemic; an intermediate state, where inconsistency reign, meritocracy coexists with nepotism and corruption; and a developmental state, where it is continually in the process of constructive negotiation of policies in order to move a society to a higher order of development 8. This includes developing trust-marks and adapting existing laws for the cyber age. 9. A digital certificate is an electronic verification methodology that provides a means

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of electronic identification as well as ensures that confidential information is sent in an encrypted form across the Internet. 10. An example of successful mass computerization in the regional context is the Singapore Civil Service Computerization Programme (CSCP). Every dollar spent has generated US$2.7 in return, or more than US$100 million every year. The programme has also reduced employment by 1,500 posts and has made an additional 3,500 jobs unnecessary, which is beneficial for labour-deficient Singapore. 11. The Group of Eight summit of industrialized nations that met in Okinawa between 21 and 23 July 2000. REFERENCES Asia-Pacific Economic Co-operation (APEC). “Ministerial Meeting on the Telecommunications and Information Industry”. Gold Coast, Australia, 5–6 September 1996. http://www.apecsec.org.sg/coastdecl.html. Asian Development Bank (ADB). Asian Development Outlook 2000: U pdate. Hong Kong, China: Oxford University Press for the ADB, 2000. Asiaweek. “Online Access — It’s a Class Thing, Too”, 4 August 2000a, p. 15. . “Bottom Line”, 15 September 2000b, p. 75. . “Bottom Line”, 22 September 2000c, p. 123. Brooke, Geoffrey M. “The Economics of Information Technology: Explaining the Productivity Paradox”. Cambridge, MA: Massachusetts Institute of Technology, Centre for Information Systems Research, 1992. Brynjolfsson, E. “The Productivity Paradox of Information Technology”. Communications of the ACM 36, no. 12 (1993): 66–77. David, Paul A. “General Purpose Engines, Investment and Productivity Growth: From the Dynamo Revolution to the Computer Revolution”. In Technology and Investment: Crucial Issues for the 1990s, edited by Enrico Deiaco, Erik Hornell, and Graham Vickrey. London: Pinter Publishers, 1990, pp. 141–54. David, Paul A. and W. Edward Steinmueller, ed. Information Technology and the Productivity Paradox. New York, NY: Harwood Academic Publishers, 1996. Evans, Peter. Embedded Autonomy: States and Industrial Transformation. Princeton, NJ: Princeton University Press, 1995. Golden, James R. Economics and National Strategy in the Information Age: Global Networks, Technology Policy, and Cooperative Competition. London: Praeger Publishers, 1994. Lucas, Henry C. Information Technology and the Productivity Paradox: Assessing the Value of the Investment in IT. New York, NY: Oxford University Press, 1999.

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National Computer Board (NCB). Annual Report. Singapore: NCB, various years. . IT2000 Plan. Singapore: NCB, 1992. National Science and Technology Board (NSTB). National Survey of R&D in S ingapore. Singapore: NSTB, 2000. Porter, M., J. Sachs, A. Warner, and K. Schwab. World Economic Forum Global Competitiveness Report 2000. New York, NY: Oxford University Press, 2000. Scherer, F.M. Innovation and Growth: Schumpeterian Perspectives. Cambridge, MA: MIT Press, 1984. Teece, D.J. “The Dynamics of Industrial Capitalism: Perspectives on Alfred Chandler’s Scale and Scope”. Journal of Economic Perspectives 31 (1993): 199–225. Teo, T.S.H. and V.K.G Lim. “Leveraging Information Technology to Achieve the IT2000 Vision: The Case Study of an Intelligent Island”. Behaviour & Information Technology 17, no. 2 (1998): 113–23. United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP). “Regional Economic Cooperation as a Means for Developing and Promoting New Advances in IT for Industrial and Technological Applications in Asia and the Pacific”. Paper prepared for the Steering Group of the Committee for Regional Economic Co-operation, 9th Meeting, Chitose City, Japan, 4–6 February 1997. Willcocks, L. and S. Lester, eds. Beyond the IT Productivity Paradox. New York, NY: John Wiley, 1999. World Bank. World Development Report 2000. Washington, DC: World Bank, 2000.

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Reproduced from Information Technology in Asia: New Development Paradigms edited by Chia Siow Y ue and Jamus Jerome Lim (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available from < http://www.iseas.edu.sg/pub.html >

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The global socio-economic landscape is fast changing. “Buzz words” such as the new economy, digital age, information era, and knowledgebased economy are now frequently used to describe the ongoing transformation — one in which information and knowledge is produced, distributed, and utilized at an accelerated pace. This phenomenon is being facilitated by the push towards globalization and the revolution in information and communications technology (ICT). Together, these forces are resulting in the shrinking of space and time, and the blurring of borders. They are also creating an environment in which knowledge is pervasively used to change the way socio-economic activities are undertaken (Tyndall 1999). 1 The new or knowledge-driven economy is now increasingly

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recognized as an important source of economic growth, a determinant of wealth, and a basis for competitive advantage. Unlike the input-driven or production-based economy that relies on factors such as land, labour, and capital, the knowledge-based economy leverages on the “soft” factors of ideas, information, innovation, skills, and relationships. It also thrives on the concept of increasing returns on the resources deployed, since “knowledge shared is knowledge multiplied”. This notion is in contrast to that of the production-based economy, where the inputs or factors of production have diminishing returns and where basic production skills are increasingly vulnerable to machine substitution as a consequence of technological improvements. In an effort to harness the benefits of the knowledge-based economy, many countries — both from the developed and developing world — have embarked on various national programmes to maximize their economic opportunities and sustain their social fabric. Within Asia, countries such as South Korea, India, Hong Kong, Singapore, Malaysia, and Thailand have started the race to create their very own knowledge-based economy environment. Strategies pursued by these economies include providing state-of-the-art infrastructure and info-structure, developing legal systems and capital markets, liberalizing telecommunication services, investing in a tech-savvy work-force and using fiscal and other incentives to lure investors. In the case of Malaysia, the shift towards a knowledge-based economy has gained momentum in recent years. Rising wages coupled with declining productivity has somewhat eroded Malaysia’s position as a lowcost production centre. This concern has expedited the search for new sources of growth, and the move away from labour-intensive to knowledge-intensive activities is a clear example. Malaysia recognizes that low wages do not necessarily translate to competitiveness. To sustain economic growth and remain competitive in the long term, it is therefore imperative that Malaysia embraces the knowledge-based economy. It needs to harness the potential of creativity and innovation by leveraging on an educated and skilled work-force, and by investing in the right infrastructure and info-structure. In this context, the Multimedia Super Corridor (MSC) is Malaysia’s principal vehicle to leapfrog from the industrial to the post-industrial era.

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1. Conceptual Framework of the MSC

First conceptualized in 1994, the MSC was launched two years later with the full backing of the government. The project is viewed as the engine that would propel Malaysia into the Information Age and help actualize Vision 2020. Located along a strip of 15 kilometres by 50 kilometres between two of the country’s most popular landmarks — the 88-storey Petronas Twin Towers and the Kuala Lumpur International Airport (KLIA), the MSC is an ambitious project designed to create a world-class multimedia and content industry. Housed within the MSC are two “smart cities” — Putrajaya and Cyberjaya. The former is poised to be the new administrative capital for the federal government while the latter is destined to be an intelligent city with ICT industries, R&D centres, a university, as well as global and local companies that create and use multimedia technology. With time, the “cluster effect” from the dynamic businesses-academia-government interaction within the MSC is envisaged to create a self-reinforcing virtuous circle that would generate high value-added and spillover effects for the whole of the Malaysian economy. The task of creating the MSC and paving the way for its success rests with the Multimedia Development Corporation (MDC), a government-owned agency with full powers for implementation and execution. Apart from developing the hard and soft infrastructure, the MDC also advises the Malaysian government on ICT-related policies and legislation, implements MSC-specific practices and sets operating standards for the multimedia industry. As champion and facilitator of the MSC, the MDC is responsible for promoting the MSC globally, attracting world-class companies, and facilitating knowledge transfer of leading-edge technologies. It also assists in linking foreign investors with potential local partners and financiers. The MSC is a long-term project with a twenty-year time-frame for full implementation. Its development is divided into three phases. Phase I (1996–2003), which is well under way, focuses on establishing the MSC (including Putrajaya and Cyberjaya), attracting a core group of world-class companies, launching the seven flagship applications, and putting into place a pioneer framework for cyber laws. Phase II (2004–

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10) will involve linking the MSC to other cyber cities, both locally and globally. A web of corridors and a second cluster of world-class companies would also be established during this phase as the MDC continues to set global standards for its flagship applications and cyber laws. During Phase III (2011–20), the MSC is projected to already have the critical mass of large and small companies needed to become a truly global test-bed for new ICT and multimedia applications. It is also envisaged to have a cluster of intelligent cities linked to the global information superhighway. In short, the MSC would be well positioned to transform Malaysia into a knowledge-based society by 2020 (Table 8.1). Admittedly, the twenty-year framework for fully implementing and executing the MSC is a long one. Nonetheless, Malaysia is focused in its desire not only to embrace but also to be at the forefront of the Information Age. To stay on track towards the goal, refinements in direction will have to be undertaken along the way as competition from other countries intensifies and advances in technology continue to shape the global environment for ICT. Table 8.1 MSC Milestones and Targets Phase I (1996–2003)

Phase II (2004–10)

Phase III (2011–20)

• One corridor • 50 world-class companies • Launch 7 flagship applications • World-leading framework of cyber-laws • Cyberjaya as worldleading intelligent city

• Web of corridors • 250 world-class companies • Set global standards in flagship applications • Harmonized global framework of cyberlaws • 4-5 intelligent cities linked to other global cyber-cities

• All of Malaysia • 500 world-class companies • Global test-bed for new multimedia applications • International CyberCourt of Justice in the MSC • 12 intelligent cities linked to the global information highway

Source: http://www.mdc.com.my.

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2. Some Distinctive Features of the MSC

What distinguishes the MSC from other similar projects in the region, such as Singapore’s Infocomm 21 effort and the Cyberport project in Hong Kong? Although these initiatives differ in scope and approach, they still do compete with the MSC for foreign investment, the latest technology, venture capital, and knowledge workers, amongst others. Their goals, too, somewhat converge, although each project possesses its own idiosyncracies. For instance, Singapore ONE, the nation-wide broadband network initiative that is part of Infocomm 21, is aimed at delivering multimedia services and applications to every home, school, university, and office in the city state. Hong Kong’s Cyberport, on the other hand, is vying to attract and locate companies specializing in the development of services and multimedia content into a dedicated zone. Like the MSC, these projects also have state backing and offer a host of incentives to entice potential investors. Yet, differences in “personality” and execution give each project a unique disposition. Among the salient features that distinguish the MSC from other regional competitors are its flagship applications, bill of guarantees, and panel of international advisers. Other factors include its purpose-built infrastructure and info-structure and comprehensive legislative framework. 2.1. Flagship Applications

The MSC has identified seven primary areas of multimedia applications for priority development. Known as “flagship applications”, these are electronic government, multi-purpose cards, smart schools, telemedicine, R&D clusters, world-wide manufacturing webs, and borderless marketing. The flagship applications are divided into two categories: multimedia “development” and multimedia “environment” flagships (Table 8.2). Multimedia development applications have long-term objectives that reach beyond the MSC’s borders. They are targeted at transforming core elements of Malaysia’s technology infrastructure and social systems in such areas as education, public administration, and healthcare. Multimedia environment applications, on the other hand, are aimed at creating a dynamic cluster of activity and strong communal

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Table 8.2 Seven Flagship Applications of the MSC Flagship applications

Key objectives

Driving agency

Multimedia development flagships Electronic government

To reinvent how government works by improving the way it operates and delivers services to the public.

Malaysian Administrative Modernisation and Management Unit

Multi-purpose card

To improve the ease of conducting routine transactions with government agencies and private sector companies.

Bank Negara (Central Bank)

Smart schools

To develop a technologically literate and thinking work-force to transform Malaysia from an industrial to a knowledge-based economy.

Ministry of Education

Telemedicine

To empower individuals to manage their health and integrate the flow of products and services throughout the healthcare system.

Ministry of Health

Multimedia environment flagships R&D cluster

To foster collaborative efforts among leading R&D firms, local universities and public research institutions, and to support the growth of SMEs.

Ministry of Science, Technology and Environment

World-wide manufacturing web

To provide a conducive environment for high value-added manufacturing and related services i.e., R&D, design, engineering, logistics support, manufacturing control, procurement and distribution.

Ministry of International Trade & Industry

Borderless marketing

To spearhead the growth of multimediabased service industries in the MSC, with emphasis on telemarketing, online information services, electronic commerce and digital broadcasting.

Multimedia Development Corporation

Source: http://www.mdc.com.my.

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ties among industry, research, and academia within the MSC. These applications aspire to develop a “utopia” for innovative producers and users of multimedia technologies in the MSC by attracting companies to build R&D centres, create regional hubs, and deliver value-added services in an efficient manner. Driving the development of the seven flagship applications are government ministries and agencies that report directly to the MSC Implementation Council, chaired by the Prime Minister of Malaysia. These agencies work in close collaboration with leading international and local companies on conceptual planning and project implementation. Pilot schemes for the flagship applications are identified jointly by team members from the MDC, lead agencies, and the private sector, through a mechanism known as the Concept Request for Proposals (CRFP). The CRFP provides bidding and solution delivery guidelines to companies or consortiums interested in undertaking multimedia projects. By defining the objectives and targeted benefits of each project, CRFPs provide the opportunity for government and other interested companies to participate and collaborate in developing the multimedia applications. 2.2. Bill of Guarantees

The Malaysian government’s commitment to the MSC is underscored in a ten-point Bill of Guarantees. The Bill allows for unrestricted employment of foreign knowledge workers, full foreign ownership of MSC-status companies, global sourcing of capital, fiscal incentives in the form of tax exemption and investment tax allowance, and duty-free import of multimedia equipment. It also provides a comprehensive framework of cyber laws and intellectual property laws to facilitate the development of the MSC. Included in this framework are laws pertaining to the use of digital signatures, copyright protection, telemedicine, computer crimes, and a regulatory regime for the convergence of telecommunications, broadcasting, and computing. 2.3. International Advisory Panel

Another unique feature of the MSC is its reliance on a group of renowned international experts for advice and guidance. The International Advisory Panel (IAP) of the MSC consists of distinguished leaders who are “movers

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and shakers” in the global ICT arena. The IAP is consulted on a variety of issues ranging from the group’s views on the progress of the MSC, new and emerging Internet technologies, global ICT trends, market potential for multimedia applications, venture capital, intellectual property rights, and future challenges. Comments and feedback from the IAP members are vital in ensuring that the MSC not only stays relevant but remains at the forefront of the ICT revolution. The IAP also serves as a valuable resource to government and planners in charting and fine-tuning the strategic and operational directions of the MSC. 3. Current Status and Progress of the MSC

Various views and opinions have been expressed on the progress and achievements of the MSC to date. Proponents of the project believe that the MSC has done rather well in the short time period since its existence. They also credit the government for its unwavering commitment to the project despite the economic crisis that hit the Asian region in mid-1997. The MDC, the body entrusted with developing and managing the MSC, says progress of the project is very much on track and has even surpassed targets in some areas. By delivering more than what it promised, the MDC hopes to avert the criticism and negative perceptions that once plagued the project. Gloomy assessments of the MSC were particularly evident in 1997 and 1998 during the Asian economic meltdown and following the arrest and prosecution of former deputy prime minister, Anwar Ibrahim (“Tech Mecca”, Far East Economic Review, 16 March 2000). Critics described the project as another “white elephant” spawned by Dr Mahathir Mohamad’s grandiose visions (“Mahathir’s High-Tech Folly”, Business Week, 22 March 1999). They argued that imposing capital controls and pegging the ringgit would severely affect foreign investment inflows into the country, and questioned the government’s wisdom of continuing to pour money into the MSC during the economic downturn. Undoubtedly, the regional economic crisis did have an impact on the MSC, but the impact was not that severe. For one, the pace of infrastructure development had to be slowed down somewhat. Also, the scope of some flagship applications had to be reviewed and their implementation delayed. More worrying, however, was the impact the

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crisis had on investors. Local investors who were hard hit by the crisis were forced to cut back on operations and postpone their plans of relocating to the MSC. Some smaller ones were even reported to have “closed shop”. Foreign investors who, on the other hand, had pledged to invest in the project, adopted a “wait-and-see” attitude until a clearer picture emerged. Together, these factors decelerated the pace and progress of the MSC, but failed to curb government commitment from moving it forward. With improving economic conditions since 1999 — the Malaysian economy expanded by 5.8 per cent in 1999 and is projected to grow by 2 8.4 per cent in 2000 — development of the MSC is back on track. To date, the government has already pumped RM14 billion into the project — RM9 billion for the KLIA, RM3 billion for the Petronas Twin Towers, and RM2 billion for Cyberjaya (“MSC to Bring in RM20 Billion”, New Straits Times, 9 September 2000). Presumably, the figure of RM14 billion does not include related expenditure, such as for the 2.5 to 10 gigabyte network, connecting road highways and other infrastructural works. Neither does it include the investment for Putrajaya, the new administrative capital and test-bed for many of the MSC’s pilot projects. If these were summed up, then the total amount invested would be staggering by any standard — which is why the MSC cannot and must not fail. So what does the MSC have to show for all these investments? A full-blown impact assessment is premature at this early stage of its development. Benchmarking the MSC against other such world-class projects is also difficult because of dissimilarities in their objectives and scopes. Yet, some qualitative and quantitative indicators can be deployed to gauge the progress and development of the MSC. The common indicators used are corporate indicators, info-structure indicators, and macro indicators. Corporate indicators track the number of leading-edge companies in operation, the depth of their R&D and value-added activities, and the types of partnerships and joint ventures they create in expanding globally. Info-structure indicators provide a measure of the quality and pricing of telecommunications services, as well as the effectiveness of cyber laws in ensuring that they are conducive for technological innovation, creativity, and e-commerce growth. Macro indicators track global advances in

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multimedia and telecommunications, the types of skills required, growth in computer and Internet usage, and the demand-supply gap of knowledge workers. The MSC has progressed well in terms of corporate indicators. By 3 mid-2000, a total of 362 companies had been granted the MSC-status. The figure is a fourfold hike from the ninety-four companies in 1997. Of the 362, approximately 60 per cent are local companies and the remaining 40 per cent are foreign (Table 8.3). There are currently thirtyseven world-class companies engaging in leading-edge multimedia technology at the MSC. They include the likes of Microsoft, NTT, Oracle, Sun, Intel, and Compaq. The target is to have at least fifty worldclass companies by 2003. MSC-status companies created 5,700 jobs between 1997 and 1999, and are expected to employ another 1,600 knowledge workers in 2000. By 2005, these companies are envisaged to generate 35,000 new jobs and invest some RM20 billion (Table 8.3). As business and economic activities gather steam and more residential and commercial space is available in the MSC, the population of Cyberjaya is expected to increase from the present 8,000 to 20,000 in mid-2001 to reach 240,000 in 2005. Currently, staff and students of Table 8.3 MSC Statistics on Companies, Jobs, and Investments MSC-status companies

1997

1998

1999

2000

Malaysian Foreign Total

46 48 94

101 96 197

176 124 300

218 144 362

Jobs created • 5,700 between the years 1997 and 1999 • 1,600 in year 2000 • Projected new jobs: 35,000 in year 2005 Estimated investments • RM1.8 billion by 2001 • RM20 billion by 2005 Source: http://www.mdc.com.my

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the Multimedia University account for almost 5,000 of Cyberjaya’s population. Others travel daily to work but still live in areas closer to Kuala Lumpur. Until a critical mass of people start working, interacting, and staying in and around the MSC, the project will not fully benefit from cluster-induced dynamics, as is evident in innovation-rich places such as Silicon Valley. Unlike infrastructure and info-structure, monitoring and benchmarking multimedia solutions is more difficult. This is because the MSC is a greenfield site for many of the flagship applications (“Bureaucrat Who Rose to the MSC Challenge”, New Straits Times, 8 September 2000). However, based on reports by the respective lead agencies, it is sufficient to say that flagship applications are making progress, albeit at different rates. For instance, the technology infrastructure for smart schools has already been installed and tested in eighty-one existing schools. However, the implementation of telehealth projects has been delayed and will only be launched later in the year. Some flagship applications have also had their scope and reach revised. For example, under the multi-purpose card flagship, there will now be two multi-purpose cards instead of one, as originally intended. The first card, to be launched at the end of 2000, is targeted at publicsector employees. It will contain their personal, immigration, and driving licence details, among others, and will incorporate e-cash and health information later on. The second multi-purpose card, to be introduced in early 2001, is meant to facilitate banking and payment transactions. Plans are in store to merge both the cards with a view to eventually phasing out automated teller machine (ATM) cards. For the electronic government flagship, pilot projects on e-services, e-procurement, human resources, and administrative functions are currently at different stages of testing. New ones are also being considered. Among the e-services projects being tested are those related to vehicle registration, licensing, utility payment, and online health information. Under the R&D cluster flagship, grants worth RM32 million have been approved for fifteen projects, two of which have already been completed. A RM100 million fund was established in 1997 to support such initiatives within the MSC. To date, about fifty applications have been received for R&D funding.

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Investment by local and foreign firms in the flagship applications amounted to RM270 million in telehealth, RM200 million in eprocurement, and RM40 million in the multi-purpose card meant for electronic payments (“MDC Chief: Benchmarks Can Help the MSC Develop”, Star, 4 September 2000). At least five new MSC-status companies have also undertaken R&D activities, while another thirty have registered as providers of e-commerce solutions. With the first wave of activities nearing completion, the MDC is in the process of reviewing the progress of all flagship applications. It hopes to identify and address existing gaps, step up the pace of implementation and fine-tune their scope and reach in preparation for the second wave of such activities. 4. Issues and Challenges Facing the MSC and Malaysia

Despite the progress made by the MSC to date, there are several issues and challenges that have to be addressed as Malaysia races to embrace the knowledge-based economy. Some of these are specific to the MSC and require urgent attention and concrete solutions. Others are broader in scope but no less important as they can undermine the progress and performance of the MSC and hence, delay Malaysia’s entry into the digital era. These issues and challenges range from the lack of knowledge workers, insufficient sources of venture capital, the need to prioritize multimedia technologies and improve global marketing skills, as well as the potential digital divide facing the country. 4.1. Knowledge Workers 4

The lack of knowledge workers or k-workers is a major concern, especially in the short-to-medium term. The new economy is driven by the creation, exchange, and diffusion of innovative ideas, and the availability of technically competent and talented workers is often a precondition demanded by potential investors. India is a case in point where a set-back in infrastructure has not prevented foreign investment in ICT from continuing to flow in. The ready pool of k-workers in India has attracted many multinational corporations to either relocate their operations or start new ones there. India has also benefited from “exporting” k-workers to such places as the United States and Europe, where they often work on leading-edge technologies in ICT. Many

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Table 8.4 Malaysian Demand for ICT Workers, 1998–2005 Category Technical support Programmers Systems analysts Software developers (with postgraduate qualifications) Systems and hardware engineers Total

Demand 34,500 22,500 26,000 10,500 14,500 108,000

Source: http://www.mdc.com.my.

eventually end up establishing networks with their Indian counterparts or return home to set up their own businesses. According to a recent study by the United Nations Development Program (UNDP) and the Economic Planning Unit (EPU), there 5 currently exists a shortage of ICT-trained k-workers in Malaysia. While the shortfall in supply is likely to ease in 2005 through ongoing efforts to produce more k-workers, there is a need to reduce the demand-supply gap in the short-to-medium term (Table 8.4). Policies are already in place to allow MSC-status companies to employ qualified foreign ICT experts. But the shortage of k-workers globally is forcing countries to 6 compete for them. To tackle this problem, talented individuals from at home and abroad are being recruited. In tabling Budget 2001, the government proposed several incentives to attract Malaysian experts working and residing abroad to return home.7 Similarly, to meet the kworker needs of the MSC, the MDC has set up a subsidiary known as the Knowledge Workers Exchange (KWX) to headhunt and recruit kworkers from within and outside Malaysia. 4.2. Venture Capital

Unlike traditional businesses, which rely on banks and financial institutions for funding, companies in the knowledge-based economy often resort to venture capital (VC) funding. VC is especially suitable for new start-up companies that have weak financial standings but are rich in innovation and marketable products/services. VC funding often has a short-to-medium term time-frame and a clear exit point. It has

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proven to be an effective form of financing for small ICT start-ups. In fact, one of the key factors behind Silicon Valley’s success in churning out so many innovative companies has been readily available VC funding. In the United States, apart from serving as risk capital, VC now rivals R&D as a funding source for innovation (“The Next Downturn”, Business 8 Week, 9 October 2000). Unfortunately, sources and avenues for VC are visibly lacking in Malaysia. In spite of the proposals made in recent government budgets, banks and financial institutions still prefer the risk-averse method of 9 collateral-based lending. Foreign VC companies are also less enthusiastic to invest in local start-up companies because of the limited success of 10 the Mesdaq (Malaysia’s equivalent of the Nasdaq in the United States). Because their exit options are limited, these venture capitalists are asking for assurances, as they do not plan to hold their investments for more than five years (“MSC to Bring in RM20 Billion”, New Straits Times, 9 September 2000). Although MDC’s subsidiary, MSC Venture Capital, has disbursed RM120 million in VC to seven companies since June last year, the amount is clearly insufficient to trigger a critical mass of start-ups. The MDC states that it has to be prudent in its stand as many Malaysian start-ups seeking VC still have weak management teams and inadequate business plans (“Malaysia’s Multimedia Super Corridor Struggles to Live Up to Its Own Hype”, Asian Wall Street Journal, 22–24 September 2000). The lack of VC resources has reportedly prompted several Malaysian start-ups to move elsewhere in search of easier financing. 4.3. Multimedia Technologies and Global Marketing Skills

The MSC’s focus on developing seven flagship applications is considered overambitious by some. At a recent meeting, IAP members cautioned for the need to prioritize and focus on certain niche technologies. Instead of overstretching its limited resources in too many areas, they advised the MSC to target and focus on areas where it can be among the best in the world. To achieve world-class status, the MSC must also aim to export its flagship applications and multimedia content. However, the lack of global marketing skills among Malaysian entrepreneurs has hampered such efforts.

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To help Malaysian companies assess and exploit overseas markets, the MDC has set up yet another subsidiary company. Known as MDC Access, the company not only provides an avenue for local companies to penetrate new markets, but also gives them the opportunity to forge “smart partnerships” and joint ventures with foreign counterparts. 4.4. Digital Divide

While the MSC is viewed as the vehicle that will spearhead Malaysia’s foray into the digital era, there is a need to “connect” the rest of the country if Malaysia is to harvest the fruits of a knowledge-rich society. Although efforts are progressing along these lines, the present situation remains less than desirable. A recent study (completed in June 2000) by the National Information Technology Council (NITC) found that the “digital divide” problem provides valid cause for concern (NITC 2000). Findings of the study reveal that 70 per cent of primary and 46 per cent of secondary schools in Malaysia do not have access to computer facilities. Neither do 90 per cent of primary and 66 per cent of secondary schools have access to the Internet (“Digital Divide Cause for Concern”, New Straits Times, 24 September 2000). Also disheartening to note is that more than 5 per cent of the country’s population could be “marginalized” from ICT altogether as they fall in the “relative and hardcore poor” categories. A high proportion of the marginalized segment of society is in East Malaysia, where approximately 25 per cent of rural households in Sabah and another 20 per cent in Sarawak do not even have access to electricity supply. Also, since about 15 per cent of Malaysia’s population have only primary school education, they would require basic ICT exposure before they can use e-public services in the future. If these issues are not tackled fast, they can widen the digital gap — especially among the poor, the elderly, and the disabled — and hamper Malaysia’s aspiration of building a mature and knowledge-rich society by 2020. While the NITC has taken the lead in addressing some of these issues, the measures instituted are clearly insufficient. One such effort undertaken to narrow the digital divide is through the Demonstrator Applications Grant Scheme (DAGS). But of the RM50 million allocated to the DAGS since its inception in 1998, only RM18 million has been disbursed to support some twenty projects.

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Among the pilot projects supported by the DAGS are “CyberCare”, which links twenty-six orphanages nation-wide for online counselling and advice; “Smasy”, which is designed to train a group of villagers to use computers; “TaniNet”, which is aimed at helping farmers keep abreast with the latest developments in agriculture and biotechnology; and “MyBiz”, which brings together small and medium enterprises to form an electronic community with a view to enhancing trade and fostering networking. 5. Concluding Remarks

Various initiatives have been undertaken at the national level to chart and accelerate Malaysia’s entry into the digital age. The MSC, which is a bold experimental venture to create a world-class multimedia and content industry, is one clear example. Given its short history, the MSC has certainly made commendable progress in terms of “hard” infrastructure development. Advances have also been made in so far as the legislative framework and flagship applications are concerned. However, the “soft” factors that drive knowledge-based industries — such as talent, skills, R&D, and venture capital — are still either lacking or underdeveloped. These factors strongly influence investment decisions and have to be put in place if the MSC is to attract more world-class companies and new ICT start-ups. Also of concern is the issue of digital divide. The gap between the information “haves” and “have nots” will only increase and create inequality of different types if not bridged. Efforts targeted at narrowing this gap are being undertaken, but they are limited in scope and reach. A lot more work has to be done on the ground if the fruits of the digital age are to be enjoyed by all levels of society. For a start, the Malaysian population needs to be more aware of the importance of ICT, and one way of doing this is by improving Internet access to schools, both at the primary and secondary levels. Another way is to expand ICT-based pilot projects to as many parts of the country as possible, especially to the rural areas. These issues must be tackled with vigour and in a concerted manner. Only then can changes in mindsets and cultural norms occur. The journey into the digital age will not be an easy one, as it involves travelling through uncharted territory. But it is a necessary one if Malaysia

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is to remain relevant and competitive in the face of globalization and the ICT revolution that is taking place. NOTES 1. The OECD definition of a knowledge-based economy is one that is directly based on the production, distribution, and use of knowledge and information in all socioeconomic activities. Information and knowledge are strategic resources (apart from land, labour, and capital) for generating output. Intellectual capital is also a key source of value, and forms the foundation for sustainable economic success. A knowledge-based economy is typically characterized by knowledge-based industries accounting for a sizeable share of the GDP/GNP; a rising share of technology products; high-tech exports; a high share of R&D; and increasing employment in high-tech industries. 2. Economic growth for the year 2000 is based on the forecast of the Malaysian Institute of Economic Research (MIER) at the National Economic Outlook Conference in Kuala Lumpur (MIER 2000). 3. To qualify for MSC-status, companies have to be providers or heavy users of multimedia products and services. They must also employ a substantial number of knowledge workers and be able to transfer technology to Malaysia. MSC-status companies enjoy various incentives, including tax exemption, investment tax allowance, and freedom of ownership. 4. As with the knowledge-based economy, there is no universal definition for the kworker (A. Abdul Rahim, J. Ahmad Sobri, and Mohammad H. Alias 2000). Definitions range from “people who use their heads more than their hands to produce value” to “workers skilled in a wide range of subjects and technologies, and are continually upgrading their skills through ongoing education” through to “workers who contribute not their physical labour but knowledge as part of their day-to-day responsibilities”. In the Malaysian context, k-workers, as defined by the MDC, are individuals possessing any one of the following qualifications: five or more years of professional experience in multimedia/information technology (IT); a bachelor’s degree (in any discipline) or a diploma in multimedia/IT with two or more years of professional experience in multimedia/IT; a master’s degree or above in any discipline. 5. The joint study by the EPU and the UNDP envisages the demand for k-workers to range from about 88,500 to 108,000 between 1998 and 2005. The new supply of k-workers is forecasted to be 105,000 for the same period. 6. Indeed, such competition might well lead to a “brain drain”. See, for example, “Brain Drain Overdrive: Singapore Targets Malaysian Tech Talents and Others” (Star, 10 October 2000).

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7. To encourage Malaysian citizens working abroad to return home and serve the nation, Budget 2001 provides for exemption from income tax, duty-free import of motorcars, and the granting of permanent resident status to spouses and children. 8. In 1988 the amount of VC dispersed in the United States was about US$5 billion while total spending on R&D was US$134 billion. In the first half of 2000, VC is running at an annual rate of about US$100 billion or 40 per cent of all money spent on R&D. 9. In Budget 2001, it was proposed that the income of qualified VC companies (that is, corporations investing in venture companies) be exempted from income tax for a period of up to ten years or to the life-span of the fund (whichever is the lesser). Budget 2001 proposes that investment in approved venture companies at start-up, seed capital, and early stage financing be given a deduction equivalent to the value of the investment. Such deductions can be carried forward if the statutory income cannot offset the investment made (MACPMA 2000). 10. Presently, only two companies are trading on Mesdaq although several more will be listed in the near future. Mesdaq also imposes the condition that 70 per cent of listing proceeds must be used in Malaysia. To provide more flexibility to Mesdaqlisted companies, Budget 2001 proposes the relaxation of several listing requirements, including lowering the 70 per cent criterion (MACPMA 2000). REFERENCES A. Abdul Rahim, J. Ahmad Sobri, and Mohammad H. Alias. “Managing the Supply of K-Workers: The Role of Higher Learning Institutions”. Paper presented at the MIER National Economic Outlook Conference, Kuala Lumpur, 20–22 November 2000. Malaysian Association of Certified Public Accountants (MACPMA). 2001 Budget Commentary. Kuala Lumpur, Malaysia: MACPMA, October 2000. Malaysian Institute of Economic Research (MIER). National Economic Outlook Conference, organized by the MIER in November 2000, Kuala Lumpur. National Information Technology Council (NITC). Access, Empowerment and Governance in the Information Age. Building Knowledge Society Series, vol. 1: NITC Malaysia Publication. Kuala Lumpur, Malaysia: NITC, 2000. http:// www.nitc.org.my/resources/bkss.pdf. Tyndall, P.S. “K-Economy Will Shape the Future”. MIER Scope Article, New Straits Times, 27 November 1999.

© 2002 Institute of Southeast Asian Studies, Singapore

Reproduced from Information Technology in Asia: New Development Paradigms edited by Chia Siow Y ue and Jamus Jerome Lim (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available from < http://www.iseas.edu.sg/pub.html >

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Information and communications technology (ICT) can be defined as the totality of the electronic means to collect, store, process, and present information to end-users in support of their activities. In terms of its economic implications, four dimensions of the positive impact of ICT on economic growth can be discerned. First, ICT allows process innovation (new ways of doing old things), which increases productivity and creates new value added. Second, innovative economic activities (new ways of doing new things) may be generated. Third, ICT represents a new factor of production, along with land, labour, and capital, which can lead to economic restructuring. Finally, ICT characterizes a new means of organizing activities, through its synergies with other technologies. All of these dimensions either directly impact on growth, or indirectly do so, through multiplier effects that influence price, income, and capacity (United Nations 1999).

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Modern economic growth, as emphasized by Nobel Laureate Simon Kuznets, is always accompanied by structural change. The structural change is the same for all nations, starting from an agriculture-based economy, followed by industry- and service-based economies. The early phase of Thailand’s modern economic growth was marked by the rise of non-agriculture shares and growth in gross domestic product (GDP) during the last three decades (Table 9.1). Under globalization and the information technology (IT) revolution, it is expected that the next phase of the economic growth will be generated from ICT. This chapter aims to present the current status of development and the challenges faced in engaging ICT in Thailand. Section 1 reviews ICT products and services in the Thai IT market. Hardware and software products, together with Internet services, are presented. In Section 2, the monopoly in Internet access and the telecommunication infrastructure of Thailand are discussed. The status of e-commerce is depicted in Section 3. National IT policies and the legal framework are reviewed in Section 4. Finally, concluding remarks and policy implications are derived in Section 5. Table 9.1 Thailand: Sectoral Shares and Growth of GDP (percentages) Sectoral share Sector

1970

1980

1985

1990

1995

1999

Agriculture Non-agriculture Industry Services

30.2 69.8 25.7 44.1

20.2 75.4 25.7 49.7

19.1 80.9 31.6 49.4

13.6 86.4 37.8 48.6

10.8 89.2 41.5 47.7

10.2 89.8 42.9 46.9

Sectoral growth Sector Agriculture Non-agriculture Industry Services

1971–75 3.7 6.4 8.0 5.6

1976–80

1981–85

1986–90

3.5 9.0 10.5 8.2

4.3 5.7 6.5 5.3

3.2 11.8 14.4 10.0

1991–95 1996–99

Source: CEIC, dX Data Time Series Data Express, version 2.1.

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1.6 9.7 11.5 8.2

0.8 –0.7 –0.4 –0.9

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1. ICT Products and Services in the Thai IT Market

The Thai IT market is divided into three major segments — hardware, software, and services. The hardware market holds the major share of the IT market (Table 9.2). By industry segment, the business sector makes up over 50 per cent of the market, followed by government/state 1 enterprises and household users (Table 9.3). 1.1. Hardware

In the hardware market, as of 1999 the production of personal computers (PCs) and workstations and their peripherals hold more than 40 per cent of the overall market (Table 9.2). The hardware market itself can be split up into the export and domestic markets. Computers and computer parts have become a main source of Thailand’s export earnings since the mid-1980s. Their exports amounted to 300 billion baht, which is equivalent to 16 per cent of the total exports of Thailand in 1999. The major export markets are the United States, Singapore, and Japan. The demand for Thailand’s exports of computers and computer parts depends on the international economic condition, particularly on the U.S. economy and on the policies of multinational corporations. Most manufacturers are engaged in investment projects launched by parent companies abroad. The domestic market for computers and their parts is small relative to their export market. However, their demand is on a rising trend due to the rapid expansion in the use of the Internet for education and e-commerce (Bangkok Bank 1999). On the supply side, most manufacturers depend heavily either on the import of complete computer sets or on computer components and parts for assembling. Their import demand is highly correlated with their export demand, due to the high import content of the components and parts industry. Imported content generally accounts for 65 to 90 per cent of production cost (Thai Farmers Research Centre 2000a). Besides, the life-cycle of the products is short. So, the value of their total imports increased continuously before being hardest hit by the economic crisis in 1998. The value of net exports of the computers and parts industry, however, has been positive and increasing over time (Table 2 9.4). The major import markets of computers and computer parts are

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Table 9. 2 Thailand: IT Market Growth Profile (million baht)

Systems

PCs and workstations

Packaged software

Services

Total

1995 value % share % growth

3,032 (10) (36)

18,726 (60) (42)

4,516 (14) (63)

4,911 (16) (34)

31,184 (100) (43)

1996 value % share % growth

3,059 (8) (1)

21,578 (59) (15)

5,634 (15) (25)

6,614 (18) (35)

36,885 (100) (18)

1997 value % share % growth

4,093 (10) (34)

23,503 (55) (9)

6,851 (16) (22)

8,200 (19) (24)

42,646 (100) (16)

1998 value % share % growth

2,465 (9) (–10)

11,132 (43) (–53)

5,126 (20) (–25)

7,229 (28) (–12)

25,953 (100) (–39)

1999 value % share % growth

2,133 (8) (–13)

11,534 (43) (4)

5,227 (19) (2)

8,215 (30) (14)

27,109 (100) (4)

Note: Figures within parentheses are in percentages. Systems = Mainframe, medium and small-scale systems, and special purpose equipment. PCs and workstations = PC units, workstations, monitors, storage, printers, and other peripherals. Packaged software = System software/utilities, application tools, middleware, and application solution. Services = Maintenance services and professional services. Source: Ministry of Commerce, Thailand (http://www.thaiecommerce.net/ ecom.htm).

the United States, China, and Japan. On the supply side, the products produced locally by the components/parts industry include floppy disk drives, disk drive components, keyboards, printers, power supplies, spindle motors, and hard disk drives. The production of complete computer sets has seen more local brand names capturing a share of the market since the crisis.

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Table 9.3 Thailand: IT Market by Industry Segment (million baht) 1997

1998

Segment

Value

Government/state enterprises

7,250

(17)

3,374

25,587 5,118 6,823 1,279 1,279 5,544 5,544

(60) (12) (16) (3) (3) (13) (13)

Home users

5,118

Others

Business sectors Financial Manufacturing Healthcare Hotel Telecommunication Education

Total

% share

Value

1999

% share

Value

% share

(13)

5,693

(21)

15,571 2,076 4,931 519 519 4,152 3,374

(60) (8) (19) (2) (2) (16) (13)

14,368 2,440 4,880 542 271 3,253 2,982

(53) (9) (18) (2) (1) (12) (11)

(12)

3,633

(14)

3,253

(12)

4,691

(11)

3,374

(13)

3,795

(14)

42,646

(100)

25,953

(100)

27,109

(100)

Source: Ministry of Commerce, Thailand (http://www.thaiecommerce.net/ecom.htm).

Table 9.4 Thailand: Exports and Imports of Computers and Computer Parts (million baht) Exports (X)

Imports (M)

Year

Value

% growth

Value

% growth

Value of net exports (X – M)

1991 1992 1993 1994 1995 1996 1997 1998 1999

46,340 55,384 62,745 92,058 128,432 165,241 217,636 316,289 299,923

(19.8) (19.5) (13.3) (46.7) (39.5) (28.7) (31.7) (45.3) (–5.2)

29,552 36,871 38,968 52,984 65,588 71,899 95,293 83,987 92,258

(12.1) (24.8) (5.7) (36.0) (23.8) (9.6) (32.5) (–11.9) (9.8)

16,788 18,514 23,777 39,075 62,845 93,342 122,342 232,302 207,665

Source: Thai Farmers Research Centre (http://www.tfrc.co.th).

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1.2. Software

A 60 per cent share of the software market is in application solutions, followed by 25 per cent in system software and utilities, 10 per cent in application tools, and 5 per cent in middleware (Ministry of Commerce, Thailand 2001). In general, software is imported for domestic consumption since software development is still limited in the local market. The United States is the top trading partner of the Thai software industry. The Intellectual Property Rights Act of 1994, coupled with stricter enforcement measures on pirated software, has increasingly forced 3 Thai consumers to invest in legal copies of software. Recently, the government has developed a Software Park to improve 4 the quality and competitiveness of the Thai software industry. With the Software Park project, Thailand can expect to see a reduction in software imports as well as a possible decline in the piracy rate as dependence on foreign software falls. This, together with the World Trade Organization (WTO) Information Technology Agreement (ITA) implemented since 1997 has resulted in a general decline in domestic prices of both hardware and software. 1.3. Internet Service

The Internet is a huge network linking millions of computers and users world-wide, and it depends on both software and hardware linkages to exchange and transmit information. The development of the Internet in Thailand began with an academic network in 1987, followed by the expansion of the Internet into commerce in 1995. As of July 2001, Thailand had eighteen commercial Internet service providers (ISPs), four non-commercial Internet hubs, 539.6 megabits per second (Mbps) of total international bandwidth (in) and 414.4 Mbps of total international bandwidth (out), 71,995 Internet hosts operating under the secondlevel “.th” sub-domain, and 6,282 Internet domain names registered under the second-level “.th” sub-domain. Although Thailand’s Internet connectivity has been established since the late 1980s, the degree of diffusion is quite low, and this is exacerbated by the low degree of PC penetration (Table 9.5). In the year 2000 there were 2.3 million Internet users, or 1.6 per cent of the total population (Internet Information Research Centre 2001a). Among the ASEAN-5, Thailand ranked third

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Table 9.5 ASEAN-5: Internet Indicators No. of Internet hosts (per 1,000 persons) 1987–91 1992–96 1998 Indonesia Malaysia Philippines Singapore Thailand

— — — 0.04 —

0.00 0.31 0.02 4.08 0.05

0.08 2.20 0.13 21.20 0.34

Internet users (% of population) 1998

1999

0.15 3.68 0.21 23.71 0.33

0.40 6.90 0.70 24.40 1.30

Estimated no. of PCs (per 100 persons) 1987–91 1992–96 1998 — — 0.10 — —

0.28 3.22 0.69 15.46 1.19

0.82 5.98 1.51 45.84 2.16

Sources: International Telecommunication Union (http://www.itu.int); United Nations (1999), pp. 143–44.

in terms of number of Internet hosts per 1,000 of the population, as well as Internet and PC penetration (Table 9.5). In 1999 the Internet penetration rate averaged 0.5 per cent per 1,000 of the population in the developing countries of the Asia-Pacific region, while that in the region’s developed countries reached 22.3 per cent (International Telecommunication Union 2001). The outlier in the data was Singapore, which highly surpassed the other ASEAN countries in terms of Internet utilization. An Internet users’ survey conducted by the National Electronics and Computer Technology Centre (NECTEC) (1999) shows that 56 per cent of Thai Internet users are in the 20–29 years age group, followed by 22 per cent in the 30–39 age group. Most of the users (48 per cent) are employees of for-profit organizations, followed by civil servants (27 per cent) and employees of state enterprises (15 per cent). 54 per cent of Internet users are located in Bangkok, followed by 10 per cent in the north and less than 10 per cent in other regions. In terms of type of use, most Internet users (68 per cent) utilize the Internet for information searches, followed by 13 per cent who use it for personal communication, 12 per cent for non-personal communication, and 3 per cent for entertainment. The low speed of Internet access is perceived as the major problem that Internet users face (71 per cent), followed by high costs (38 per cent), network unreliability (34 per cent), and the lack of a law that protects consumers making purchases over the Internet (28 per cent).

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2. Monopoly in ICT Infrastructure 2.1. Internet Infrastructure

Together with the Telephone Organization of Thailand (TOT) and the National Science and Technology Development Agency (NSTDA), the Communications Authority of Thailand (CAT) set up Thailand’s first commercial Internet service provider, Internet Thailand Company, in 1995. The shareholdings of the three state-owned agents in Internet Thailand are 33 per cent by the TOT, 34 per cent by the NSTDA, and 33 per cent by the CAT. In the Internet market, Internet Thailand holds 5 the largest share, which is 20 per cent of the market. Instead of granting licences, the CAT has required that, in exchange for access to international connections, it hold a 35 per cent stake in each ISP. This means that ISPs have to come up with an extra 35 per cent in funds when they want to raise capital, so as not to dilute the CAT’s holdings. In addition, the CAT has also set up pricing guidelines on how much an ISP can charge their customers (Palasri, Huter, and Wenzel 1999). Unfortunately, the CAT’s leased lines are some of the most expensive in the region (Crispin 2000). Consequently, Internet services in Thailand are quite expensive for both individual and corporate customers. Furthermore, the CAT’s self-allocated free shares distort the competition by increasing the burden faced by ISPs, who then pass on the cost to their customers. A study by the Thailand Development Research Institute (TDRI) points out that the CAT’s free shares cost each ISP about 8 to 20 per cent in addition to the real costs (Palasri, Huter, and Wenzel 1999). The CAT has also set a traffic limit to Thai hosts. This traffic limit not only discourages data transfer, technical improvement, and content development in Thai sites, but also forces hosts to seek cheaper offshore sites. A study conducted by the Organization for Economic Co-operation and Development (OECD) echoed the TDRI’s research that the prices that ISPs charge corporate customers directly affect the country’s presence on the Internet. The OECD study indicates that the penetration of Internet hosts is five times greater in competitive than monopoly markets, and if an allowance is made for the date of service commencement, Internet access in countries with telecommunications infrastructure

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competition has grown six times faster than in monopoly markets. Moreover, in 1995 the average price for leased line access to the Internet in countries with a monopoly telecommunications infrastructure provision was 44 per cent more expensive than countries with competitive infrastructure provisions. A change in the CAT’s monopoly position has thus been strongly recommended, and in July 2000 the shareholding intervention of the CAT was abolished. 2.2. Telecommunications Infrastructure

Although the Thai telecommunications industry has been developed for many decades, the number of telephone lines as a percentage of the population is still low, with little change over time (Table 9.6). The latest figures show that the number of fixed telephone lines per 100 persons rose from 3 per cent in 1992 to 8.6 per cent in 1999. It is noted that the share of Thai telecommunications investment in GDP had begun to decline even before the crisis while the shares of Indonesia, Malaysia, and the Philippines had increased over the period (Table 9.6). The Thai telecommunications industry is a government monopoly under the supervision of the Ministry of Transport and Communication (MOTC). Under the MOTC, the TOT manages domestic telecommunications while the CAT provides international services; postal services are under the supervision of the Department of Post and Telegraph (DPT). In the early 1990s, the government awarded concessions of fixed Table 9.6 ASEAN-5: Telecommunication Indicators Share of telecom investment in GDP (%)

No. of telephone lines (per 100 persons)

1987–91 1992–96 1987–91 1992–96 1999 Indonesia Malaysia Philippines Singapore Thailand

0.46 0.73 0.47 0.67 0.41

0.74 1.52 0.88 0.51 0.19

0.55 8.28 1.00 37.19 2.18

1.40 14.70 1.72 46.32 4.90

2.91 20.30 3.95 48.20 8.57

No. of cellular phone subscribers (per 100 persons) 1987–91 1992–96 1999 0.01 0.34 0.01 1.26 0.09

0.09 3.64 0.51 8.63 0.93

1.06 13.70 3.66 41.88 3.84

Sources: International Telecommunication Union (http://www.itu.int); United Nations (1999), pp. 143–44.

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telephone service to two private companies, TelecomAsia Corporation PCL (TA) and Thai Telephone and Telecommunications Public Company Limited (TT&T), under the “build-transfer-operate” (BTO) sys6 tem with a revenue-sharing contract. Based on production capacity, the largest market share belongs to the TOT (46.5 per cent), followed by the TA (34 per cent) and TT&T (19.5 per cent). The fixed telephone lines have concentrated in big cities where only a third of the Thai population resides. For the time being, the TOT controls the domestic telephone industry while the CAT regulates the international telephone and Internet services. The services have been characterized by exorbitantly high prices, especially compared with those of developed countries (Palasri, Huter, and Wenzel 1999). Besides the fixed telephone line, mobile phones are another form of communications equipment that have been developed to provide Internet services — presently mainly through the wireless application protocol 7 (WAP). Thailand now has six mobile phone providers offering eight transmitting systems (Thai Farmers Research Centre 2000b). The penetration rate of mobile phones has increased rapidly in the late 1990s, compared with that of fixed telephone lines (Table 9.6). All mobile phone companies have to obtain concession rights from the TOT and CAT. Based on production capacity, private companies hold the major market shares — Advanced Info Services System Company (AIS), for example, holds 48.3 per cent, and Total Access Communications Public Company (TAC) holds 39.2 per cent. Meanwhile, the TOT and CAT together hold only 5.4 per cent share of the mobile phone market (Ratananuban and Somboontanond 2000). The current trend of linking mobile phones to the Internet has sped up domestic demand as well as imports of mobile phones (Thai Farmers Research Centre 2000b). In line with the commitment to the WTO, the Thai government has developed a master plan for the liberalization of the telecommunications industry by 2006. The plan, approved by the cabinet in November 1997, has four major phases, beginning with the privatization of the 8 TOT and CAT and a revision of their agreements with private companies. In order to facilitate the privatization of the TOT and CAT, the cabinet has approved a proposal to establish a joint holding company, the Rum Thun Company Limited, to own shares in TOT Co., CAT

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Co., and Thai Postal Co. The joint holding firm will be the parent of the three companies, and the corporatization of the TOT and CAT is a prerequisite for privatization. A strategic partner will be sought for both the TOT and CAT. Shares will also be sold to TOT and CAT employees, as well as the public (Figure 9.1). So far, the corporatization plan for the two state agencies, which stipulated domestic liberalization in October 1999, is still uncertain as several political parties have been campaigning that they have no intention to sell the state agencies to foreign investors. Moreover, political intervention may give rise to difficulty in the conversion of concessions awarded by the TOT and CAT to the private sector (Bangkok Post, 3 January 2001). If the conversion is successful, competition in the telecommunications market will increase. The opening up of the market to international investment will occur in the final stage of liberalization in the telecommunications sector. Capital inflow and technology transfer, together with improvements in the development of the domestic telecommunications infrastructure, are expected to benefit the country. 3. Status of E-Commerce

To date, e-commerce has not been widely used in Thailand. The Internet users’ survey conducted by the National Electronics and Computer Technology Centre (1999) finds that only 18.4 per cent of Internet users have had the experience of buying goods and services online. The purchase of books is the most popular use of e-commerce, with 76 per cent of those who have ever purchased online having bought a book before. The purchase of computer software represents 47 per cent; music, 46 per cent; and digital information, 43 per cent. The major reasons cited against Internet purchases are the unreliability of product quality, insecure credit card transactions, and the non-possession of a credit card. As for the business-to-business (B2B) segment, a survey conducted in 1999 by the Business Economics Department Market at Thammasat University shows that Thai small- and medium-sized enterprises (SMEs) are still reluctant to capitalize on Internet commerce because of the high costs involved, the lack of knowledge, and security concerns. However, awareness of the value of e-commerce is high among large enterprises, particularly in the construction, auto-vehicle, farm products, and

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Not 22%

Not 22%

Subsidiaries

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Individual investors

Subsidiaries

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This chapter discusses e-commerce-related policy issues from the perspective of Thailand. The objective is to assess certain global ecommerce policy proposals advanced by international bodies, governments, and academics in developed countries. The assessment is limited to five areas: telecommunications liberalization, taxation, trade negotiations in the General Agreement on Trade in Services (GATS), harmonization of e-commerce-related commercial laws, and intellectual property rights protection. Although the analysis is largely based on case studies of Thailand, it is hoped that it will also reflect the viewpoints of other developing countries. The chapter is structured as follows. In Section 1, a brief overview of the status of e-commerce in Thailand will be made. This is followed by a background discussion on digital divides in the region and U.S.centric e-commerce proposals. Section 3 will deal with key policy issues

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which include the liberalization of the telecommunications market, the creation of a tariff-free environment for trade in goods and services on the Internet, the harmonization of the commercial code, and the protection of intellectual property rights. Section 4 is the conclusion. 1. The Status of E-Commerce in Thailand

E-commerce in Thailand is still in its infancy stage. On the consumer side, it is estimated that there were approximately 1 million Internet subscribers in the country in 1999. According to a survey, about 57.5 per cent of the users were in their twenties, 22.5 per cent were in their thirties, and 11 per cent were teenagers (NECTEC 1999). The survey also found that more than 81.6 per cent of the Internet population had not bought goods and services online. On the producer side, a survey in May 1999 found that at least 383 companies had a web presence (Tangkitvanich 1999). However, about 53 per cent of these websites were used merely to post company information or to advertise company products. Only 32 per cent of the websites offered online transactions, while 15 per cent offered secure credit-card payments. Among goods offered for sale on the Internet are electronic products, jewellery, books and handicraft. There are very few companies selling intellectual products, such as software, music, and information. Among the services provided online are hotel reservation and Internet access services. There are currently no websites that provide online professional or business services. Concerning business-to-business (B2B) e-commerce, very few companies have started to procure raw materials and provide customer service over the Internet. Recently, a few B2B exchanges have emerged in some industries, for example, in food and oil. 2. Background Issues 2.1. Digital Divides

It is broadly known that e-commerce infrastructures and e-commercerelated activities are highly concentrated in a few developed countries, especially in the United States. This phenomenon is often referred to as 1 a “digital divide”. The main reason for the divide is that Internet

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penetration is generally correlated with the level of development of a country, measured by income per capita. Thus, the United States, which has less than 5 per cent of the world’s population, is home to over 25 per cent of all Internet users. This “access divide” inevitably translates into differences in the use of e-commerce, the “commerce divide”. Currently, the United States dominates approximately 85 per cent of the world’s e-commerce websites, with Western Europe and Asia making up almost all of the rest. There are also great disparities among Asian countries. In terms of number of Internet hosts, for example, Thailand is considered to be less wired than Hong Kong, Singapore, Japan, South Korea, and Malaysia, but more advanced than the Philippines and Indonesia (Figure 10.1). Due to the disparities, global e-commerce policies proposed by developed countries may not necessarily be appropriate for developing countries. It is therefore important that these proposals are carefully assessed from the perspective of Asian nations.

Figure 10.1 Number of Internet Hosts per 1,000 Persons in Asian Countries, 1999

80 66.4

70 60 50 40 30

22.19 16.6 2.8

0.49 Th ai la nd

ia ay s al M

Ko re a

Ja pa n

Si ng ap or e

H on g

Ko ng

0

Source: Network Wizard (www.nw.com).

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0.23

0.18

In do ne si a

6.03

10

Ph ilip pi ne s

20

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2.2. The U.S.-Centric Proposals

The United States is the most active nation in advocating its policies on global e-commerce. Its vision in developing the global platform for ecommerce is articulated in the document entitled The Framework for Global Electronic Commerce (White House 1997). The Framework has laid down the following principles: • • •

• •

the private sector should lead; governments should avoid undue restrictions on e-commerce; where governmental involvement is needed, its aim should be to support and enforce a predictable, minimalist, consistent, and simple legal environment for e-commerce; governments should recognize the unique qualities of the Internet; e-commerce over the Internet should be facilitated on a global basis.

In addition to these principles, the Framework also discusses certain key policies and provides concrete strategic directions. Among other things, it proposes that the telecommunications market be liberalized, that the Internet be a tariff-free environment for trade in goods and services, that the commercial code be harmonized, and that intellectual property rights be strongly protected. A summary of the key issues is presented in Box 10.1. 3. Key Policy Issues 3.1. Liberalizing Telecommunications Markets

Telecommunication is an indispensable infrastructure for e-commerce. In many developing countries, a monopoly in the sector has retarded the countries’ entry into cyberspace. In Thailand, for example, although the retail Internet access market is quite competitive, with eighteen companies operating as Internet service providers (ISPs), the wholesale market, or the international market, is still monopolized by the Communications Authority of Thailand (CAT). This has in many ways adversely affected the adoption of the Internet in the country. First, the cost of access to the Internet in Thailand is significantly higher than those in other Asian countries. Figures 10.2a and 10.2b compare the prices of Internet access among Asian countries. It can be

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Box 10.1 Issues from the U.S. Framework for Global Electronic Commerce Financial issues • Customs and taxation: the United States will advocate in the World Trade Organization (WTO) and other international fora that the Internet be declared a tariff-free environment whenever it is used to deliver products or services. • Electronic payments: As electronic payment systems develop, governments should work closely with the private sector to ensure that governmental activities flexibly accommodate the needs of the emerging marketplace. Legal issues • “Uniform Commercial Code” for electronic commerce: the U.S. supports the adoption of an international set of uniform commercial principles for electronic commerce through international fora including the UNCITRAL • Intellectual property protection: the United States supports the adoption of international agreements that establish clear and effective copyright, patent, and trademark protection. • Privacy: the United States will engage its key trading partners in discussions to build support for industry-developed solutions to privacy problems. • Security: The United States will encourage the development of a voluntary, market-driven key management infrastructure that will support authentication, integrity, and confidentiality. Market access issues • Telecommunications infrastructure and IT: the United States will seek effective implementation of the WTO’s Basic Telecommunications Agreement and the Information Technology Agreement to ensure global competition in the provision of basic telecommunication services and to remove tariffs on IT products. • Content: The United States supports the broadest possible free flow of information across international borders. • Technical standards: The United States urges industry-driven multilateral fora to consider technical standards.

seen that while the price of a twenty-hour dial-up Internet service in Thailand is comparable with other Asian countries, the price of a 64 kbps leased line in Thailand is significantly higher. It is about six times as expensive as that in Hong Kong, four times that in Japan, 2.7 times that in Malaysia, and 2.6 times that in the Philippines. It was found in a previous study that due to monopoly the number

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Charges for 20-Hour Dial-Up Internet Access in Asian Countries (as of September 2000)

12 10.8

10.6 9.9

9.6

10

US$

8 5.9

6 3.5

4 2

n pa

s Ph

Th a

ilip p

Ja

in e

d ila n

Ko ng g on H

Si

M

ng ap

al ay

or e

si a

0

Source: The author. Figure 10.2b Monthly Charges for 64 Kps Internet Leased Line in Asian Countries (as of September 2000) 1,600 1,421 1,400

1,200

US$

1,000

880 779

800 555

526

600 356

Thailand

400 233 200

Source: The author.

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Th

ai

la n

d

or e Si

ng

ap

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pi

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of Internet hosts in Thailand is significantly lower than that in other countries with a comparable gross domestic product (GDP). More generally, econometric analysis shows that on average there will be 557 more Internet hosts for every billion dollars of GDP in a country with a competitive international telecommunications market than in a country with a monopolistic one (Tangkitvanich and Nikomborirak 1997). Other state interventions also impose higher costs on the users. In particular, the CAT requires that every ISP hand over one-third of its shares free of charge to the CAT in return for the concession to operate. The above analysis has also shown that for an ISP that expects an annual internal rate of return (IRR) of 30 per cent, the equity hand-out requires an additional 20 per cent price mark-up. To promote the use of the Internet and e-commerce, Thailand needs a competitive market and a more reasonable regulatory regime. One way to achieve the goal is to liberalize the market to allow more competition from new entrants, domestic as well as foreign, and to set up an independent regulatory body that works in the interests of consumers. In particular, there is a need to ensure an effective implementation of the Basic Telecommunications Agreement of the World Trade Organization (WTO), as advocated by the U.S. proposal in the Framework for Global Electronic Commerce. 3.2. Creating a Tariff-Free Environment

The spread of e-commerce will pose serious problems for income tax, consumption tax, and tariff collection. This is due to the difficulties in identifying the parties involved in any transaction, the tax jurisdiction, and the content of the transaction itself. Disintermediation and monitoring costs also impose a greater burden on revenue authorities. Transactions that are most problematic in terms of tax collection are those that involve trade in intangible goods, such as software, music, movies, and online services. It is possible to assess the impact of exempting tariffs on digital goods delivered online, as proposed in a WTO Ministerial Conference by the U.S. government, on government revenue collection. Digital goods would potentially include all “information products” that can be digitized, such as books, CD-ROMs, diskettes, videotapes, and movie films. The

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United Nations Conference on Trade and Development (UNCTAD) (2000) has shown that tariff revenue that could potentially be lost from tariff exemption would on average be less than 1 per cent of total tariff revenue and 0.06 per cent of total government revenue. In the case of Thailand, tariffs collected from information goods constituted only US$6.6 million in 1998, or 0.03 per cent of the total government revenue (Figure 10.3). Thus, tariff exemption seems to have a negligible impact on government income. Considering the difficulty in collecting tariffs for digitized products, it would be logical to conclude that imposing 2 tariffs on international transmission is hardly worth the cost of collection. For consumption tax collected from trade in digital goods, however, the potential loss is significantly greater. To compensate for the forgone revenue, academics in countries of the Organization for Economic Cooperation and Development (OECD) have suggested a shift towards alternative tax regimes. For example, some have advocated an increase in tax on labour compensation since labour wages are probably least affected by e-commerce (Bishop 2000; Mann, Eckert, and Knight 2000). Others have recommended a reform of consumption tax to a system called a “broad-based consumption tax”, that is, a consumption tax levied on a person based on the difference between his or her income and savings (Varian 2000). Still others have advocated the adoption of an origin-based taxation instead of the current destination-based taxation in taxing consumption (Office of Tax Policy 1996). In the case of Thailand and probably in other Asian countries, the solutions proposed by developed countries may not be applicable due to differences in tax structures. For Asian countries, the government would need to widen the tax base by being more frugal in handing out tax privileges for the promotion of investment, cracking down on tax evasion, and making the informal sector taxable. Previous studies have shown that about 81 per cent of the tax incentives given by the Thai government to attract foreign investment were redundant (Foreign Investment Advisory Service 1999). Evasion of tax by offshore diesel smuggling alone constituted an estimated annual tax loss of 386 million to 1,285 million baht due to the Thai government in 1997 (Thailand Development Research Institute 2000).

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0

50

100

150

200

250

300

1991 1992 1993

Compact discs videotapes Laser discs diskettes movies

1995

Source: The author.

1994

1996

Figure 10.3 Tariff Revenues from Information Goods

1997

1998

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Somkiat Tangkitvanich

Million baht

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3.3. Liberalizing Online Services

E-commerce poses many puzzling questions to the organizing framework of the WTO. Traditionally, cross-border transactions are dealt with within the classification of either the General Agreement on Tariffs and Trade (GATT) or the General Agreement on Trade in Services (GATS). If this classification is maintained, should digital products be dealt under the GATT or the GATS? If e-commerce is classified as a service, which mode of supply would it fall under? To study these issues, the General Council of the WTO established a work programme for the relevant specialized bodies in 1998 (WTO 1998). Examples of issues examined by these bodies are shown in Table 10.1. Due to space limitations, it is impossible to discuss all of these issues. In this chapter, the focus will be on an issue that is central to the Table 10.1 WTO Work Programme on Electronic Commerce Relevant body

Examples of issues examined

The Council for Trade in Services The modes of supply, market-access commitments on electronic supply of services, customs duties, and classification issues The Council for Trade in Goods

Market access for and access to products related to electronic commerce, valuation issues, customs duties and other charges, standards in relation to electronic commerce, rules of origin issues and classification issues

The Council for TRIPS

Protection and enforcement of copyright and related rights, protection and enforcement of trademarks, new technologies and access to technology

The Committee on Trade and Development

Effects of electronic commerce on the trade and economic prospects of developing countries, challenges to and ways of enhancing the participation of developing countries in electronic commerce

Source: World Trade Organization (1998).

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negotiation on e-commerce in the GATS: should online service provision, such as professional and financial services, be considered as a Mode 1 (cross-border supply), Mode 2 (overseas consumption), or Mode 5 (a 3 new mode) service? A Mode 1 service is a service delivered across borders from a service provider in one country to a consumer in another country. For example, a law firm may deliver legal consulting service via telephone to a client in a foreign country. A Mode 2 service describes services consumed overseas. For example, a client may travel to another country to obtain legal consulting services. See Box 10.2 for more detailed definitions of the mode of supply under the GATS. The problem concerning online service provision is that nobody knows where the consumer and service provider meet in cyberspace. Many proposals have been advanced to solve the difficulties in assigning the appropriate mode of service for online services. Tinawi and Berkey (1999) analyse several options. One approach is to combine Mode 1 and Mode 2 services. This would solve the classification problem in that online services would be covered in the new combined mode. However, this solution leads to a more difficult problem of reconciling Box 10.2 GATS Classification of Modes of Supply of Services Mode 1 (Cross border): Delivery “from the territory of one Member into the territory of other Member”. An example of cross-border delivery is legal consultation provided by a U.S. lawyer to a client in Thailand over the phone. Mode 2 (Consumption abroad): Delivery “in the territory of one Member to the service consumer of any other Member”. This includes all services that a citizen of a country obtains while in another country. For example, a Thai client who travels from home to obtain legal consulting in the United States. Mode 3 (Commercial presence): Delivery “by a service supplier of one Member through commercial presence in the territory of any other Member”. For example, a U.S. law firm may provide legal services in Thailand through a subsidiary located in Bangkok. Mode 4 (Movement of natural persons): Delivery “by a service supplier of one Member through the presence of natural persons of a Member, in the territory of any other Member”. For example, a U.S. law firm may send its lawyer to provide legal consulting to a Thai client.

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differences in previous commitments made in each of the two modes. Another idea is to create a new mode for online services (Mode 5). This will avoid the classification dilemma and does not complicate existing commitments. However, a problem of this approach is that it is not clear whether an online service should be classified in Mode 1, Mode 2, or Mode 5. For example, if a medical doctor delivers his advice over the phone, would this service be classified as Mode 1 or Mode 5? Would the classification change if he instead delivers it over the Internet? Yet another solution is to classify all online services as Mode 2 services, as suggested by some U.S. scholars. The classification will automatically result in a very liberal trade regime for e-commerce. This is because in the Uruguay Round, commitments for most countries made in Mode 2 were clearly more liberal than those made in Mode 1. For example, Table 10.2 shows parts of the commitments of Thailand for some professional service sectors. It can be seen that while Thailand imposes no restrictions on overseas consumption of services, as shown by the “None” entries for all Mode 2 services except management consulting, it does not commit to liberalize any Mode 1 services, as shown by “Unbound”. Classifying all online services as Mode 2 services will mostly benefit service-exporting countries, notably the United States. Of course, consumers in developed and developing countries will also gain from a more liberal regime. However, it can be argued that such liberalization will bring about a more open trade regime than that foreseen by member states at the time when commitments are made during the Uruguay Round negotiation. It is therefore suggested that online services be classified as Mode 1 services and that additional commitments be made by further negotiation. This can be achieved by redefining Mode 2 to require physical presence, as suggested by Drake and Nicholaidis (1999). To ensure that all participating countries gain from the arrangement, negotiations to increase Mode 1 commitments should be implemented on a cross-sectoral basis. 3.4. Harmonizing Commercial Codes

The expansion of global electronic commerce depends on the participants’ ability to achieve a reasonable degree of certainty regarding

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• Consultancy related to the installation of computer hardware • Software implementation services (part 842) • Data-processing services (part 843) • Database services (part 844)

Unbound = No commitments to liberalize. None = No restrictions.

Advertising services Market research (part 864) Management consulting services

Legal service Accounting, auditing, and bookkeeping services Architectural services Engineering services Computer and related services

Service Unbound Unbound Unbound Unbound Unbound

Unbound Unbound Unbound Unbound Unbound None

Unbound Unbound Unbound

Unbound Unbound Unbound Unbound Unbound None

National treatment

Unbound Unbound

Market access

Mode 1

Table 10.2 Examples of Thailand’s Commitments to Liberalize the Service Sectors

None

None None None

None

None

None None None

None None

Market access

None

None None None

None

None

None None None

None None

National treatment

Mode 2

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their exposure to liability for any damage that might result from their actions. Inconsistent local tort laws, coupled with uncertainties regarding jurisdiction, could substantially increase litigation and create unnecessary costs that ultimately will be borne by consumers. The United States advocates the adoption of an international set of uniform commercial principles for e-commerce through international fora, including the United Nations Commission on International Trade Law (UNCITRAL). The UNCITRAL has completed an E-Commerce Model Law, a model law that supports the commercial use of international contracts in e-commerce. The law establishes rules and norms that validate and recognize contracts formed through electronic means and sets default rules for contract formation. It also defines the characteristics of valid electronic writing and original documents, provides for the acceptability of electronic signatures for legal and commercial purposes, and supports the admission of computer evidence in courts and arbitration proceedings. Also of particular importance is the development of trusted certification services that support the use of electronic signatures that will permit users to know whom they are communicating with on the Internet. To promote the growth of a trusted electronic commerce environment, the law that governs the use of electronic signatures needs to be harmonized. The UNCITRAL is in the process of developing uniform rules for electronic signatures. The rules would lay a framework for determining the duties and liabilities of related parties: signature holders, parties that rely on signatures, and signature issuers. It will also set a standard for recognizing foreign issued signatures in order to avoid discriminatory practices. Recognizing the need to harmonize commercial codes for ecommerce, the Thai government is in the process of drafting the Electronic Transaction Act and the Electronic Signature Act based on 4 the UNCITRAL laws. 3.5. Protecting Intellectual Property Rights

The problem of intellectual property rights protection in the context of e-commerce will now be discussed. In particular, the analysis will address the problems of copyright protection of digital products, the conflicts

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between domain names and trademarks, and the problems of extending patentable subject matters under existing patent law to cover business methods. The United States is advocating a world-wide adoption of the World Intellectual Property Organization (WIPO) Copyright Treaty, which is believed to be the solution to the protection of copyrighted digital works. The treaty not only confirms and clarifies existing rights of copyright holders under both the Trade-Related Intellectual Property Rights (TRIPS) agreement as well as the Berne Convention, but also provides new measures to fight against piracy of digital works. First, it provides the protection of the “right of communication” or “right of making available”; this is to combat unauthorized “uploading” of copyrighted works to a server, which enables subsequent unauthorized downloading of the works. Second, it provides protection of technological measures to prevent the cracking of passwords, keys, hard locks, and other forms of digital protection. Third, it also protects against the removal or alteration of “rights management information” — including text, numbers, or codes identifying the work, author, rightful owner; terms and conditions of use; and so on. Currently, only seventeen member countries of the WIPO have ratified the treaty. The number is still short of the thirty required to enable the treaty to come into effect. Thailand has yet to ratify the treaty. However, the current Thai copyright law, the Copyright Act 1992, has already provided most of the protections granted by the treaty. The protections include, among other things, the right of reproduction, the right of rental and the right of communication to the public. The only unprotected rights are the protection of technological measures and the protection of rights management information. Thus, there is no immediate need for Thailand to become a signatory to the treaty. Concerning domain names, the problem of “cyber squatting” or abusive domain name registration appears to be the most imminent problem. The problem has brought about conflicts between domain name holders and trademark holders. The United States and the WIPO are advocating the provision of privileges to famous trademark holders with respect to domain name registration and dispute settlement. In

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theory, such provision would alleviate the problem of cyber squatting. In fact, the current conflict resolution mechanism under the Rules for Uniform Domain Name Dispute Resolution Policy of the Internet Corporation for Assigned Names and Numbers (ICANN) has implicitly provided these privileges. As of May 2000, about 75 per cent of the 327 cases settled under the rules were in favour of well-known trademark 5 holders. It is important to recognize the increasing number of abuses by trademark holders. For example, McDonalds, the global fast food company, has sued a number of companies including McWellness (a Swiss healthcare company), McAllen (a Danish sausage store), McMunchies (an England sandwich retailer), and McCaughey (a Californian coffee shop), claiming that its trademark is contaminated by these confusingly similar trademarks (“Today Burger, Tomorrow …?”, The Economist, 15 July 2000, p. 60). Thus such privileges should be granted in a fair and transparent manner. Stakeholders need to have an opportunity to voice their concerns. It is therefore important that governments of developing countries closely follow future policy developments in international fora, especially in the ICANN, an international organization that manages domain names. The issue of extending patent law to encompass business methods is another area that needs to be considered. A business method patent is a patent granted to protect a certain way of conducting business. Examples of such patents that have been granted in the United States are shown in Table 10.3. From the table, it can be seen that most business method patents are related to the execution of e-commerce activities on the Internet. As a result, their impact reaches across national borders more rapidly than that of traditional patents. Traditionally, a patent applies only within the country where the patent had been granted. For example, even if a U.S. company has obtained a U.S. patent on an invention, it is still possible for a Thai company to independently develop and manufacture a similar product and to sell it within Thailand without violating the patent holder’s rights. However, in the age of the Internet, the situation is different. When a

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© 2002 Institute of Southeast Asian Studies, Singapore

Network Sales System Digital active advertising Fully integrated, online interactive frequency and award redemption programme Attention brokerage Method of conducting an online auction with bid pooling Reverse auction Post-paid traveller’s cheques Method and apparatus for conducting computerized commerce Selling professional advice over the Internet Method and apparatus for the sale of airline-specified flight tickets One-click buying Internet-based customer referral system

Invention

Source: The author, from U.S. Patent and Trademark Office.

5,960,411 6,029,141

5,862,223 5,897,620

5,794,210/5,855,008 5,794,219 5,797,127 5,798,508 5,802,497

5,715,314 5,724,424 5,774,870

Patent number

Table 10.3 Examples of U.S. Business Method Patents

Amazon.Com Inc. Amazon.Com Inc.

Walker Asset Management L.P. Priceline.Com Inc.

Cybergold Inc. Health Hero Network Inc. Walker Asset Management L.P. Walker Asset Management L.P. Digital Equipment Corporation

Open Market Inc. Open Market Inc. Netcentives Inc.

Holder

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U.S. company obtains a U.S. patent for an Internet-related service, consumers from all over the world can use the service over the Internet. If a Thai company starts providing similar services, some U.S. consumers may switch to it. This will mean a loss of business for the U.S. company. The U.S. company may claim that its patent is violated and may take legal action against the Thai company. It is argued that business method patents works against the benefits of all related parties except the patent holders. It may result in a wider digital divide between developed and developing countries. Developing countries will lose opportunities to gain benefits from imitating developed countries’ method of conducting business on the Internet. It is therefore proposed such patents be abolished. However, if granting such patents proves inevitable, the process should be more prudent and the protection period should be lowered from a typical twenty years to between three and five years. 4. Conclusion

To assess the U.S.-centric proposals, this study has classified them according to their impact on consumers and e-commerce producers in developing countries. According to the classification, there are four categories of proposals: those that increase consumer as well as producer welfare, those that increase consumer but decrease producer welfare, those that decrease consumer but increase producer welfare and those that decrease consumer as well as producer welfare (Figure 10.4). 4.1. Proposals That Increase Consumer and Producer Welfare

Examples of proposals that increase both consumer and producer welfare are the harmonization of e-commerce law and the liberalization of the telecommunications market. The former will facilitate electronic transactions and will benefit both consumers and producers due to lower transaction costs. The latter will reduce the cost of access to the Internet for users (consumers) and e-commerce-related business (producers), such as Internet service providers (ISPs), web hosting service providers, applications service providers (ASPs), and so on.

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Figure 10.4 An Assessment of the U.S.-Centric Proposals Increase producer welfare

• EC Law • Telecom

• Copyright Increase consumer welfare

Decrease consumer welfare

• Tariff • Mode 2

•Patent Decrease producer welfare Proposal

Impact

Telecom: telecommunication liberalization

Liberalization reduces access cost for consumers and e-commerce business

EC law: harmonizing e-commerce law

Harmonized law will facilitate electronic transactions

Tariff: Making the Internet a tarifffree zone for online trade in digital goods

Exempting tariff will make imported digital goods cheaper

Famous trademark: Giving privileged Similar trademarks of companies will protection for famous trademarks in be unfairly treated in domain name domain name disputes disputes Copyright: Signifying WIPO copyright treaty

Signifying the treaty will bring about higher cost to consumers

Mode 2: Treating online services as GATS Mode 2 services

Service sectors will become more liberal than agreed under GATS

Patent: Extending patentable subject matters to include business methods

Companies in developing countries will not be able to participate in ecommerce as producers

Source: The author.

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4.2. Proposals That Increase Consumer Welfare but Decrease Producer Welfare

Protection for famous trademarks in domain name disputes is an example of a proposal that increases consumer welfare but decreases producer welfare, at least in the short term. While the protection helps reduce potential confusion arising from identical or similar trademarks and thus increases consumer welfare, most producers in developing countries with less-known trademarks are prone to being unfairly treated in domain name disputes. Another example is the proposal to make the Internet a tariff-free zone for digital goods. Lowering tariff barriers induces more competition that will benefit consumers but makes it more difficult for domestic producers to sell their goods or services. However, the extent of welfare gains or losses effected upon consumers and producers in this case is relatively small since digital goods are already tariff-free in practice. Similarly, treating online services as GATS Mode 2 services is also classified in this category since a more liberal regime will increase consumer choices while imposing greater competitive pressure on domestic producers. 4.3. Proposals That Decrease Consumer Welfare but Increase Producer Welfare

An example of proposals that decrease consumer welfare but increase producer welfare is the world-wide adoption of the WIPO Copyright Treaty. The adoption will bring about stronger protection for local software producers, hence increasing their welfare. However, as most developing countries are software-consuming countries, the benefit from stronger protection is unlikely to offset the losses in consumer welfare due to the monopoly granted. 4.4. Proposals That Decrease Both Consumer and Producer Welfare

Extending patentable subject matters to include business methods will decrease the welfare of consumers and producers in developing countries. This is because the producers will not be able to exploit the patented business methods freely. As a result they may be forced to use less efficient

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methods in providing their services. Part of the cost will be passed on to their consumers. In summary, proposals that increase consumer and producer welfare should be implemented with no hesitation. Proposals that increase consumer welfare but decrease producer welfare should also be implemented in most cases. However, developing countries need to ensure that global e-commerce policies in these areas are sufficiently well balanced. For example, famous trademarks must not be given unreasonably privileged protection. To achieve that, developing countries need to take more active roles in participating in international fora such as the ICANN. On the contrary, proposals that decrease consumer welfare but increase producer welfare should not be implemented unless developing countries are compensated fairly from developed countries that are likely to gain considerably from the implementation. The “compensation” may be in the form of liberalization of certain markets in developed countries that will bring about significant benefits to developing countries, for example, in the agricultural sector. Asian countries should form alliances with one another to tackle critical policy issues; in particular, those that clearly decrease the welfare of consumers as well as producers in these countries. In some cases, the alliances should be extended to parties in developed countries with similar stances. Concerning business method patents, for example, there are many not-for-profit organizations and even some business leaders in the United States that also advocate the abolition of such patents. These groups of people can be powerful alliances. NOTES This chapter is part of a research project “Economic Impacts of E-Commerce on Thailand”. The author would like to thank the Thailand Research Fund for its support under grant RDG01/0009/2542. 1. More generally, digital divides are created by the differences in levels of access to ICT both between countries as well as within countries. See also the chapter by Kraemer and Dedrick in this volume. 2. For consumption tax collected from trade in digital goods, however, the potential loss is significantly greater. The issues need to be addressed more carefully and are

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beyond the scope of this chapter. 3. E-commerce will also impact other modes of services. For example, laws and regulations that require commercial presence will limit the activities of “pure” online service operators. Due to space limitations, however, such issues will not be discussed. 4. Apart from these laws, the National Information Technology Committee (NITC) is also drafting other cyber laws: a law on data privacy, a law to fight against computer crimes, and a law to facilitate electronic funds transfer. 5. See ICANN’s web site (http://www.icann.org) for more information concerning the rules and the cases settled. REFERENCES Bishop, Matthew. “A Survey of Globalisation and Tax”. The Economist, 29 January to 4 February 2000. Drake, W.J. and K. Nicholaidis. “The Information Revolution and Services Trade Liberalization After 2000”. Discussion paper presented at Brookings Institution conference on Services 2000: New Directions in Services Trade Liberalization, 1–2 June 1999, Washington, DC. Foreign Investment Advisory Service (FIAS). Thailand: A Review of Investment Incentives. Washington, DC: FIAS, June 1999. Mann, Catherine, Sue E. Eckert, and Sarah C. Knight. Global Electronic Commerce: A Policy Primer, Institute for International Economics. Washington, DC: Institute for International Economics, July 2000. National Electronics and Computer Technology Centre (NECTEC). Internet User Profile of Thailand (in Thai). Bangkok: Ministry of Science, Technology and Environment, 1999. Office of Tax Policy. Selected Tax Policy Implications of Global Electronic Commerce. Washington, DC: Department of the Treasury, November 1996. Tangkitvanich, Somkiat. The Status of E-Commerce in Thailand (in Thai). Bangkok: Thailand Development Research Institute, 1999. Tangkitvanich, Somkiat and Deunden Nikomborirak. The State of Internet Competition and Pricing in Thailand (in Thai). Bangkok: Thailand Development Research Institute, 1997. Thailand Development Research Institute (TDRI). Offshore Diesel Oil Smuggling: Problems and Preventive Measures (in Thai). Bangkok: TDRI, 2000. Tinawi, Emad and Judson O. Berkey. E-Services and the WTO: The Adequacy of the GATS Classification Framework. WTO Online Conference: Developing Countries and the Millennium Round, 11–29 October 1999. http://www.itd.org/ wb/partic.htm.

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United Nations Conference on Trade and Development (UNCTAD). Building Confidence: Electronic Commerce and Development. Geneva: UNCTAD, 2000. Varian, Hal. “Drop the Sales Tax”. The Standard, 21 January 2000. White House. The Framework for Global Electronic Commerce. Washington, DC: White House, 1997. http://www.ecommerce.gov/framewrk.htm. World Trade Organization (WTO). “Work Program on Electronic Commerce”. 1998. http://www.wto.org.

© 2002 Institute of Southeast Asian Studies, Singapore

Reproduced from Information Technology in Asia: New Development Paradigms edited by Chia Siow Y ue and Jamus Jerome Lim (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available from < http://www.iseas.edu.sg/pub.html >

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In the contemporary world forum, the term “knowledge-based economy” is widely used to describe a current development trend in which the innovation, creation, generation, and application of knowledge are driving forces for development. Among other things, a knowledge-based economy is characterized by a rapid and widespread development of information and communications technology (ICT). This is because the dramatic development of ICT during the last three decades has brought about substantial changes in the way we live and in the very nature of economic activity. The ICT revolution has been marked by a rapid fall in the price of telecommunications, an increase in the use of ever-faster computers, and the resulting transformation of science, education, and commerce. It is expected that in the next century, computers will connect families, schools, organizations, businesses, factories, and even individuals and

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appliances. So, an information society based on a computerized society will be formulated. Recognizing the role of ICT and its tremendous 1 impact on the world economy, the Group of Eight (G-8) adopted the Okinawa Charter on the Global Information Society, which declares that “ICT is one of the most potent forces in shaping the twenty-first century” (Group of Eight 2000, paragraph 1). While it is obvious that ICT brings about many positive changes for developed countries and has become the central factor in many of these countries’ industrial and technological strategies, it is still not clear whether the poorer developing countries will be able to benefit from the spread of ICT. Different conclusions have been reached on this. For example, it has been argued that the rapid diffusion of ICT provides opportunities for newly industrialized countries (NICs) to achieve “world class” production of some ICT-related products and/or knowledge-based service. For developing countries, the danger of being digitally divided from developed nations is real, so even though there is no guarantee that ICT will open the door to opportunities and prospects for the least developed countries, they are unlikely to benefit from the spread of ICT unless concrete efforts are made to upgrade their capacity. During the last decade, many countries in Asia such as Japan, Korea, Singapore, India, Malaysia, China, and so on have contributed to building the global ICT industry in several ways. China, for example, has devoted a large amount of resources to research and development (R&D) for the promotion of new technologies, which has subsequently enabled them to develop significant technological capability. The ASEAN countries — both old and new members — on the other hand, are also building their ICT industries and promoting the application of ICT goods and services in various areas of economic and social activities. Very recently, leaders of the ten ASEAN members adopted the e-ASEAN 2 Framework Agreement. However, this development will not be easy for Vietnam and the other new ASEAN members (including Cambodia, Laos, and Myanmar) 3 that are currently in transition to a market economy. Being further behind in the development stages, and possessing underdeveloped technological infrastructures, having less professional and skilled labour forces, and lacking transparent and institutionalized legal frameworks,

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these countries will have to cope with several challenges in the process of ICT development. However, if the CLMV nations — Cambodia, Laos, Myanmar, and Vietnam — are able to take advantage of the enabling nature of ICT, and diffuse and assimilate ICT widely in their economies, and accelerate co-operation with more technologically advanced ASEAN members, they can take advantage of shortcuts in building their own ICT industry. This chapter provides an initial analysis on whether a transitional economy such as Vietnam can leapfrog in the case of ICT, and if so, how it can best do so. While the first section provides an overview of the role of ICT in socio-economic development, the second section addresses the digital divide between the CLMV transitional economies and other ASEAN countries. This is followed by a detailed examination of the current status of Vietnam’s ICT development. Finally, the last section of this chapter focuses on the policy implications faced by a transitional economy such as Vietnam in the process of building its own ICT industry. 1. The Role of ICT in Socio-Economic Development

The role of ICT in an economy can be understood in terms of the following conceptual framework.4 There are four main blocks by which ICT operates under: 1. 2. 3. 4.

ICT goods sectors; information content sectors; communication network sectors; informatization sector.

The last three decades have witnessed rapid expansion and diversification of ICT innovations and applications. Along with this process, the emergence of the term “knowledge-based economy” has coincided with, and has been made possible by, technological progress, particularly ICT, which is a driving force for development. For many developed countries, ICT has proven its ability to bring about tremendous opportunities in several ways. ICT provides new and faster ways of delivering and accessing information, innovative ways for effecting real-time communication, and new ways to do business and create livelihood opportunities. The

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technology is putting more and more information into the public domain, leading to a rearrangement of social forces and governance structures towards greater efficiency, transparency, and accountability. First, ICT paves the way towards greater knowledge-sharing (Nath 2000). For centuries, knowledge has been passed on from one generation to another through written texts, folklore, word-of-mouth, religions, and customs, and has been preserved geographically and hierarchically. However, ICT breaks all the natural, social, cultural, and hierarchical barriers to knowledge-sharing in an unprecedented manner. This is because the ICT network is based on the principle of inclusion and participation rather than on exclusion. Information hosted on the Internet is automatically meant to be in the public domain. The technology allows individuals to bring together knowledge by harvesting data from other sites and adding value to the data by prioritizing, translating, and updating. Second, in well-interconnected economies, ICT acts as a force multiplier in the enrichment of the knowledge base of society, through the quick dissemination of knowledge products and best practices to a great number of people. Use of the force multiplier attribute of ICT in the fields of education, training, and business development can result in the creation of new social capabilities. Third, ICT has a radical and fundamental impact on society and economy, just like the earlier general-purpose technologies such as the harnessing of steam, the use of electricity, and the adoption of the internal combustion engine. At present, ICT can be found in almost all economic activities, improving the speed and efficiency of markets, reducing transaction costs, and creating a range of products and services that were inconceivable a few years ago. ICT is present not only in computers, military goods, and computer products, but also in the control mechanism of machinery. Thus, the ICT goods sector continually expands, creating new jobs and sub-sectors. The informatization sector, on the other hand, brings about dramatic changes in economic activities that improve the competition capability of traditional industrial sectors. For instance, ICT changes the way business is conducted: when information is accessible twenty-four hours a day, seven days a week, the demand for storage and capital is reduced since inventory systems

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can be kept leaner through improved information flows. The Internet, the final converging technology, will combine telecommunications, broadcasting, and publishing to create digital households, web life-styles, and digital learning infrastructures to enable tele-learning, tele-shopping, and tele-working. For developing countries, however, ICT provides both tremendous opportunities and substantial challenges. Apart from the substantial opportunities that ICT brings to society, many people in developing countries are excluded from enjoying its benefits. Furthermore, the poor remain very much isolated — economically, socially, and culturally — from the advances in ICT. Statistics show that 95 per cent of all computers and 75 per cent of the world’s telephone lines are found in developed nations and ten industrial countries, which account for only 20 per cent of the global population. In addition, 60 per cent of total Internet access can be found in North America and Western Europe, while only 3 per cent is in Eastern Europe and 2 per cent in Asia and the Pacific (Arunachalam 1998). In another study, Manuel (1998) indicates that the highest levels of science and technology that share and command overall ICT development are concentrated in a few dozen R&D centres, almost all of which are in the United States, Western Europe, and Japan. This illustrates the fact that digital divides exist in ICT development between and among developing and industrial countries, and the process of trying to catch up with competitors who have already enjoyed a major headstart is not an easy task. Nevertheless, the experiences of all previous technological revolutions have shown that if developing countries are unable to act quickly, to seize the potential of the new technologies, and to establish policies that support new applications, they will fall even further behind. The strategic question for those countries is not whether they should apply and develop ICT to achieve integration into global markets, but how to apply it fully and more strategically than others, and with sufficient speed. 2. Digital Divides and Challenges for Transitional Economies in Southeast Asia

There is evidence of rapid growth in ICT industries in many Southeast

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Asian countries during the last decade. Singapore, for example, has invested significant resources to develop its high-technology capability in semiconductors and other ICT products, which has enabled it to become a regional hub for commerce, communications, and transportation. Malaysia is already a prominent centre of semiconductor chip packaging. The government has launched the national initiative of a Multimedia Super Corridor (MSC), which is positioned to be the catalyst to expand ICT products and industries by capitalizing on mutual synergies. Other ASEAN countries such as Thailand, the Philippines, and Indonesia have become important platforms for offshore electronics assembly and test operations for global corporations. However, ICT growth and the status of its development have not been progressing equally among ASEAN countries; in particular, the ASEAN transitional economies of the CLMV remain far behind in terms of level of ICT development. This issue has been raised in many regional and ASEAN-level fora. Very recently, the informal summit of ASEAN leaders held from 24 to 26 November 2000 in Singapore decided to accelerate the establishment of e-ASEAN. This initiative aims for the establishment of a common legal and economic environment for ICT, and to develop human resources as well as implement measures for its diffusion in different sectors. In order to do so, the leaders of the more advanced ASEAN countries agreed to take any action necessary to help the CLMV countries develop the ICT industry in their economies. While the above-mentioned support would to some extent enable the CLMV nations to leapfrog the ICT development process, the governments of these transitional economies in Southeast Asia should undertake for themselves the necessary reforms and initiatives required to facilitate the development of ICT in their countries. This is the most crucial factor that would help the CLMV countries to address the existing digital divide between them and the more advanced countries in Southeast Asia. What are the various disparities that currently impede ICT development in the CLMV countries and prevent them from catching up with their other ASEAN neighbours? First, there is a big gap between the CLMV and other more advanced ASEAN countries in terms of economic structure, size of economy, as well

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as the stage of technological development. As shown in Figure 11.1, the economies of the CLMV are mainly based on agriculture, whereas the more developed ASEAN countries tend to be based more on industry and services. While the average share of agriculture in the gross domestic product (GDP) of the old member countries is about 10 per cent, that of the CLMV is about 50 per cent. This indicates that the CLMV countries have yet to complete their industrialization process. With the current underdevelopment in their industrial sector and infrastructure, the future growth of ICT in these countries cannot depend on the development of the agricultural sector, but must instead mobilize other resources. Moreover, unlike other ASEAN countries, the majority of the population in the CLMV live in rural areas (Table 11.1). This is an important point to note in any measure undertaken to ensure the widespread use of ICT so that the application of ICT benefits not only people in urban cities but also the rural population. Second, the GDP per capita of the CLMV countries is considerably lower than that of other ASEAN countries. Table 11.1 suggests that the 6 average GDP per capita of the CLMV is approximately half that of Indonesia, 1/6 that of Thailand, 1/11 that of Malaysia, and 1/98 that of Singapore. As GDP per capita is assumed to indicate ability to access ICT in terms of both the supply and demand side, the low figure means that the CLMV countries would face difficulties in promoting ICT application and diffusion. On the supply side, these countries are unlikely to spend large amounts of capital investing in ICT (which is considered to be very capital-intensive), as their priority would be to create more jobs to provide income for their population. On the demand side, the low average GDP per capita of the CLMV countries does not allow them access to the Internet and other ICT services. Third, as human resource development is an important factor for ICT development, it is worth noting that there is a significant gap between the CLMV countries and the r est of ASEAN in ter ms of the H uman Development Index (HDI).7 Although the transitional economies in Southeast Asia had made some progress in increasing the level of their HDI over the last five years, Figure 11.2 indicates that the HDI of these countries still lags behind those of other ASEAN countries such as Singapore, Malaysia, Thailand, and the Philippines. In addition, the

© 2002 Institute of Southeast Asian Studies, Singapore

© 2002 Institute of Southeast Asian Studies, Singapore

0

10

20

30

40

50

60

70

Singapore

Philippines

Malaysia

Thailand

Vietnam

Indonesia

Services

Source: World Bank, World Development Report 2000/2001: Attacking Poverty (2000).

Myanmar

Lao PDR

Industry

Cambodia

Agriculture

Figure 11.1 GDP Structure by Economic Sectors: Southeast Asia, 1999

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Percentage of GDP

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Table 11.1 Size of the Economy: Southeast Asia, 1999

Country Cambodia Lao PDR Myanmar Vietnam Indonesia Malaysia Philippines Brunei Singapore Thailand

Population (million)

Urban population (%)

10.9 5.4 48.8 79.4 207.7 22.7 74.7 0.3 3.9 62.1

22 22 27 21 38 56 57 67 100 36

GNP per capita

GNP per capita measured at PPP

US$

Rank

US$

Rank

260 280 —* 370 580 3,400 1,020 —* 29,610 1,960

186 184 — 167 150 82 131 — 9 102

1,286 1,726 — 1,755 2,439 7,963 3,815 — 27,024 5,599

176 161 — 160 143 72 118 — 7 90

* Estimated to be of low income (US$755 or less). PPP = Purchasing power parity. Source: World Bank, World Development Report 2000/2001: Attacking Poverty (2000).

share of unskilled and low-skilled labour in the CLMV is much higher than in other ASEAN countries. Fourth, there is a lack of an adequate pool of professionals qualified in the ICT field. The transitional countries in Southeast Asia either have 8 yet to create their own technological capabilities, or they remain in a weak position with technological capabilities that have already been created. ICT requires indigenous technological capabilities in the main areas of production, design engineering, and so on, and should proceed at the right pace to achieve optimal assimilation and efficient utilization, with at least some of its components produced domestically. The CLMV countries are currently between the initial and second stages of technological development.9 Fifth, the digital divide between the CLMV and other ASEAN countries can also be seen in terms of accessibility to ICT. As shown in Table 11.2, in terms of number of personal computers per 1,000 persons in 1998, Vietnam leads the CLMV countries with a ratio of 6.4, followed by Laos and Cambodia at the level of about 1 computer per 1,000

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persons. This figure is much lower than that of Malaysia and Singapore, and slightly lower than that of Thailand, the Philippines, and Indonesia. In terms of number of Internet hosts per 10,000 persons in January 2000, the ratios scored by the three transitional countries of Laos, Myanmar, and Vietnam were almost zero. Cambodia fared only slightly better, with a ratio of 0.13. This indicates that people in the CLMV countries, especially those in the rural areas, are very much isolated from and do not have accessibility to ICT. Sixth, organizational structure is another challenge if the CLMV countries are to leapfrog into the ICT revolution. There are severe constraints to the impact of state-sponsored research institutes on industry and economic productivity. That is because of a sharp segmentation between production enterprises and state-sponsored research institutions. Research institutions for the most part are “supply-driven”, with little connection with the production needs. Moreover, the very modest financing for R&D via the state budget is fragmented, and this has resulted in very small amounts being disbursed to individual research projects. This makes any form of serious research impossible, as in the case of Vietnam (Project VIE/99/002, May 2000). Seventh, the institutional framework needs consideration as well. It should be noted that the CLMV countries are not yet free from the mechanism of command economies. The nascent market economy is not fully established and does not yet operate smoothly. Despite some advances, progress in terms of the transparency and consistency of legal regulations is still found wanting. Businesses continue to operate in a legal framework lacking in consistency and transparency. With regard to the ICT sector and ICT-applied sectors, regulations are not fully promulgated and even when implemented, are weakly enforced. There is an absence of private R&D activities and an anti-monopoly policy.10 Charges for Internet access in the CLMV thus remains among the highest in the world, and strong regulatory controls are put in place. 11 Eighth, a proper ICT infrastructure is a pre-condition for the transitional economies to leapfrog into the ICT revolution. Table 11.2 also shows indicators — such as the number of television sets, main telephone lines, mobile phones, personal computers (measured per 1,000 persons), Internet hosts (per 10,000 persons), and scientists and engineers

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© 2002 Institute of Southeast Asian Studies, Singapore

123 4 7 47 136 166 108 348 236 2 6 5 26 27 198 37 562 84

No. of main telephone linesa 6 1 0 2 5 99 22 346 32

No. of mobile phonesa 0.9 1.1 — 6.4 8.2 58.6 15.1 458.4 21.6

No. of personal computersa 0.13 0.00 0.00 0.07b 1.00 25.43 1.58 452.25 6.46

Source: World Bank, World Development Report 2000/2001: Attacking Poverty (2000).

b

Per 1,000 persons, in 1998. Saigon Economic Times, 3 August 2000. c International Development Research Centre (1999). — = No data available.

a

Cambodia Lao PDR Myanmar Vietnam Indonesia Malaysia Philippines Singapore Thailand

Country

No. of television setsa

No. of Internet hosts (per 10,000 persons, Jan. 2000) — — — 379c 182 93 157 2,318 103

No. of scientists and engineers in R&D (per million persons, 1987–97)

Table 11.2 Communications, Information, and Science and Technology: Southeast Asia

— — — — 10 51 71 59 31

High-tech exports (% of mfg. exports, 1998)

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in R&D (per million persons) in 1998 — used as representative indicators of the quality of the ICT infrastructure in the ASEAN countries. Among the ASEAN countries, the CLMV economies, led by Vietnam, rank at the bottom in terms of ICT infrastructure. Leapfrogging in terms of ICT will depend on the speed and extent of ICT adoption and diffusion. But in the transitional economies in Southeast Asia the lags between the availability, adoption, and the eventual diffusion of ICT are significant, due mainly to the relative scarcity of the requisite skills and physical and 12 research structure (Table 11.2). Finally, citizens of the CLMV nations face a socio-economic hurdle in their ability to handle ICT applications, despite their relatively high average net enrolment ratio in education compared with other ASEAN countries (Table 11.3). This is because they have lower levels of computer literacy and Internet skills. Much of this stems from their inadequacies in English language ability as compared with other ASEAN countries. This highlights serious shortcomings in the current educational and training system, which has not been responsive to the demands of the changing economy, particularly in the ICT and ICT-applied sectors. Table 11.3 Education: Southeast Asia, 1980 and 1997 Public expenditure on education (% of GNP) Country Cambodia Lao PDR Myanmar Vietnam Indonesia Malaysia Philippines Singapore Thailand

Net enrolment ratio (% of relevant age group) Primary

Secondary

1980

1997

1980

1997

1980

1997

— — 1.7 — 1.7 6.0 1.7 2.8 3.4

2.9 2.1 1.2 3.0 1.4 4.9 3.4 3.0 4.8

100 72 71 96 89 92 95 100 92

100 73 99 100 99 100 100 91 88

15 53 38 47 42 48 72 66 25

39 63 54 55 56 64 78 76 48

Source: World Bank, World Development Report 2000/2001: Attacking Poverty (2000).

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3. Current Status of ICT in Vietnam and Plans for Development of the ICT Industry 3.1. Background

In 1996, at the Eighth Communist Party’s Congress, Vietnam confirmed the path of industrialization and asserted that it expected to become an industrialized country by the year 2020. For the last decade (1991– 2000) this country had achieved a relatively high GDP growth rate, based mainly on the rapid growth of export and investment (in particular, on growth in foreign direct investment [FDI]). This was a result of the doi moi reform policy, which emphasized the opening up of the economy by mobilizing both domestic and external resources, thus shifting from a centrally planned economy to a socialist-oriented market economy. The economic performance for the last decade can be seen in Table 11.4, from which the following observations may be made. First, during the period 1991–2000, the economy had been growing at an average annual rate of 7.5 per cent, while exports grew at 18 per cent. Second, the economic structure has been moving slowly towards a more industrial economy, with the share of agriculture in GDP decreasing and that of the industry and services sectors increasing. Third, the employment structure has shifted very slowly compared with the pace in economic growth and economic structural change. A major proportion (68 per cent in the year 1999) of the labour force was working in the agricultural sector. Fourth, real GDP per capita in 2000 had multiplied by 1.8 times as compared with the level in 1990. In general, however, by the end of the 1990s, Vietnam remained a mainly agrarian country with a relatively low level of development. Among the ten countries in Southeast Asia, Vietnam is ranked eighth in terms of GNP per capita, although it is ranked at the sixth place in terms of the HDI (Table 11.1 and Appendix Figure A11.2). In 2000, Vietnam set a strategy for development into the next decade and reconfirmed its commitment to industrialization and modernization. However, in the new development period, Vietnam cannot continue with the old path of development policy. This is because in the context of international integration and rapid changes in the world economy, the expansion of exports would very much depend on the world market, where there are already many competitors wanting to share a slice of the

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Table 11.4 Selected Economic Indicators of Vietnam, 1991–2000 1991–95

1996–2000

Annual GDP growth rate (%) Agriculture Industry Service

8.2 5.9 13.7 10.1

6.7 5.0 12.2 6.4

7.5 5.4 12.9 8.2

Annual export growth (%)

13.3

22.8

18.1

100 23.6 52.0 24.4

100 21.9 54.2 23.9

100 22.5 53.4 24.1

1990

1995

2000

Economic structure (% of GDP) Agriculture Industry Service

100 38.7 22.7 38.6

100 27.2 28.8 44.1

100 25 34.1 40.9

Employment structure (%)* Agriculture Industry Service

100 73.3 12.4 14.3

100 69.7 13.3 17

100 67.8 12.9 19.3

GDP per capita (US$) (as compared with 1990)

206 —

— —

378 1.8

Investment structure (%) State budget Domestic business Foreign direct investment

1991–2000

* The figures in the last column are those of the year 1999. Sources: Ministry of Planning and Investment (MPI) and General Statistical Office (GSO), in CIEM, Vietnam’s Economy in 1999 (2000, charts 3 and 9, pp. 100–3).

same market “cake”. It will also be more difficult to mobilize investment than in recent years, unless appropriate policies and structural reforms are made. In addition, it should be understood that the industrialization process in the next decade should not simply be an increase in the share of the manufacturing sector in GDP. The industrialization of Vietnam in the new international context should be seen as a transformation from an inefficient, agriculture-based, and labour-intensive economy to an effective, productive economy with easy access to information and advanced technology (in particular, ICT) in all its economic activities.

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3.2. Steps towards ICT Development

Although the government has only recently shown a keen interest in ICT, Vietnam had already made considerable progress in ICT development during the last decade. In 1991 the policy for ICT development was mentioned for the first time in the Communist Party’s Resolution (26-NQ/TW). Thereafter, a number of regulations related to ICT were issued by the government as well as by related government agencies (Box 11.1). In the implementation of these regulations, Vietnam has benefited from the world’s development of ICT by importing the technology and spreading its use in different economic sectors and taken the initial steps preparing for developments in ICT. The country’s telecommunications infrastructure has also been improved, and the government has made significant budget investments to upgrade the ICT infrastructure as well as improve the capacity of the World Wide Web gateway. Furthermore, the government has recently announced a plan to develop several high-tech parks to facilitate ICT 13 development. Such policies have borne fruit and resulted in the Box 11.1 Government Policies Relating to ICT Development in Vietnam 1991 8/1993 1993

1994 1996 5/2000 9/2000 10/2000

A policy to promote diffusion and application of ICT was introduced in the Communist Party’s Resolution (26-NQ/TW). Resolution No. 49/CP on the national programme of IT development for the period 1996–2000 was issued. A special Office of the Steering Committee directly under the authority of the Primer Minister was created and mandated with the development of a national IT programme. A programme of training on IT in some selected universities was launched. Accelerated application of IT in government management and government agencies. A government resolution on development of the software industry for the period 2001–2005 was issued. A government action plan for the development of software industry for the period 2001–2005 was drawn up. A directive (58-CT/TW) by the Communist Party of Vietnam on strengthening ICT development and application for industrialization and modernization was issued.

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development of some ICT industries. Although Vietnam is a latecomer, it has been able to forge a niche in the world’s market for ICT through the export of some ICT-related products such as television sets, cassettes, and some software products. Information technology (IT) has been widely introduced in universities and a considerable number of computer personnel (software as well as hardware) had been trained during the last five years. In this regard, since 1994 seven universities in Vietnam have faculties specializing in IT education and have been providing 2,000 to 2,500 graduates annually to the IT labour market. Apart from the universities, some vocational colleges have also participated in the training of IT technicians. More importantly, initial steps have been taken to use and assimilate IT into the national management system. Finally, several national workshops have also been organized to involve national government officials and experts in discussions about what Vietnam should do to leapfrog in the area of ICT development. Furthermore, several studies have been made by both Vietnamese as well as international teams on the potential of ICT development in Vietnam. The above-mentioned achievements indicate that the Vietnamese people have already recognized the importance of ICT in the development of its economy. Figure 11.2 illustrates the rapid growth in ICT penetration in Vietnam over the last five years, especially in terms Figure 11.2 Growth of ICT in Vietnam 2,500 1995

Thousands

2,000

2000

1,500 1,000 500 0 Fixed phones

Mobile phones

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of the number of the fixed telephone and mobile phone lines. The data suggest that a more dramatic development of ICT can be expected in the coming period. However, this faces major challenges and difficulties, and these are discussed in the following sub-section. 3.3. Current Status of ICT in Vietnam

As demonstrated in Table 11.2, the current status of ICT in Vietnam is far behind that of other countries in the region. The figures indicate that further developments are needed before Vietnam can successfully interconnect with the knowledge-based economy. The discussion below examines this proposition, based on the ADB (2000) report on the pre14 conditions for ICT development. The report argues that human resources is the most important factor in the ICT development process. To facilitate ICT development, it is necessary to have an adequate pool of professionals qualified in the sciences and mathematics, adept at problem solving, often working in multi-disciplinary teams, and utilizing their skills and knowledge to enable them to create and refine products constantly. In the case of Vietnam, the number of personnel involved in R&D is quite numerous, especially for a country at Vietnam’s stage of industrial 15 development. However, unlike other industrialized countries, Vietnam’s existing pool of scientists and engineers is structured in such a way that most of them (73 per cent) are employed by either the national centres for R&D, ministries, or government agencies. Only a very small fraction of them work in industrial enterprises. In addition, many of these scientists and engineers are often sixty years old or above, most of them having received their training and education in a different era under the Soviet-oriented learning system based on the technology of heavy industry and on state planning and control. As it takes several more years to build up a younger generation of scientists and engineers with the expertise in ICT, Vietnam has to temper its ambitions concerning ICT development over the medium term. Inadequate reforms in educational policy as contrasted with the development process have created difficulties in ICT development over the past few years. An unchanged teaching curriculum and the employment of the old theoretical (lecture-based) teaching method are

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the main factors that prevent school and university students from developing their creativity and innovative capability. Moreover, knowledge and skills for the application of ICT have not been satisfactorily introduced into the university curriculum. As a result, the fresh graduates produced in general do not have the skills that the market needs. Most graduates have to undertake additional training (either in IT or English language courses) to get a job that requires their level of training. The rest have to work in other sectors, many of which do not require a university degree: Many IT companies in Vietnam have complained that the education provided by the universities does not equip IT graduates with enough skills. According to them, most of the university graduates in IT lack operational and communication skills, and the capability to work and cooperate in a team. More importantly, their levels of creativity and discipline are still limited. Consequently, as the recent survey by the Information Association in Ho Chin Minh City has pointed out, although the city currently has about 6,000 university graduates qualified in IT, only about 25 per cent of them are actually employed by software companies. (Saigon Economic Times, 3 August 2000)

To spearhead the development in ICT, Vietnam needs a large number of professionals who are directly involved in this sector. However, as discussed above, the fresh IT graduates still fall short in the skills that the market needs. Many IT companies have had to re-train their staff after recruiting them from the labour market, and the actual number of employed IT staff is smaller than the number that was trained. Looking at the software industry alone, by the year 1999 Vietnam had only 1,500 software personnel working in ninety-five software companies. This figure is obviously very small compared with the target set by the government — 25,000 software professionals by the year 2005. Organizational structure is another important factor in the development of ICT. The R&D institutions in Vietnam should work closely with enterprises to keep abreast of changing needs in the business world. Business enterprises, on another hand, must create an environment that encourages creativity and innovation. In this way, organizational structure working in concert with human resources will help Vietnam in the generation of ICT products. At present the R&D institutions in Vietnam tend to work in

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isolation, and structured networks are few in number. There are about 300 R&D institutions specializing in various areas such as the natural sciences, social and cultural research, education, agriculture, engineering, economics, and so on. Most of these institutions are state-funded and they offer few opportunities for exchange and shared learning; the linkages between R&D institutions and the productive sector are very weak as well. For the most part, research continues to be “supply-driven” and bears little relation to the needs of business and industry. Although some centres and research institutions specializing in ICT services were 16 established during the past few years, no strong links exist between them and the production enterprises. The Vietnamese enterprises, on the other hand, do not seem to be much concerned with R&D. Apart from the R&D centres in large state general corporations and some R&D divisions attached to FDI enterprises, most of the SMEs in Vietnam are not involved in R&D 17 activities. At present, Vietnam has companies participating in hardware production, software production, and ICT services. In hardware production, equipment and parts are exported from countries in the region such as Singapore, Taiwan, and China, and appliances assembled in Vietnam. In 1999, Vietnamese hardware companies met 65 per cent of the domestic market demand for computers, and the percentage has continued to rise. The software industry in Vietnam has been primarily engaged in the provision of applied solutions, which is only a component 18 of the total software production. ICT services, however, are still lacking in Vietnam. ICT has also seen limited use in banking, the financial sector, and commerce, but seen from another perspective this makes them a huge potential market for the ICT industry. The Internet and e-commerce are important areas to be developed in Vietnam. In this regard, there are some issues to be considered. First, despite the fact that by the end of 1999, Vietnam had about 75,000 Internet accounts, the bulk of these were owned by individuals (55 per cent), with 24 per cent owned by organizations, and only 21 per cent by businesses or enterprises. Second, the Internet service is characterized by the low quality of its service accompanied by high costs. Download times are much longer in Vietnam as compared with other countries.

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This is because of the limited bandwidth capacity of the Vietnam Data19 communication Company (VDC) as well as government regulations that limit the provision of Internet services by other Internet service 20 providers (ISPs). Third, the charges for Internet access in Vietnam are relatively high. A recent study by the VDC in Ho Chi Minh City has found that the Vietnamese pays an average monthly charge of US$20 for Internet access, out of an average per capita monthly income of US$50 21 — or 40 per cent of monthly income. Presently, the expansion of Internet application by organizations and enterprises in Vietnam is very slow. So far, among 50,000 enterprises in Vietnam, only 600 have websites and 1,000 have Internet accounts. In the public sector only a few government agencies have set up websites, and these include the Ministry of Foreign Affairs, the Government Office, the Hanoi People’s Committee, and the Ho Chin Minh City’s People’s Committee. In contrast, all the newspapers already have websites in Vietnamese and partially in English. There are many reasons for the situation being such in Vietnam. First, Vietnamese enterprises and organizations are unfamiliar with the use of the Internet, and are unaware of the benefits that it can bring. Second, existing regulations require that website information be vetted by an authorized department before a website can be launched on the Internet, and this has prolonged the administrative process of website establishment. Third, the cost of website maintenance is relatively high. Currently, most government agencies have to seek external funds for setting up and maintaining their websites on the Internet. As discussed earlier, an institutional framework is needed for accelerating the rate of investment in the ICT industry and the rate of ICT utilization by businesses. An institutional framework should provide an environment for ensuring due rewards, resolving disputes, and protecting against intellectual property rights violation. Moreover, there should be a competitive spirit for ICT stakeholders. The decision to give priority to the development of the ICT industry in Vietnam was first mentioned in the Communist Party’s Resolution No. 2 in 1996. This was specifically addressed again in the new Party Directive dated 17 October 2000. However, it takes time and considerable effort to implement policies to actualize this.

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There are several challenges to consider. First, software services are classified into a product group that is highly taxed, and the imported hardware equipment/computers are subject to taxes as high as that for imported consumer goods. For the ICT industry, telecommunication services and the Internet are regarded as important components that support the development of the software industry. However, the cost charged by the VDC for renting out bandwidth is very high. Currently, ISPs in Vietnam pay a service charge that is four times higher than in the United States for an equivalent service. Similarly, the costs of international calls are two to three times higher than in other countries. Together with several restrictions over Internet use, these facts present significant constraints for ICT service development in Vietnam. Second, although the government has established regulations concerning intellectual property rights, they are not strictly enforced. Widespread illegal copying has robbed many software companies of considerable revenue, and Vietnamese consumers do not seem to be aware of their responsibilities when they buy cheap, unauthorized copies of software programmes. Third, Vietnam lacks a transparent and consistent legal framework for ICT development. At present, the Ministry of Science, Technology and Environment (MOSTE) and the Vietnam Posts and Telecommunications (VNPT) are jointly responsible for supervising the development and management of the ICT network infrastructure. The Ministry of Culture and Information is tasked with supervising information provided on the Internet, while the Ministry of Public Security is responsible for the security aspects of IT activities. This leads to a complicated regulatory framework for supervising the ICT industry and has slowed the process of ICT expansion in Vietnam. For example, many Internet services — such as Internet telephony, Internet faxing, and Internetbased video-conferencing — are restricted in Vietnam because of security reasons. And the strict screening of information that is made available on the Internet has led to longer download time. In addition, to spread the use of e-commerce in Vietnam, appropriate regulations should be put in place to ensure the legal position of trade transactions through e-commerce. However, Vietnam’s existing legal framework lacks provisions to address disputes in transactions arising

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from e-commerce. According to current laws, only economic contracts with “fresh seals” are legally binding, which is why enterprises in Vietnam use their websites on the Internet mainly for the purpose of marketing their products and not for handling e-commerce. Fourth, the absence of a competitive environment for the ICT industry has adverse impacts on the development of the ICT industry. For security reasons, private domestic and foreign investment in the telecommunications infrastructure is restricted in Vietnam. At present, the VNPT is the only company that has a telecommunications infrastructure and, through the VDC, it controls the vital gateways that allow Vietnam access to the World Wide Web. As such, the VDC is given the best conditions both in terms of technical facilities as well as accessibility to the telecommunications infrastructure. Other existing ISPs have to cope with disadvantages such as slower bandwidths as compared with the VDC, a limitation in the number of services they are able to provide, and, in many cases, a longer waiting time to clear bureaucratic red tape. Another important factor for ICT development is resources, which have to be mobilized and invested in buildings, machines, equipment, transport, and communications. However, in the nature of ICT, it is the telecommunications infrastructure that ensures connectivity, networking, and economies of scale. Without it, the potentials of IT cannot be realized. During the last five years, Vietnam had made great strides in investing in ICT-related industries to expand its ICT resource base. For example, of the estimated US$220 million that was invested in this sector in 1999, 60 per cent was ploughed into infrastructure and only 40 per cent was put into the development of software and ICT services. However, the government’s Resolution No. 7 (see Appendix Box A11.1), issued on 5 June 2000, has made it clear that priority should be given to the development of the software industry in Vietnam over the period 2000– 2005, and has indicated an estimated budget of US$120 million for investment into this area. While the impacts of the above-mentioned measures on ICT development can only be seen several years later, it is clear that the current status of ICT infrastructure in Vietnam remains underdeveloped. In

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addition, most of the investment in ICT infrastructure comes from government budget (90 per cent), with little participation from the private sector. In summary, the analysis of the current status of the ICT industry of Vietnam yields the following picture: •

•

•

•

•

•

The ICT industry in Vietnam today is not ready for the creation or innovation of new ICT products. In fact, Vietnam has so far been importing hardware and software products and adapting them for its own use. Although Vietnam has actively introduced and spread the use of ICT products and services in the national management system and has produced a number of IT experts, the scope and dimension of ICT application is still very limited. The current lack of an adequate pool of IT professionals limits the process of accelerating ICT application and assimilation in various economic activities. The underdeveloped telecommunications infrastructure is one of the main factors that makes ICT services less competitive in terms of time and cost. The current institutional and legal framework does not provide favourable conditions for accessing and using ICT services, and does not create a competitive environment for the development of the ICT industry. The existing domestic market for ICT products and services is small. But a more developed Vietnam in the future holds promise of a huge potential market for ICT, which is necessary to accelerate the development of the ICT industry.

4. Policy Implications for ICT Development in Vietnam

Compared with the other transitional economies in Southeast Asia, there are several factors that give Vietnam an edge in the development of its ICT sector, namely: •

The education of the work-force is accelerating, and Vietnam is producing bright young students and specialists who possess relatively high mathematical capability.

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•

•

•

The government of Vietnam is strongly committed to ICT and the knowledge-based economy, and has taken the first important steps to increase the people’s awareness of the role of ICT in development and to upgrade the infrastructure for ICT. With a population of 79 million people (ranked second largest among the ASEAN countries), Vietnam has a large potential market for ICT services. Many of the approximately 3 million overseas Vietnamese are experts in ICT who are working in developed countries such as the United States, Australia, and France. Many of these are willing to contribute their ICT expertise to their homeland.

These factors should lead to a rapid development in ICT in Vietnam over the next few years. What Vietnam needs to do, however, is to have good and favourable policies for ICT growth. In this regard, a master plan for ICT development in Vietnam is urgently needed. This is because a segmented and piecemeal approach towards ICT development policy would not allow Vietnam to derive the maximum benefits possible from a well-coordinated development plan. To illustrate, the technological upgrading of the information infrastructure would permit cheaper and faster information access, and in turn, it should attract investment, improve efficiency, and increase economic opportunities for Vietnam. These potential benefits will be greatly reduced, however, if the overall incentive regime for economic activity is hampered by high transaction costs. Benefits will also be reduced if the human resources produced by the educational system are incapable of responding to and creating their own opportunities via the new information infrastructure. It is important to note that using a systematic approach does not mean that everything should or can be done at once. The sequencing of reforms and policies is entirely consistent with the systematic approach. For example, Vietnam can decide, for the medium term, to undertake policies for ICT diffusion and then, for the longer term, to take further steps for ICT development. For medium-term prospects, several policies for ICT development have been proposed. First, policies to develop human resources are central to ICT development and the diffusion of its applications. Although the

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government continues to play an important role in providing basic education and skills, private-sector participation in computer education and schools should also be encouraged to provide easy and economical access to ICT. For Vietnam, it is important to teach its people the basic sciences, technology, and English language to enable them to understand, adopt, and adapt ICT in sector-specific applications. Second, the establishment of a legal framework that is supportive of the ICT industry is another policy that the government is expected to undertake. This includes fiscal incentives to encourage the business sector to accelerate the diffusion of ICT applications, policy measures to create a competitive environment for the ICT industry, and appropriate regulatory, supervisory, and monitoring systems for intellectual property rights. It is important to note that market institutions and a legal framework for the operation of ICT products and services markets should be formulated as soon as possible. Third, there must be policies to enable the telecommunications infrastructure to grow as ICT cannot grow in the absence of a dynamic telecommunications sector. As this would require a huge investment of capital, the government should remove all restrictions on the development of the telecommunications industry as well as mobilize private resources from both private domestic and foreign investors. In this regard, foreign direct investment (in particular, investment by overseas Vietnamese) can be useful in bringing in the necessary technologies, along with financial resources. Fourth, there must be measures to accelerate the assimilation and diffusion of ICT in the various economic sectors. This would help many industries to obtain the benefits of ICT, which in turn would lower their production costs and make their products more competitive internationally. Fifth, as 78 per cent of Vietnamese people live in rural areas, the policy of ICT industry development should look into how it might expand the use and benefits of ICT to these rural areas. The experiences of countries such as China and India on introducing schemes for diffusion include concentrating on well-proven technologies and offering assistance to farmers in ICT training with subsequent technical support. Such measures are well worth looking into.

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Finally, for longer-term prospects, ICT development needs further government policies. These include first, the need to support higher education in science and mathematics because the development of ICT can hardly take place without an adequate number of trained and qualified personnel in the sciences and mathematics. The country’s education reform policy should address this. Second is the need to promote R&D. In this regard, the government’s policy has to guide R&D by developing beneficial linkages between research institutions and industries, and by providing incentives for specific areas of R&D. Apart from the above policy measures, international co-operation is most welcome to help Vietnam learn and exchange experiences and expertise in the development of the ICT industry. Experience has shown that official development assistance (ODA) and other forms of international assistance during the past few years have helped Vietnam improve its ICT infrastructure. In addition, discussions at various international seminars have made significant contributions towards increasing the awareness of Vietnamese officials and the government of the role of ICT and its impact on the world economy. In November 2000, the World Bank organized an International Conference on the Knowledge-Based Economy in Vietnam, where ICT was one of the main topics discussed. More of such activities in the future will give Vietnam opportunities to exchange lessons and experiences on ICT development with other countries. NOTES This chapter was written in collaboration with Mrs Vu Xuan Nguyet Hong and Mrs Dinh Hien Minh of the Central Institute for Economic Management. 1. The G-8 consists of Canada, France, Germany, Italy, Japan, the United Kingdom, the United States (G-7) and, most recently, Russia. 2. This was adopted on 25 November 2000. More information on the e-ASEAN agreement can be obtained from the Task Force’s official website (http://www.easeantf.org). 3. The so-called CLMV transitional economies of ASEAN. 4. For a detailed elaboration of this theoretical framework, see the chapter by Wong and Singh in this volume.

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5. This is corroborated by other chapters in this volume. See, in particular, the contribution by Wong and Singh, as well as the country studies presented by Toh (Singapore), Singh (Malaysia), and Montreevat (Thailand). 6. The figures were calculated with the average GNP per capita of Cambodia, Laos, and Vietnam (Myanmar was excluded due to lack of data), and utilized nominal values. 7. The HDI for Vietnam, and that of comparative ASEAN countries, are given in Appendix Figures A11.2 and A11.3. 8. Technological capabilities refer to firm-level as well as national technological capabilities. Firm-level technological capabilities consist of investment, production, innovation, and linkage capabilities. National technological capabilities are not simply the sum of thousands of individual firm-level capabilities. Despite individual characteristics, there is a common element of response of firms to the policy, market, and institutional framework. 9. Technological development refers to a successful transfer of technology, technological mastery, technological acquisition, or technological promotion. The term refers to a process of learning that can generally be viewed as comprising three main stages: selection/purchase, absorption, and diffusion. 10. It should be noted that anti-trust regulations can present a unique set of problems of their own, as evidenced by the recent Microsoft-Netscape case. However, in the context of developing countries, the removal of state-run monopolies in the telecommunications sector is generally regarded as an important step towards promoting equality and improving the level of ICT development in the country. 11. Here, ICT infrastructure is limited to not only physical infrastructure (reflected in the first five indicators), but also intangible infrastructure such as the quality of the research environment (as reflected in the final indicator). 12. The specific case of Vietnam is examined in the second part of this chapter. 13. For instance, the Hoalac High-Technology Park in a northern province, the Quangtrung Software Park in the south, and a new high-technology park in Danang. 14. Asian Development Outlook 2000 Update (ADB 2000, p. 66). 15. As indicated in Table 11.2, the number of scientists and engineers involved in R&D per million persons in Vietnam is even higher than that in Thailand and the Philippines, which are countries that are in a more advanced stage up the development ladder. 16. Most of these belong to the ministries or the state’s general corporations. 17. However, this may be a matter of constraint rather than choice, as R&D activities are usually engaged in only by large organizations that can afford the long incubation period between investment and payoff.

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18. The software industry can be divided into three sub-sectors: systematic software development, provision of instruments for applied development, and provision of applied solutions. Production in the software industry made a dramatic increase in 2000, with an output of US$50 million, as compared with US$21million in 1999. 19. The VDC is the sole backbone network provider in Vietnam, and is a state-owned company managed by the VNPT. 20. Government regulation allows ISPs to provide only three main Internet services: email, website hosting, and file transfer. 21. Contrast this with Australia, where the ratio is 1.25 per cent, and the United States, where it is 1.2 per cent. REFERENCES Arunachalam, S. “Information Technology: Equalizer or Separator of Developing Countries?” The Technology Source, August 1998. http://www.horizon.unc.edu/TS/ default.asp?show=article&id=74. Asian Development Bank (ADB). “IT and Development”. Asian Development Outlook 2000 Update. Manila: ADB, 2000. Central Institute for Economic Management (CIEM). Vietnam’s Economy in 1999. Vietnam: Statistical Publishing House, 2000. Chinh phu Vietnam. Nghi quyet cua Chinh phu ve xay dung va phat trien cong nghiep phan mem giai doan 2000–2005. So 07/2000/NQ-CP, ngay 5/6/2000. Communist Party of Vietnam (CPV). “Resolution and other draft documents submitted to the IX CPV Congress”. Mimeographed. 2000. Dapice, D. “Choices and Implications: Roads Open to Vietnam”. Mimeographed. 2000. Group of Eight. “Okinawa Charter on Global Information Society”. Okinawa. Mimeographed. 22 July 2000. http://www.g7.utoronto.ca/g7/summit/ 2000okinawa/gis.htm. “ICT Industry — The Engine of Growth in the Knowledge-Based Economy”. Report in National Seminar on the Knowledge-Based Economy held in Hanoi, 24–25 June 2000. International Development Research Centre (IDRC). Vietnam at the Cross-Roads: The Role of Science and Technology. Ottawa, Ontario: IDRC, 1999. Manuel, Castells. “Information Technology, Globalization and Social Development”. Paper presented at a conference in Geneva, 22–24 June 1998. Nath, V. “Heralding ICT-Enabled Knowledge Societies — Way Forward for the Developing Countries”. Paper presented at the Sustainable Development Networking Programme, India, April 2000. http://www.cddc.vt.edu/knownet/articles/ heralding.htm.

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Office of the Central Committee of Communist Party of Vietnam (CPV). “ICT and the ICT Development in Our Country”. Mimeographed. October 2000. Project VIE/99/002. Report on Science, Technology and Industry Development Strategy for Vietnam. The Final Report. UNDP’s Assistance on the Preparation of SocioEconomic Development Strategy for Vietnam Up to the Year 2010. May 2000. United National Development Program (UNDP). Human Development Report. New York, NY: UNDP, various years. World Bank. World Development Report 2000/2001: Attacking Poverty. Oxford: Oxford University Press, September 2000.

Appendix Box A11.1 Vietnamese Government Resolution No. 7 Issued on 5 June 2000 In June 2000, the Vietnamese government promulgated the Resolution on “software industry development for the period 2000–2005”. This Resolution set a range of objectives for software industry development in the next five years, including: 1. To take advantage of the knowledge potential of the Vietnamese people, especially the younger generation in developing a software industry with a high growth rate, actively contributing to the modernization process and the development of economic sectors. 2. To achieve an export value of US$500 million for the software industry by the year 2005, through measures such as focusing on exporting software experts, processing software products, providing services for foreign companies, and substituting imported software products for domestic ones. In order to achieve the above objectives, several policies have been proposed. These include: first, government plans to invest an amount of US$120 million in this sector for the next five years; second, the promotion of education and the training of experts specialized in the software industry and programming; third, the introduction of tax exemptions on company income and export for software products; fourth, the provision of the best favourable conditions for both domestic and foreign investors to invest in developing the software industry; fifth, the provision of favourable credit conditions for enterprises involved in the software industry. In addition, other supportive measures for this industry have also been considered, such as the establishment of an international-standard telecommunication infrastructure in the two hightechnology parks, the amendment of legal documents on intellectual property rights, and more active enforcement of regulations.

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Appendix Figure A11.2 Human Development Index: ASEAN Countries

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a

0.0

Source: UNDP, Human Development Report (various years).

Appendix Figure A11.3 Human Development Index: Vietnam 0.8 0.7 0.6 0.514 0.5

0.539

0.523

1992

1993

0.557

0.664

0.671

1997

1998

0.568 0.523

0.472

0.4 0.3 0.2 0.1 0.0 1990

1991

1994

1995

1996

Source: UNDP, Human Development Report (various years).

© 2002 Institute of Southeast Asian Studies, Singapore

Reproduced from Information Technology in Asia: New Development Paradigms edited by Chia Siow Y ue and Jamus Jerome Lim (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available from < http://www.iseas.edu.sg/pub.html >

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The “new economy” of today has presented new contours to the developmental landscape. In the United States, where the new economy is most visible, it is characterized by strong non-inflationary growth in macroeconomic terms, but with underlying factors that can be attributed mostly to the rising influence of information and communications technology (ICT) (Organization for Economic Co-operation and Development [OECD] 2000). As a result, the new economy has become a fashionable topic within the domain of both policy and academic studies. However, the term can be illusive because “new” as an expression does not carry a great deal of meaning. Instead, we prefer to use the term “knowledge-based economy”. As defined by the OECD (1996), a knowledge-based economy is an economy in which the production, distribution, and use of knowledge are the main drivers of growth, wealth

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creation, and employment across all industries. It can be argued that all economic activities have something to do with knowledge, although differing in degree. To the extent that knowledge as an economic good outweighs others, there may then be fundamental structural changes in the economic system, as will be discussed in Section 1. Against this background, this chapter examines the features of the evolving knowledge-based economy in Taiwan, with special focus on the area of information technology (IT). We approach the topic from 1 the perspective of industrial organization, not from one of policy. As in most advancing nations of the world, the government in Taiwan looks upon the knowledge-based economy with enthusiasm, and is therefore in the process of formulating a policy package. Furthermore, in the case of Taiwan, the most interesting aspect concerning the knowledge-based economy seems to be one of industrial organization. The analysis will proceed in four stages. First, taking into account the features of knowledge, Section 1 highlights some important factors that characterize a knowledge-based economy. This is followed by an analysis of the development of Taiwan’s hardware production, which includes an examination of the personal computer and semiconductor industries in Sections 2 and 3 respectively. The overall development of IT applications and their effects on Taiwan’s economy are then taken up in Section 4. Finally, Section 5 concludes by looking at the potential implications of the study. 1. What Is a Knowledge-Based Economy?

The term “knowledge-based economy” has drawn considerable attention from both the academic and political arenas, but questions remain as to its exact meaning. Since knowledge represents intangible goods, the knowledge-based economy, in its most basic form, should be qualitatively different from a material- or manufacturing-based economy. To shed more light on the knowledge-based economy, one needs to analyse more thoroughly the features of knowledge. Figure 12.1 summarizes some of the important features of knowledge. First, knowledge is intangible, which gives rise to the issues of non-rivalry and carriers needed for presenting and transferring knowledge. For its owner, knowledge is indefinitely expandable in usage

© 2002 Institute of Southeast Asian Studies, Singapore

Knowledge

© 2002 Institute of Southeast Asian Studies, Singapore Degree of codification

Carriers needed

Accumulativeness

Implicit

Explicit

Externality

Indefinitely expandable

(still subject to depreciation and obsolescence)

Intangibility

Non-rivalry

FEATURES

Figure 12.1 The Features of Knowledge and Their Implications

Application and absorption of knowledge is conditioned by own knowledge base

Knowledge embedded in human capital and organization may be transferred through networking

Information technology facilitates knowledge diffusion

Knowledge generates spillover effects, leading to increasing returns to scale

Knowledge as an input generates scale and scope economies

DIRECT IMPLICATIONS

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because of its negligible duplication costs (David 1993). As a result, knowledge as an input will generate economies of scale and scope. In addition, non-rivalry may to some extent lead to spillover effects, entailing increasing returns to scale (Romer 1986). The fact that knowledge needs carriers for presentation and transfer suggests that knowledge differs in the degree of codification and hence, of exclusivity. In this regard, knowledge can be broadly classified into articulated (explicit) and tacit (implicit) knowledge. One of the benefits of IT is that articulated knowledge is easily and widely transferable, and there is a trend towards codifying certain types of knowledge (OECD 1996). Conversely, tacit knowledge is socially or organizationally embedded knowledge that cannot be easily transferred through formal channels of information but may be transferred by means of networking (Cantwell and Santangelo 1999; Senker and Faulkner 1993). Knowledge is characterized by “accumulativeness”, though still subject to depreciation and obsolescence. It follows, then, that an organization’s ability to absorb and utilize knowledge is conditioned by its knowledge base (Cohen and Levinthal 1989). This also points to the importance of the value-adding activities of knowledge. Taking into account the above discussion, one can characterize the knowledge-based economy as follows. First, knowledge has become an increasingly important economic good; hence one witnesses the shrinking distance between knowledge and economic activities. An example at issue is the debate on the “third mission” of higher education institutions (Etzkowitz et al. 2000). Second, knowledge as an input will generate scale and scope economies, but their magnitude depends on the speed at which knowledge depreciates and becomes obsolescent, as well as market size. Therefore, speed and first-mover advantage are essential for industrial competition in the knowledge-based economic era. Third, knowledge is increasingly being integrated into economic outputs, giving rise to the trend of dematerialization of final products. As a result, the boundaries between manufacturing and services, as well as hardware and software, have become blurred. For example, Wise and Baumgartner (1999) presented cases where U.S. manufacturers moved downstream to integrate the service function in order to become more

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profitable. In extreme cases, some parts of industrial and economic activities may become weightless. Fourth, IT and networks, which are central to knowledge creation, distribution, and utilization, will become necessary conditions for industrial development in the knowledge era. Information technology is a general-purpose technology and is considered to be the key driving force in the current techno-economic paradigm (Freeman and Perez 1988). It is generally agreed that the new economy in the United States has much to do with ICT (OECD 2000). Fifth, the knowledge-based economy is characterized by the globalization of a wide range of corporate value-added activities. Globalization has been driven by multinationals’ outreach of capital, production (Michalet 1991), and more recently technology (Patel 2000; Sigurdson 1990). In addition, the IT network, which is by nature global and real-time, will enable firms to synchronize supply chains and to organize corporate activities across borders in an effective way. As a result, globalization means more than simply the international division of labour in production. 2. Taiwan’s Information Industry: Industrial Upgrading by Going Global and Forging International Linkages

Taiwan is widely regarded as one of the major players in the information industry, currently ranking as the third largest producer of information products world-wide. This outstanding performance received its momentum mainly from the production of personal computers (PCs), peripheral equipments and related sub-sectors, and quite a number of Taiwanese-made products within these sectors, such as motherboards, scanners, monitors, and notebook computers, enjoy a considerable global market share (Figure 12.2). An important milestone in the development of Taiwan’s information industry is the outreach of its constituent firms starting from the late 1980s, with their outward investment initially being directed towards Southeast Asia, and more recently towards China and elsewhere in the world. As a result, the offshore production of Taiwan-based IT firms grew from US$973 million in 1992 to US$18.86 billion in 1999, accounting for 47.29 per cent of all production by Taiwan-based firms

© 2002 Institute of Southeast Asian Studies, Singapore

© 2002 Institute of Southeast Asian Studies, Singapore

Percentage

N

e ot

ok bo

0

10

20

30

40

50

60

70

80

90

m

co

er

t pu

40

49

M

s De

op kt

r to

i on m

co

58 58

66

ly pp u s er w o p

d ar

o rb D

C

m

Ro

e on eb ar B

34 34

75 75

S

n ca

r ne

65 60

k

in

ce rfa e t

58

se ou M or w t e N

68

Source: Institute for Information Industry (2000).

ng hi ti c Sw

M

he ot

19

er

t pu

17

61

64

70

84

91

ar d

100

Figure 12.2 Taiwan’s World Market Share in PC-Related Products

yb o Ke

rd ca

36

40

em od M

34

57

1998 1999 (estimated)

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(Figure 12.3). It then follows that there has been an increasing divergence between the volume of export orders received by local IT firms, and that of their actual exports (Figure 12.4). By observation, it seems that 1997 was the turning point when this divergence became much greater, and this probably had something to do with the current global restructuring in the industry, as discussed below. As the ability to manufacture PCs has become widely diffused throughout the world, as price competition has intensified, and as profit margins have narrowed for most mature computer technologies, the PC industry has witnessed a profound change in inter-firm competition and its manufacturing systems. Within this process of change, PC firms in the United States have sought to establish new sources of competitive advantage by accelerating the pace of new technological developments and by increasing the use of external subcontractors. As a result, components are now sourced from a global network of suppliers, whereas the final assembly of PCs tends to be done in each of the major market areas of North America, Europe, and Asia (Angel and Engstrom 1995; Borrus and Borrus 1997). More specifically, recent developments have led to the emergence of a variant of global production networks — global logistics (Chen and Liu 1999). In their efforts to withstand market encroachment by lowcost clone suppliers, brand marketers in the United States, led by Compaq, Hewlett Packard, and IBM, now tend to concentrate on R&D and marketing whilst obtaining their outsourcing production and logistics operations from, amongst others, Taiwan-based firms. For example, Compaq pioneered the so-called optimized distribution model (ODM), which, in essence, is aimed at providing customers with options as to what, when, and how they want their PCs, and at the lowest cost. This operational model has three facets. First, in order to narrow the gap between supply and demand, manufacturers produce to meet orders (build-to-order) rather than forecasts (build-to-forecast). Second, in order to meet the variety of customer demands, the build-to-order practice is extended to configuration-to-order practice, under which customized products are produced in specified quantities. Third, Compaq’s vendors are required to undertake the task of final assembly,

© 2002 Institute of Southeast Asian Studies, Singapore

© 2002 Institute of Southeast Asian Studies, Singapore

0

10

20

30

40

50

60

70

80

72

Taiwan

57

62.6

67.9

52.7

22.8

33.2

Thailand

5.9 5.4 5.3 5 5.5

5.6

4.5 4.0

Malaysia

7.2 7.4

Source: Institute for Information Industry (2000).

China

16.8 14

29

Figure 12.3 Geographical Distribution of IT Production by Taiwan-Based Firms

Others

3.1 4.1 4.8 1.8 2.4

1995 1996 1997 1998 1999

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Percentage

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Figure 12.4 The Divergent Trend between Export Orders and Exports in Taiwan’s IT Industry 3,000 2,500 2,000 1,500 IT export orders 1,000 IT exports 500 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

bringing together a set of modular sub-assemblies produced and delivered by Compaq’s subcontractors. From Compaq’s perspective, the adoption of ODM enables it to concentrate on its own core competencies of R&D and marketing whilst leaving the rest of the value chain to its subcontractors in Taiwan and to vendors. Meanwhile, the latter two types of firms have come to resemble members of Compaq’s “virtual business”, providing the requisite ammunition for Compaq to compete effectively in the global market. But what does such a new model of contracting mean when it comes to the development of Taiwan’s PC industry? Underlying the new contractual relationships is the drive to reduce production costs, lead time to market, and inventory costs. It is therefore imperative for Taiwanese firms to establish international production and logistics networks to serve their customers. For example, by implementing ODM, Compaq has completely handed its inventory costs over to its subcontractors, whilst the latter are also required to produce and deliver sub-system products in line with tight schedules and the variety of market demand. Therefore, they have to ensure that everything is synchronized

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up and down the supply chain. In order to do so, these subcontractors, such as those based in Taiwan, have had to establish a well-structured, fast-response global production and logistics network by means of internalization, or through the formation of strategic alliances. In addition, they will need to ask their components and parts suppliers to follow suit, in order to smoothly link up the whole supply chain. As a result, the totality of PC production systems has increasingly come to resemble a “just-in-time” system on a global scale, weaving together the cross-national constituent elements of the value chain into competitively effective production systems. Therefore, the relationship between Taiwanese IT firms and their 2 customers — owners of world-class PC brand names — has gone beyond that of the traditional original equipment manufacturing (OEM) model. Under OEM contracting, Taiwanese IT firms act merely as providers of finished products to their customers. In contrast, emergent global logistics contracting requires that Taiwanese subcontractors take on much greater responsibility by participating in supply-chain management, logistics operations, and after-sale services. In addition, both sides of the contractual relationship now have to work closely together and link themselves up electronically in order to create “across-the-board” competitive advantages in all mainstream activities in the industry, engendering escalating interdependence between them and hence a “lockin” effect. Aided by such relationships, Taiwanese firms may be able to broaden the scope of their value chains — upstream to R&D and downstream to distribution and logistics — in a way that involves much less risk. Moreover, with a global production and logistics network at their disposal that will satisfactorily meet the needs of their customers, Taiwan-based IT firms may pre-empt the entry into the network of their counterparts in many countries. As a result, from a Taiwanese perspective, owners of world-class PC brand names — which are international core firms in the industry — can be “anchored” to Taiwan’s economy (Chen and Liu 2000). Looking back to their developmental roots, Taiwanese firms were previously able to rely heavily on local firms and networks, stretching from Keelung to Hsinchu, for their production of PCs (Kawakami 1996; Kraemer et al. 1996). However, under global logistics systems, they now

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have to mobilize resources from their global networks to undertake their production. In other words, PCs delivered by Taiwan-based firms will be the result of the productive and innovative efforts of a variety of firms and economies around the world. Admittedly, the PC firms in the United States are in the driving seat, but Taiwan-based IT firms may act as an essential node of the global production and logistics network. Taiwan-based firms have earned such advantages because of their outreach, as well as their ability to climb up the value chain ladder. There have been concerns that since Taiwanese firms are, in general, short of marketing capacity and brand names, their outreach might become footloose, engendering the hollowing-out of industrial activities back in Taiwan. The IT story, however, has proven that this is not the case. By going global, Taiwanese IT firms have been able to position themselves as an active co-ordinator of the global production network. A study by the Central Bank in Taiwan has even revealed that global logistics contracting contributed 0.85 per cent to Taiwan’s GDP growth in 1999. Of particular note is the emerging post-PC era which will present both threats and opportunities to Taiwan’s IT industry. The post-PC era has resulted from the trend of “digital convergence” and integration between the four Cs (computers, communications, consumer electronics, and content), and it is about to lead to the proliferation of a variety of information appliances (IAs). As the development of IAs is still in its infancy, it is characterized by diverse points of innovation, particularly with regard to product architectures and industrial standards. As a result, there are no well-established industrial standards (that are equivalent to the “Wintel” standard for PCs) for Taiwanese IT firms to follow, and the extent to which such technological discontinuity will undermine the fortunes of Taiwanese IT firms is still an open question. In order to confront the challenge, Taiwan has formed the IA Consortium, which comprises more than 180 local information hardware, software, and content firms. In addition, some of the leading international firms, such as Sony, Microsoft, Texas Instruments, and National Semiconductor, are amongst its members. This reflects the view that at the dawn of the post-PC era, the forging of international linkages and industrial clusters is essential to the development of Taiwan’s IA

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industry, as IAs are characterized by technical systems that entail innovation networks (Windrum 1999). 3. Taiwan’s IC Industry: Growth through Flexible Specialization 3

The IC (integrated circuit) industry presents another example of Taiwan’s impressive performance in the IT arena. The industry in Taiwan currently ranks as the fourth largest in the world, subordinate only to the United States, Japan, and South Korea. Of particular interest are the differences between Taiwan and its forerunners in a couple of aspects. Unlike South Korea, which tends to specialize in the production of dynamic random access memory (DRAM), Taiwan provides IC design houses and integrated device manufacturing (IDM) firms with foundry services, which have captured around 70 per cent of the global market share, and produce a much wider variety of chips. In addition, Taiwan’s IC industry consists of many small firms specializing within a narrow range of the value chain, such as IC design, mask production, foundry service, packing, and testing, in contrast to the dominance of vertically integrated conglomerates in South Korea and Japan. In a sense, Taiwan’s IC industry is organized by an industrial network system with a strong link to Silicon Valley, the globally prominent IC market and technology centre. For one thing, the development of Taiwan’s IC industry has been driven by organizational innovation, creating foundry services as a market niche to specialize in production for external customers. This was a deliberate choice made by local entrepreneurs to avoid the risks associated with the market fluctuations of DRAM, and whilst there are currently some DRAM manufacturers in Taiwan, foundry services still accounted for 53 per cent of local IC production in 1999. By disintegrating the IC value chain, the emergence of foundry services in Taiwan has facilitated the proliferation of small- and medium-sized firms engaged in other market segments, such as IC design, testing, and packaging. In 1999, there were 127 firms in Taiwan engaged in IC design, five in mask production, twenty-one in wafer fabrication, forty-two in packaging, and thirty-three in testing. This flock of constituent firms demonstrates a balanced and vertically disintegrated industrial structure. However, despite the vertically disintegrated structure, there is a

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trend towards “virtual” vertical integration amongst local firms in a number of ways. First, the domestic sales ratio in Taiwan’s IC industry increased from 39.5 per cent in 1996 to 54.7 per cent in 1999 (Table 12.1), higher than in other major countries or regions, such as North America (44.8 per cent), Japan (51.8 per cent), and Europe (43.6 per cent). Second, the subcontracting relationships that exist in the value chain range tend to be localized. For example, local contracts accounted for 91.2 per cent of revenue in Taiwan’s IC design houses in 1999, as compared with 72.3 per cent in 1998. Likewise, around 98 per cent of the products of Taiwan’s fabless designers were packaged locally in 1999. Third, almost 70 per cent of the ICs designed by local fabless designers are for the information industry, indicating a strong connection between Taiwan’s IC and information sectors. In essence, the development of Taiwan’s IC industry has, to a large extent, come to resemble the scenario of the flexible specialization thesis (Piore and Sable 1984). Fabless IC design houses have proliferated in

Table 12.1 Taiwan’s Integrated Circuit Industry Statistics (NT$ billion)

Global IC output value (US$ billion) Growth rate (%) Output value (US$ billion) Market share (%) Output value Growth rate (%) IC design IC fabrication Foundry service IC packaging IC testing Product revenue Domestic sale ratio (%) Domestic market NT$/$US exchange rate

1996

1997

1998

1999

114.9 –8.9 6.85 5.96 188.2 9.5 21.8 125.6 56.0 35.8 5.0 91.4 39.5 203.6 27.49

119.5 4.0 7.60 6.36 247.9 31.7 36.3 153.2 84.2 47.8 10.6 105.3 47.0 235.5 32.64

109 –8.8 8.80 8.07 283.4 14.3 46.9 169.4 93.8 54.0 13.1 122.5 49.7 274.4 32.22

126.6 16.0 13.49 10.66 423.5 49.4 74.2 264.9 140.4 65.9 18.5 198.7 54.7 345.7 31.40

Sources: Data taken from ERSO (2000); ITRI, Industrial Technology Information Services Project Report (2000); Taiwan Statistical Data Book (2000).

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Taiwan partly because their access to external fabrication capacity has lowered the entry barriers of the IC design market, but in addition, the geographical concentration of Taiwan’s IC and computer-related firms 4 in the Hsin-Chu Science-Based Industrial Park has generated agglomeration effects, allowing those firms to explore the benefits associated with geographical proximity and outsourcing. Therefore, whilst specializing in one segment of the value chain or another, IC firms in Taiwan are networked by social and business connections. Furthermore, it is arguable that the IC industries in Taiwan and Silicon Valley are closely connected. Table 12.2 presents data on the R&D intensity and capital expenditure intensity of the IC industries in the United States, Japan, South Korea, and Taiwan during the period 1995–99. It is evident that with regard to R&D intensity, the United States scores the highest amongst the four largest IC-producing countries. Table 12.2 R&D Intensitya and Capital Expenditure Intensity b of the Integrated Circuit Industry: USA, Japan, South Korea, and Taiwan (percentages) 1995

1996

1997

1998

1999

USA R&D intensity Capital expenditure intensity

9.7 20.7

11.6 22.8

12.1 17.5

13.9 18.0

— 14.0

Japan R&D intensityc Capital expenditure intensity

6.6 16.1

6.5 20.8

6.6 20.2

6.5 18.0

— 16.0

South Korea R&D intensity Capital expenditure intensity

— 25.7

7.9 40.1

11.6 51.0

12.9 26.0

— 26.0

Taiwan R&D intensity Capital expenditure intensity

7.0 31.9

6.9 63.4

8.8 63.4

9.1 73.0

— 68.0

a

The ratio of R&D expenditure to sales in percentage terms. The ratio of capital expenditure to sales in percentage terms. c Fiscal year. — = No data available. b

Sources: ITRI, Industrial Technology Information Services Project Report 1999; IC Insight (http://www.icinsight.com), accessed in 2000.

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In contrast, with regard to capital expenditure intensity, Taiwan comes up on top, whilst the United States ranks fourth. By implication, there seems to be an interesting pattern emerging in the international division of labour in the IC industry between the United States and Taiwan. On the one hand, Taiwan’s strength lies in foundry services for which development requires substantial investment in fabrication capacities. On the other hand, U.S. IC firms tend to devote themselves to R&D, design, and marketing, which is backed up by their access to Taiwan’s foundry service capacities. This argument is more directly supported by the data in Table 12.3, which presents the geographical distribution of the clients of Taiwanese foundry services over the past five years. In 1998, over half of Taiwan’s foundry capacities served customers in the United States, whilst local contracts amounted to about 35 per cent only. In fact, most of the top ten fabless designers in the United States have been clients of Taiwanese foundry companies. The Taiwan Semiconductor Manufacturing Company (TSMC), the largest foundry service provider in the world, treats its customers as partners and shares its resources and information with them. Each year, the TSMC makes known to its customers its plans for the development of its process technology for the next five years. The exposure of this information is useful for TSMC’s customers, since it helps to ensure that the proposed process technologies of TSMC can support the future development of their products. As a result, the sharing of resources and Table 12.3 Geographical Breakdown of Taiwan’s Foundry Services Clients (percentages)

1994 1995 1996 1997 1998

Taiwan

North America

Western Europe

Others

30.5 36.6 40.8 47.5 34.9

55.1 55.5 42.8 31.2 51.4

5.1 4.0 11.7 6.3 7.2

9.3 3.9 4.7 15.0 6.5

Source: Data taken from ITRI, Industrial Technology Information Services Project Report 1999.

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information not only facilitates the development of a close relationship in the long run, but also helps to reduce the uncertainty associated with technology development on both sides. The connection between Taiwan and the United States in the IC industry also takes the form of an intensive interface between the specialists of both countries. Underlying this interface are Taiwanese and Chinese expatriates living abroad, who play an important role bridging the overseas social networks. The part played by those returning to Taiwan is also crucial for tightly connecting Taiwanese production systems with advanced market knowledge and technology (Saxenian 1997; Kim and Tunzelmann 1998). According to Saxenian (1997), in the 1990s one out of three specialists in Silicon Valley were from overseas, and there are over 1,300 firms (or 17 per cent of the total) under the directorship of Overseas Chinese, the bulk of whom have emigrated from Taiwan. Such an ethnic social network of engineers helps to create IC industrial linkages between Silicon Valley and Taiwan, both of which have production networks that are organized by specialist firms. This presents several advantages. First, industries with production networks in both regions have greater flexibility and are able to adapt to changes in technology and markets. This type of industrial system encourages the pursuit of multiple technical opportunities and a heavy reliance on outsourcing as the industrial systems in both regions are decentralized (Saxenian 1997). Second, the ethnic social network assists the trade in differentiated chips. As Rauch (1999) has argued, proximity and a common language/colonial ties are more important for differentiated products than for products traded on organized exchanges in matching international buyers and sellers. In dimensions of both characteristics and quality, the “uninformativeness” of prices on organized exchanges cannot perfectly match international buyers and sellers of these differentiated products, which thus leads to higher costs in the search process. But as Rauch argues, ethnic social networks that result in trading networks rather than “markets”, can effectively reduce the costs incurred in the search process. It is instructive here to refer to Saxenian’s (1994) explanation as to why high-technology industries in Silicon Valley tend to enjoy a greater capacity for adaptation than their counterparts on Route 128. She

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suggests that firms in Silicon Valley are network-based and smaller in size, with each firm specializing in narrow segments of the production process. A close personal relationship exists between specialists who work for different firms, which helps to diffuse market and technology information, and this contributes to low transaction costs in product markets. The social-institutional conditions of Silicon Valley thus help to enrich various organizational trials. Thanks to the intensive sharing of information and the variety of organizational trials, firms in Silicon Valley are able to respond swiftly to changes in technologies and markets. Based along similar lines, the specialist-firm organizational structure of Hsin-Chu Science-Based Park makes networking across both localities much easier. It is worthwhile mentioning that such industrial networking as exists in Taiwan’s IC industry has benefited from recent innovations in IT. First, IT reduces the uncertainty and the transaction costs involved in purchasing from the best outsiders, offsetting the advantage of large firms’ centralized purchasing or in-house suppliers. Second, technological changes have led to smaller production runs, making changes in products more feasible and providing more room for small, specialized firms to exploit the fragmented product markets with their flexible response. 4. Beyond IT Hardware Production: Catching-Up in Software and Applications

IT hardware production is part of the knowledge-based economy, but the more important parts are software and applications. The traditional core of the Taiwanese IT story lies in the former, but more weight is now being given to the latter. This shift reflects the recognition that software and applications have come to the forefront in the new era because they are more knowledge-based. The Internet, digital convergence, and telecommunications liberalization are thus amongst the driving forces. It is not the intention here to go into great detail on Taiwan’s development in the relevant sectors. Instead, the aim is to provide an overall picture of Taiwan’s development in software and applications. In addition, an econometric analysis of Taiwan’s production function is presented, in order to explore the effects of IT application on Taiwan’s economy. To begin, some indicators of information application for

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Taiwan and other selected countries are presented in Table 12.4. A few points can be made to summarize the information provided in Table 12.4. First, the United States is the leading country in the world in information application, and both Taiwan and South Korea are behind Japan and Singapore. Second, in the league of newly industrializing countries (NICs), Taiwan outperforms Singapore and South Korea in IT production and the value-added ratio of IT products, though it is some distance behind the United States and Japan. The gap between Taiwan and the two leading countries may be mainly attributable to software, since software accounted for only 6.92 per cent of IT production in Taiwan in 1999. Third, in comparison with Japan and Singapore, not to mention the United States, Taiwan is particularly weak in terms of the deployment of broadband networks. It also scores low in the ratio of firms with intensive information application and the ratio of online government services. However, a study by the Institute for Information Industry (2000) has projected that broadband network coverage in Taiwan would reach 96 per cent in 2004, which would bring it on par with the United States, Japan, and Singapore, and by that time, around 30 per cent of firms in Taiwan would be intensively applying IT. The study also projects that ecommerce would account for 9 per cent of Taiwan’s GDP. It is therefore interesting to address the question of the effect of IT application on Taiwan’s economy in terms of productivity. Information technology has been widely seen as the driving force behind emerging paradigm shifts, but relevant empirical research remains sparse (Antonelli 1998), especially in the context of such a country as Taiwan. Inspired by this, this study follows Antonelli (1998) and attempts to calculate Taiwan’s output elasticity of IT services. In order to do this, Taiwan’s input/output data for 1996 (the latest data set available so far) is employed in estimating Taiwan’s production function. In the Antonelli study, the standard production function, in addition to labour and capital, includes IT services as specific production factors. A simple mathematical transformation is applied here to derive a labour productivity function. Its econometric specification is presented as follows:

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Table 12.4 Indicators of Information Application for Selected Countries, 1999 USA

Japan

Singapore

Taiwan

S. Korea

Internet penetration rate per capita (%)*

47%

18%

48%

22 n.a.

21

Network usage costs (NT$ per month)

1,000

9,000

6,000

5,260 (700)

8,000

Deployment of broadband networks (%)

20%

15%

10%

4% (96)

3.5%

Local web pages (% of global total)

70

4

0.08

0.2 (4)

0.005

Global ranking in IT production value

1

2

4

3 (3)

9

Value-added ratio of IT products (%)

65%

45%

25%

30% (40)

25%

Ratio of firms with intensive information application

35

20

10

4 (31)

4

Tele-education per capita (%)

0.02%

0.02%

0.32%

0.05% (9)

0.02%

Average expenses on Internet for entertainment (US$)

146

13

35

14 (447)

5

Ratio of online government services (%)

20%

14%

15%

10% (70)

9%

Share of e-commerce in GDP (%)

3.6%

3.0%

2.3%

2.1% (9)

1.6%

Note: Figures within parentheses are projected targets for the year 2004. * Nua Internet Surveys (http://www.nua.ie/surveys). Source: Market Intelligence Centre, Institute for Information Industry.

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ln(Y/L) = a + b ln(K/L)+ c ln(ITS/L) + dS + eS * ln(ITS/L) where Y is the value added of the sectors available, K is capital stock estimated from investment data, L is labour costs, and ITS is the input of IT services purchased by each industry. Y, K, L, and ITS are each measured in millions of New Taiwan dollars (NT$). Y/L in the equation above refers to labour productivity; K/L, the capital-labour ratio; ITS/L, the IT services intensity; while S is a dummy variable for the service sector. Both Y and ITS are provided by input-output statistics, and K and L obtained from the industrial census data. In specifying the econometric equation in this way, we intend to achieve two things. First, we aim to estimate the output elasticities of both capital and IT services. Second, by introducing the cross term of S * ln(ITS/L), we wish to examine the effect of the inclusion of IT services in the production function on the output elasticity of labour productivity in the service sectors. The ordinary least squares (OLS) cross-section estimates of the equation are presented in Table 12.5. A couple of interesting observations can be derived from the empirical results presented in Table 12.5. First, in both service and non-service sectors, the output elasticity of IT services in Taiwan is positive and higher than that of capital. Given the robustness of the estimation (significant at the 5 per cent level), we can argue that IT services have contributed positively to Taiwan’s productivity. Second, the cross term of S * ln(ITS/L) is significantly negative, which implies that the effect of IT services on labour productivity in the service sector is less than that in the non-service sector. Third, the coefficient of the variable S is significantly negative, indicating that the labour productivity of the Table 12.5 Determinants of Labour Productivity, 1996

Constant

ln(K/L)

ln(ITS/L)

S

S * ln(ITS/L)

R2

F

No. of observations

5.46 (18.80)*

0.14 (2.41)*

0.79 (16.40)*

–3.86 (7.87)*

–0.62 (6.16)*

0.77

94.41*

120

Note: Student’s t-value is given within parentheses. * Indicates significance at the 5 per cent level.

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service sector is lower than that of the non-service sector in Taiwan. While Antonelli (1988) tends to interpret such effects in the context of localized technological change and national innovation systems, given Taiwan’s much smaller knowledge base, we are reluctant to go so far in Taiwan’s case. However, it suffices to say that IT significantly reduces the costs of communication, and hence facilitates economic efficiency in transaction and production, which in turn promotes economic growth (Jovanovic and Rob 1989). In addition, of particular note is the fact that the Internet, which is U.S.-centric, did not begin to be widely commercialized in countries such as Taiwan until the mid-nineties. And if, as is generally believed, the Internet leads to a paradigm shift, the effects of IT on Taiwan’s productivity could be more profound after 1996. However, we must await the availability of more up-to-date input/ output data sets to prove the case. 5. Conclusions and Implications

Industrialization is often regarded as an important way of restructuring the economy of developing countries to promote their economic welfare. The contrast in the developmental path between the NICs in East Asia and that in South America has spotlighted the different strategic trade policies of export-orientation versus import-substitution in the debate on industrialization. However, in a world of increasing globalization in which linkages across countries prevail, it has become less appropriate to champion the strategic trade policies of individual countries. This may be particularly true of countries in the process of evolving in the knowledge-based economy. High-tech production is part of the knowledge-based economy, and the most characteristic feature of Taiwan’s high-tech production is its industrial structure and linkages. For a better understanding of the relationship between technological innovation and industrial structure, it may be useful to refer to Schumpeter (1942). Widely publicized is Schumpeter’s concept of “creative destruction”, which champions the cause of small technological firms or innovative entrepreneurs in challenging both large established firms and existing technologies, based on their new technological breakthroughs. In contrast to the above Mark I scenario, Schumpeter also recognizes that established firms may be in

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a better position to appropriate new knowledge by means of devices such as patents, secrecy, lead times, and superior sales efforts. As a result, there is a Mark II scenario that is characterized by high market concentration and the continued existence of large established firms. However, the Mark I/Mark II analysis fails to capture the complexity of technology and its effects on industrial structure, particularly in the IT area. As argued by Windrum (1999), innovations such as e-commerce are inherently large technical systems, comprising a set of interdependent products that are jointly consumed. Because of network effects and product compatibility, successful innovations for technical systems entail intensive interfaces between multiple actors with different knowledge and skills bases, and these are thus termed “innovation networks”. By implication, not only do innovations often result from the collective efforts of interrelated firms, but the value chain also need not be completely internalized within individual firms. However, the relevant literature tends to focus mainly on innovation networks woven by firms in the advanced countries (see, for example, Delapierre and Mytelka 1998), downplaying the role played by firms in countries such as Taiwan. Thus, Taiwan’s achievements in high-tech production can be better appreciated in terms of the ability of local firms to leverage and align local and international networks. The industrial structures of Taiwan’s PC and semiconductor sectors are both characterized by vertical disintegration but with strong linkages amongst local firms and across national borders. The agglomeration effects of industrial clusters help to create the momentum for the development of the local industries in Taiwan, and, to the extent that the local networks become part of the global network, the local industries are given additional ammunition for development. However, there is a downside to such local and global networking due to their “lock-in” effects (Hakansson 1987). It is therefore imperative that Taiwanese firms align themselves in terms of their position within the global network, and for them to re-configure themselves within this network. In this way, Taiwanese IT firms can endeavour to become important players in co-ordinating the supply chain of the global network. However, hardware is only half of the IT story. Taiwan is therefore faced with the challenge of promoting its software industry and IT ap-

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plication, which demands a strategy of looking beyond industrialization. Specifically, Taiwan has to upgrade its value-added activities by integrating more services into manufacturing or by promoting economic activities based on intangible goods. As argued by Quinn (1988), broadly defined services have intensive interfaces with manufacturing, which can promote value added throughout the economy. In addition, it is becoming increasingly evident that services have an important role to play in innovation (Hauknes 1998). Therefore, without denying the importance of manufacturing, Taiwan needs to re-orientate its economic activities to become more software- and service-based. This movement requires more than just a quantitative shift in economic structure between services and manufacturing, but also a qualitative change in their interfaces. In this context, the technical system remains a useful concept, particularly in the IT arena. The convergence of the four Cs as mentioned earlier makes it difficult for any individual firm to master all of the knowledge and resources required, and as a result, no single producer can entirely shape, on its own, an evolving technology and application. Innovation networks may therefore become essential to harnessing new technologies and applications. NOTES 1. For the role of the government in the development of Taiwan’s IT industry, please see Hou and San (1993) and Mathews (1995). 2. This is not to detract from the fact that Taiwan itself has world-class PC brand names, such as Acer. 3. Or, more generally, the semiconductor industry. 4. The Park is the centre of Taiwan’s IC industry. 5. Although some of the figures given in Table 12.4 are only estimates, for the purpose of comparison, they provide a good gauge of the status of information application in these countries. REFERENCES Angel, D.P. and J. Engstrom. “Manufacturing Systems and Technology Change: The U.S. Personal Computer Industry”. Economic Geography 71, no. 1 (1995): 79– 102.

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Antonelli, C. “Localized Technological Change, New Information Technology and the Knowledge-Based Economy: The European Evidence”. Journal of Evolutionary Economics 8, no. 2 (July 1998): 177–98. Borrus, M. and Z. Borrus. “Globalization with Borders: The Rise of Wintelism and the Future of Global Competition”. Industry and Innovation 4, no. 2 (1997): 141– 66. Cantwell, J. and G.D. Santangelo. “The Frontier of International Technology Networks: Sourcing Abroad the Most Highly Tacit Capabilities”. Information Economics and Policy 11 (1999): 101–23. Chen S.H. and Liu D.N. Strategic Alliances in the Context of Competition P olicy (in Chinese). Final Report to Industrial Development Bureau. Taipei: Chung-Hua Institution for Economic Research, 1999. . “Taiwan’s Active Role in the Global Production Network”. In Weathering the Storm: Taiwan, Its Neighbours, and the A sian Financial Crisis, edited by P. Chow and B. Gill. Washington, DC: Brookings Institution Press, 2000. Cohen, W.M. and D. Levinthal. “Innovation and Learning: The Two Faces of R&D”. Economic Journal 99 (1989): 569–96. David, P.A. “Intellectual Property Institutions and the Panda’s Thumb”. In Global Dimensions of Intellectual Property Rights in Science and Technology. Washington, DC: National Academy Press, 1993. Delapierre, M. and L.K. Mytelka. “Blurring Boundaries: New Inter-Firm Relationships and the Emergence of Networked Knowledge-Based Oligopolies”. In The Changing Boundaries of the F irm: Explaining Evolving Inter-Firm Relations, edited by M.G. Colombo. London and New York: Routledge, 1998. Electronics Research and Service Organization (ERSO). Almanac of the Semiconductor Industry in Taiwan. Hsin-Chu: Industrial Technology Research Institute, 2000. Etzkowitz, H., A. Webster, C. Gebhardt, and B. Terra. “The Future of the University and the University of the Future: Evolution of Ivory Tower to Entrepreneurial Paradigm”. Research Policy 29 (2000): 313–30. Freeman, C. and C. Perez. “Structural Crises of Adjustment, Business Cycles and Investment Behaviour”. In Technical Change and E conomic Theory, edited by G. Dosi et al. London: Pinter, 1988. Hakansson, H. Industrial Technological Development: A Network Approach. London: Croom Helm, 1987. Hauknes, J. Services in Innovation — Innovation in Services. SI4S Synthesis Paper. Oslo: STEP (Studies in Technology, Innovation and Economic Policy) Group, 1998. Hou, C. and San G. “National Systems Supporting Technical Advance in Industry: The Case of Taiwan”. In National Innovation Systems: A Comparative Analysis, edited by R. Nelson. New York and Oxford: Oxford University Press, 1993.

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Industrial Technology Research Institute (ITRI). Industrial Technology Information Services Project Report 1999. Taipei: ITRI, 1999. . Industrial Technology Information Services Project Report 2000. Taipei: ITRI, 2000. Institute for Information Industry (III). The Upgrading of Taiwan’s Information Strength. Final Report to the Council for Economic Development and Planning. Taipei: III, 2000. Jovanovic, B. and R. Rob. “The Growth and Diffusion of Knowledge”. Review of Economic Studies 56, no. 4 (1989): 569–82. Kawakami, M. Development of the Small- and Medium-Sized Manufacturers in Taiwan’s PC Industry. CIER Discussion Paper Series 9606. Taipei: Chung-Hua Institution for Economic Research, 1996. Kim, S. and N. Tunzelmann. Aligning Internal and External Networks: Taiwan’s Specialization in IT. Brighton: Science Policy Research Unit, University of Sussex, 1998. Kraemer, K.L., J. Dedrick, C.-Y. Hwang, T.-C. Tu, and C.-S. Yap. “Entrepreneurship, Flexibility, and Policy Coordination: Taiwan’s Computer Industry”. The Information Society 12 (1996): 215–49. Mathews, J. High-Technology Industrialization in East Asia: The Case of the Semiconductor Industry in Taiwan and Korea. Contemporary Economic Issues Series no. 4. Taipei: Chung-Hua Institution for Economic Research, 1995. Michalet, C. “Strategic Partnerships and the Changing Internationalization Process”. In Strategic Partnerships: States, Firms and International Competition, edited by L.K. Mytelka. London: Pinter, 1991. Organization for Economic Co-operation and Development (OECD). The Knowledge-Based Economy. Paris: OECD, 1996. . Is There a New Economy? First Report to the OECD Growth Project. Paris: OECD, 2000. Patel, Pari. “National Systems of Innovation under Strain: The Internationalization of Corporate R&D”. Paper presented at the Conference on Measurement of Industrial Technology Competitiveness in a Knowledge-Based Economy”, 23–24 August 2000, Taiwan Institute of Economic Research, Taipei. Piore, M. and C. Sable. The Second Industrial Divide. New York: Basic Books, 1984. Quinn, J.B. “Technology in Services: Past Myths and Future Challenges”. In Technology in Services: Policies for Growth, Trade and Employment, edited by B. Guile and J.B. Quinn. Washington, DC: National Academy Press, 1988. Rauch, J.E. “Networks versus Markets in International Trade”. Journal of International Economics 48 (1999): 7–35.

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Romer, P. “Increasing Returns and Long-Run Growth”. Journal of Political Economy 94, no. 5 (1986): 1002–1037. Saxenian, A. Regional Advantage. Cambridge, MA and London: Harvard University Press, 1994. Saxenian, A. “Transactional Entrepreneurs and Regional Industrialization: The Silicon Valley–Hsinchu Connection”. Paper presented at the Conference on Social Structure and Social Change: International Perspective on Business Firms and Economic Life, Academia Sinica, Taipei, Taiwan, 1997. Schumpeter, J.A. Capitalism, Socialism and Democracy. New York: Harper, 1942. Senker, J. and W. Faulkner. “Networks, Tacit Knowledge and Innovation”. Paper presented at the Second International Conference on Advances in Sociological and Economic Analysis of Technology, UMIST, Manchester, April 1993. Sigurdson, J. “The Internationalization of R&D — An Interpretation of Forces and Responses”. In Measuring the D ynamics of Technological Change, edited by J. Sigurdson. London: Pinter, 1990. Taiwan Statistical Data Book. Taipei: Council for Economic Planning and Development, 2000. Windrum, P. The MERIT Report on Innovation Networks in E-Commerce. Report prepared for the SEIN Work Package 4, EU TSER Programme, 1999. Wise, R. and P. Baumgartner. “Going Downstream: The New Profit Imperative in Manufacturing”. Harvard Business Review, September–October 1999, pp. 133– 41.

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Reproduced from Information Technology in Asia: New Development Paradigms edited by Chia Siow Y ue and Jamus Jerome Lim (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available from < http://www.iseas.edu.sg/pub.html >

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Recent evidence suggests that the rapid economic growth in the United States over the past five years and the accompanying sharp increase in productivity growth have been led by rapid advances in the information technology (IT) sector and the application of these technologies in other areas of the economy. The possibility of a “new economy” has sparked considerable interest not only in the United States but also in other fastgrowing advanced economies. A rise in productivity growth in these economies has been linked to computers and information technologies through three channels: • • •

direct productivity gains in industries that produce IT goods; capital deepening and the improvement of labour productivity because of investments in information technologies; spillover effects, such as increasing returns to scale due to network externalities, especially through increased connectivity brought about by the Internet.

The ASEAN economies experiencing fast growth have also been

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interested in harnessing IT to achieve similar increases in productivity growth. Many of these fast-growing economies have been interacting with India (particularly the Bangalore IT cluster) in the outsourcing of their software development, as well as sourcing expertise. 1. IT in India: Historical Development

Computerization in the country on a commercial scale began almost three decades ago. However, it was not till the mid-1980s that the government attempted to spell out an explicit policy. Recognition of the potential for growth, employment, and revenue-generation by the sector resulted in the provision of special incentives for the development of computer hardware and software. While the hardware industry in the country has not attracted much attention, it is the software sector that has been in the limelight. The rate of growth of the Indian software industry was ten times higher than the rate of growth of the gross national product (GNP) of the country between 1991 and 1996. During this period, the growth of the Indian software industry was nearly five times that of the global software industry and almost twice that of the U.S. software industry, though it started from a much smaller base. The software industry in the country is known today for its quality, timeliness, and the ability to handle and deliver the complex and sophisticated software requirements of its clients. There has been a marked shift in the general perception of the quality of goods and services sourced from India. Almost 70 per cent of software companies assessed at the SEI CMM1 Level 4 or 5 are based in the country. India is the preferred destination for global software outsourcing. In 1997/98, 158 of the FORTUNE 500 companies outsourced their software development to India. According to a World Bank study (Mitra 2001; World Bank 1996), in 1991 India’s share in the global cross-country customized software development market was around 12 per cent; it was estimated to have risen to almost 18 per cent by 1998. However, the country’s share in the products and packages market has been less than 1 per cent. As with any traditional industry, firms in the software sector vary in output and spatial dispersion. The top thirteen export-revenue earners

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accounted for more than half (51.51 per cent) of the total export revenues earned by all software exporters. Similarly, of the 450 major software 2 firms in the country, 95 per cent are located in just seven cities. 1.1. Bangalore: India’s IT Capital

In an era of blurring national boundaries and a seamless global economy, the ability of cities or nations to attract investments and industry is assuming increasing importance. Today, Bangalore has the largest 3 concentration of IT industries in India. Bangalore has undergone various transformations during the last five hundred years of its existence. From being the largest cantonment in southern India at the turn of the last century, it became the science and technology capital of India around the middle, with a strong base in aircraft, electronics, machine tools, and telecommunication industries. In the course of time, it became home to a number of specialized institutions of higher learning and research and development (R&D). Over this period of time, it also picked up a number of sobriquets that were indicative of its transformations: from a time when it was considered the retired persons’ and pensioners’ paradise, it came to be known as the Garden City, the Air-Conditioned City, the Electronics Capital of India, then the Silicon Valley of India and, lately, the City of the Future. This chapter aims to understand Bangalore’s success in its evolution as an IT cluster within India. The analyses will take an a priori look at the global competitiveness of the IT industry in India and then limit itself to the city level (specifically, Bangalore) within India. 1.2. Structural Change in the Indian IT Industry

The IT industry can be segmented in terms of first, hardware — both for domestic use and for export; second, software — both for domestic use and for export; and third, maintenance and others. Table 13.1 presents figures of the IT industry in India over the last decade. The turnover of India’s IT industry, which was valued at approximately US$1.09 billion in 1990/91, increased over five times during the decade; in 1997/98 it was estimated to be US$5.03 billion. In terms of segments, the hardware segment, which accounted for close

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Table 13.1 IT Industry in India (US$ million) 1990/91 Value Hardware Software Maintenance Others Grand total

%

1993/94 Value

1997/98

%

Value

%

CAGR (%)

541 243 93 210

49.8 22.4 8.6 19.3

583 560 117 233

39.0 37.5 7.8 14.9

1,445 2,700 221 663

28.7 53.6 4.4 13.2

18.9 41.6 13.9 19.2

1,087

100.0

1,493

100.0

5,029

100.0

26.7

CAGR = Compound annual growth rate. Source: NASSCOM (1999).

to 50 per cent in 1990/91, saw its share in total turnover decline to about 28 per cent in 1997/98. On the other hand, the software segment, which accounted for less than a quarter of the total IT industry turnover, had increased its share to almost 54 per cent in 1997/98. The progress of the IT industry has been synonymous with the progress of its software segment. Consequently, the emphasis of this study is on aspects which facilitated the quantum jump in the growth of the software segment of the IT industry. 1.3. Structural Changes in the Indian Software Industry

The software segment of the industry can be classified as follows: • • • •

type of activities — whether turnkey projects, professional services, consultancy and training, data processing, and so forth; type of services — on-site, off-site, or efforts in developing packages; type of software development — application software, communication software, and so forth; structure (in terms of size) — nature of applications (such as banking, insurance, manufacturing, and so forth).

To get an insight into the development of the software industry, one needs to analyse the growth pattern of the industry segment in terms of the above classifications. This is given below.

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Professional services and turnkey projects are the key software activities driving the export market while products and packages represent the key software activities of the domestic software market. In 1997/98, professional services and turnkey projects accounted for over 88 per cent of software exports; in the domestic market, products and packages accounted for over 57 per cent. In other words, products and packages play a dominant role in the domestic software segment, and an insignificant role in the export software segment. Despite a strong domestic software market, the products and packages segment has not become an important component of the export software market, as can be seen in Table 13.2. Indian software exports continue to retain a predominantly “on-site service” component (59 per cent). Offshore packages and services account for a 40 per cent share, as shown in Table 13.3. The weak presence in the offshore packages for exports is a key weakness of the software industry in India’s IT industry. The Indian software industry has specialized in the applications software category; its share increased from 59 per cent in 1994/95 to 64 per cent in 1997/98. While the shares of communications software, firmware, and software development activities have remained stationary, the share of consultancy activities has seen a marginal decline. This can be seen in Table 13.4. A high proportion of Indian software companies are engaged in developing software applications for the banking, manufacturing, communication, retail and distribution, and government sectors. Emerging areas of software applications development include hotels, insurance, and transportation. The proportion of companies engaged in developing software by nature of applications in presented in Table 13.5. India’s IT industry can be characterized thus: first, a softwaredominated IT industry; second, a predominantly on-site development services provider for the export market and a dominant products and packages developer for the domestic software segment; and third, more important as an application-oriented software developer than a major player in communications and consulting segments. Based on the above and the finding that the Indian software industry

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Table 13.2 Indian Software Industry by Type of Activity Domestic market (percentage of total)

Software activity Turnkey projects Professional services Products and packages Consultancy and training Data processing Others Total

1994/95

1996/97

1997/98

37.80

40.90

31.50 4.52 57.27 6.71

38.30 13.40 8.20 2.30

46.80 6.90 5.20 0.20

100.00

100.00

100.00

Export market (percentage of total) 1994/95

1996/97

49.00 11.00 25.00 9.00 6.00

46.70 11.10 27.40 11.00 3.80

100.00

100.00

1997/98 34.92 53.66 9.75 1.66

100.00

Source: NASSCOM (1999). Table 13.3 Indian Software Exports by Type of Services Rs. million Types of services

Share (%)

1996/97

1997/98

1996/97

1997/98

On-site services Offshore services Offshore packages

22,890 11,780 4,330

38,527 21,027 5,746*

58.7 30.2 11.1

59.0 32.2 8.8

Total

39,000

65,300

100.0

100.0

* Figure for products and packages. Source: NASSCOM (1999). Table 13.4 Indian Software Companies by Segment of Software Development (percentage share) Segment Applications software Communications software Firmware Software development* Consultancy bespoke development

1994/95

1996/97

1997/98

59 11 2 7 21

61 11 2 7 19

64 11 2 7 16

* Software development in 1996/97 is “systems software development”. Source: NASSCOM (1999).

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Table 13.5 Indian Software Companies by Software Development Application (percentage share) Application

1996/97

1997/98

Banking Insurance Defence Manufacturing Hotels Transport Retail and distribution Communication Government

78 57 25 72 56 65 73 64 68

82 55 38 70 56 65 73 78 70

Others

46

55

Source: NASSCOM (1999).

accounts for a share of less than 1 per cent in the global products and packages segment, and for over 18 per cent in the customized software development market, it is possible to infer several policy approaches. First, India can leverage its presence in the products and packages segment considerably through a build-up of expertise in the domestic market. Second, India needs to protect its market share in customized software development through an aggressive increase in share of off-site software development activities. Third, the emerging segment in the software industry involves “turnkey projects”, which need to be nurtured. 2. Why Bangalore?

Bangalore, which is the capital of the state of Karnataka in India, accounts for less than 0.1 per cent of the country’s area and about 0.5 per cent of the population. Yet it contributes more than 40 per cent of the country’s software exports. Newsweek magazine rated Bangalore as one of the top ten Tech Cities. It was also considered as one of the top ten hightechnology Hot Spots in a survey conducted by Business Week magazine. The German publication Die Zeit called Bangalore the City of the Future. Some of the factors that have enabled Bangalore to rise to the top among various cities in terms of attractiveness to investors and other stakeholders in software development are briefly explored below.

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It would be pertinent to mention here a few facts that point to Bangalore’s pre-eminence in the Indian software industry. First, Bangalore consistently produces new-technology ventures. Second, it has a large concentration of software companies. Third, Bangalore is the primary destination for IT firms. Fourth, firms in Bangalore display high levels of productivity. Last, the Technology Park in Bangalore accounts for almost half of all exports from technology parks nation-wide. These are addressed in turn. New ventures are established on a regular basis in Bangalore. The companies in Bangalore are at the forefront of IT and several core technology areas. Many multinational companies have applied for international patents. For instance, Texas Instruments, the first MNC in Bangalore, has already applied for 115 patents. Bangalore boasts of over 55,000 highly qualified professionals in the areas of integrated chip design, communications software, applications software, as well as other services. Bangalore is a leading city in terms of housing software companies, as shown in Tables 13.6 and 13.7. Moreover, Bangalore is also the main destination for IT start-ups. Table 13.6 Location of Software Companies in Major Urban Areas Number of companies City Mumbai Bangalore Delhi (Gurgaon and Noida) Hyderabad Chennai Calcutta Pune Others Total

1994/95

1996/97

1997/98

68 56 30 16 15 8 7 —

115 87 70 37 51 25 23 22

104 97 41 50 55 52 28 23

200*

430

450

— = No data available. * Excluding “Others”. Source: NASSCOM (1999).

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Table 13.7 Location of IT Firms in Major Urban Areas Urban area

Number of firms

% of total

Bangalore Mumbai Calcutta Delhi Hyderabad Madras Pune Others

205 172 28 187 75 169 28 61

22.2 18.6 3.2 20.2 8.1 18.3 3.2 6.6

Total

925

100.0

Source: Dataquest (1996), as reported in Srinivas (1998). Table 13.8 Start-Up of Firms by Location in India Year 1950–59 1960–69 1970–80 1981–85 1986–90 1991–96 Total

Bangalore Mumbai Calcutta Delhi Hyderabad Madras Pune Others Total

10 20 71 104

1 6 18 25 64 58

205

172

1 2 10 15

2 9 12 82 82

1 3 4 26 41

2 14 60 93

5 6 8 9

3 9 26 23

1 9 51 92 347 425

28

187

75

169

28

61

925

Source: Dataquest (1996), as reported in Srinivas (1998).

Srinivas’s (1998) survey of IT firms based in Bangalore finds that the majority of start-ups in Bangalore started their operations between 1991 and 1996 (Table 13.8). In terms of productivity (net value-added per employee), Bangalore firms score higher than firms located in Mumbai. Bangalore’s turnover per employee in 1996 was 30 per cent more than that of Mumbai and 16 per cent higher than the all-India average (Srinivas 1998). The Software Technology Park in Bangalore currently accounts for 40 to 50 per cent of the exports from technology parks nation-wide, and its performance has been consistent over a decade. Software Technology Parks of India (STPI), an autonomous organization, was

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Table 13.9 Exports from Bangalore Software Technology Park

Year

Exports from Bangalore STP units (Rs. million)

1991–92 1992–93 1993–94 1994–95 1995–96 1996–97 1997–98

56 206 900 2,000 4,800 9,800 20,000

Exports from Bangalore STP units as a % of all-India STPI units (% shares) 41% 46% 52% 48% 62% 53% 50%

STP = Software Technology Park. Source: Software Technology Parks of India (1998).

established by the Department of Electronics of the government of India for the purpose of providing a conducive environment to entrepreneurs operating under the Software Technology Park (STP) scheme. Under the scheme, entrepreneurs are eligible for benefits that include completely duty-free imports, the possibility of 100 per cent foreign equity ownership, exemption from the payment of income tax for a period of ten years, dedicated data communication links, the provision of single window clearance, and the provision of custom clearance and export certification at a single point. Of the many STP locations such as Trivandrum, Mumbai, Pune, Gandhinagar, Noida, Chandigarh, Calcutta, Bhubaneshwar, and Hyderabad, Bangalore STP alone accounts for over 50 per cent of exports of STPI (national), as shown in Table 13.9. Exports from Bangalore STP units have been growing at a compound annual growth rate (CAGR) of 166 per cent. 2.1. Urban Competitiveness Approach

Bangalore’s urban competitiveness in attracting both foreign and domestic IT industries has been a subject of recent research. Srinivas (1998) attempted to analyse why Bangalore is able to create and sustain its

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competitive advantage over other cities (such as Mumbai, Chennai, Hyderabad, and Delhi) or regions in the software industry. Competition in the context of urban areas is a complex issue unlike in the context of firms. Some of the hypotheses cited in the literature can be summed up as follows. First, cities are competitive if they are able to cope with the negative consequences of economic success such as exploding land prices, traffic congestion, environmental degradation, and social exclusion. Second, cities that have basic locational factors, such as efficient infrastructure systems, an adequate supply of strategic urban services (such as telecommunication and transport facilities), and a good business environment, can be considered competitive. Third, cities can be ranked based on empirically derived indicators of competitiveness related to growth of retail sales and manufacturing value added. Fourth, cities with factors facilitating urban functioning and favouring investment flows and employment-creation can be also be considered as competitive cities. Fifth, urban competitiveness as measured by economic (manufacturing value addition, income distribution, or urban amenities) and strategic (governance, institutional flexibility, or private/public sector cooperation) determinants can be used to identify competitive cities. Many of the above-mentioned approaches fail to explain Bangalore’s ability to attract investments in IT-related industries. For instance, Bangalore does not have basic infrastructural facilities, such as an efficient metro rail service or good-quality power supply (brownouts and blackouts are common). Bangalore has also not been successful in avoiding the negative consequences of economic success. Traffic congestion and environmental degradation are major concerns and constraints for the continued expansion of production activities. However, there are certain positive features which partially explain the success of Bangalore in attracting investments related to the IT industry. For instance, the Srinivas (1998) survey of IT firms in Bangalore reveals important city-related attributes, such as the availability of research institutes and laboratories, “liveability” (favourable physical climate and lower cost of living), and the availability of high-technology units that act as crucial factors in determining the locational choice of IT firms.

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Government-related factors, such as the level of government support, availability of a software technology park, and proximity to Electronics 4 City also turn out to be key factors in determining the competitiveness of Bangalore as an urban location. Although in the survey more than 50 per cent of the respondents concurred that the city has inadequate infrastructure, they were overwhelmingly positive that Bangalore would be able to sustain its competitiveness in the long run. 2.2. Competitiveness Analysis: Market Growth/Market Share Analysis

One can analyse a country’s export competitiveness with reference to its “dynamism” in world trade. While there are many ways of measuring dynamism, businesses increasingly use a matrix classifying a country’s exports according to world market share and market growth. The Economic Commission for Latin America and the Caribbean (ECLAC) has developed a methodology for this analysis and is using it to evaluate countries’ competitiveness. The matrix that follows gives an adaptation of this methodology to the Indian software industry. The analysis uses the position of a country’s exports in dynamic or stagnant product segments. An export that gains world market share in a dynamic product group, with an increasing share of total world exports, denotes a desirable competitive position (“rising star”). An export that is

Share of product in world trade

Rising

OPTIMAL

“rising stars”

WEAKNESS

Falling

Share of country’s export in world trade

Rising

“lost opportunity”

Falling VULNERABLE

“falling stars”

RESTRUCTURING

“retreat”

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losing market share in a dynamic product shows competitive weakness (“lost opportunity”). An export that is gaining market share in a stagnant or declining product group with lower growth than world trade, shows competitive strength in a vulnerable segment (“falling star”). Finally, an export in a stagnant product group that is also losing market share should undergo restructuring. One can analyse a country’s overall competitive position by examining the distribution of its exports over these categories. Within the Indian IT industry, as viewed from the above framework, software export products and packages represent a lost opportunity, while offshore exports and turnkey projects represent rising stars. On-site services-related software development might fit loosely into the falling stars category. 2.3. Framework of National Competitive Advantage

Unlike the urban competitiveness approach, which has theoretical roots in regional planning, the framework of national competitive advantage developed by Michael Porter (1990) can be advantageously employed to gauge the attractiveness or competitiveness of an industry segment. Porter argues that a nation’s competitiveness in any industry is dependent on good factor conditions, strong domestic rivals, aggressive home-based 5 suppliers, and demanding local customers, as shown in Figure 13.1. Porter suggests that the four constituents are self-reinforcing and constitute a system. His hypothesis is that weakness in any one determinant would constrain an industry’s advantage and upgrading. In the Indian context, demand factors and competition amongst firms are considered vital for the cluster to become viable (Venkatesan 1999). In the context of the Indian software industry, India cannot be said to have excellent domestic demand conditions, although export demand conditions are significant. Furthermore, India is not endowed adequately with related and supporting industries (such as hardware) or the factors required for the industry to succeed. In general, Indian firms do not compete in the manner envisaged in Porter’s diamond of the determinants of national competitive advantage. Krishna, Ojha, and Barrett (1998) modify Porter’s diamond by focusing on the type of activity predominant in the Indian software in-

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Figure 13.1 Determinants of National Competitive Advantage Firm stategy, Firm Strategy, structure, Structure and and rivalry Rivalry

Factor Factor conditions Conditions

Demand Demand conditions Conditions

Related and Related and suporting Supporting industries Industries Source: Porter (1990).

dustry in order to understand the software development system. It has been argued that the software industry is not bound by national boundaries, mainly due to true globalization. First, India has a predominant share of the world market in software, especially in the outsourced software and services segment, and this produces positive demand conditions. Second, they assert that the Indian software industry had demonstrated its competitive strength by transcending from a low-value vendor relationship at the client site to a high-value company site relationship in the 1990s — satisfying firm strategy requirements. Third, modern communications technology enables one to develop off-site production and service facilities effectively, which renders the agglomeration economies due to related and supporting industries. Last, the Indian society encourages people to adopt creative and intellectual pursuits and also provides the organizational environment that nurtures these skills (such as in the case of non-hierarchical organizations). This yields favourable factor conditions. Therefore, the “Software Development System Diamond” explains India’s, and thus Bangalore’s, success in the software industry. Bangalore was examined as the “microcosm of the macrocosm India”.

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Table 13.10 Comparison between Silicon Valley and Bangalore Silicon Valley, California

IT Cluster, Bangalore

Anchor companies

HP, Fairchild Semiconductor, Sun Microsystems, Cisco Systems

WIPRO, Infosys, Microland, i-Flex, TCS, Motorola, Texas Instruments

Research centres

XEROX, Palo Alto Research Centre

ISRO, NAL, LRDE, GTRE, CSIR, CAIR

University

Stanford

Indian Institute of Science, Indian Institute of Management, Indian Institute of Information Technology

Venture financing

Burr Egan Deleage & Co., Draper Fisher Jurvetson, Kleiner Perkins Caufield & Byers, Mayfield Fund, Softbank Venture CapitaI

CAN Bank, Draper Fisher Jurvetson, ICF Ventures, ICICI Ventures, IL&FS Ventures, Indus Ventures, KITVEN

ISRO = Indian Space Research Organization. NAL = National Aeronautical Laboratory. LRDE = Electronics and Radar Development Establishment. CSIR = Council of Scientific and Industrial Research. GTRE = Gas Trubine Research Establishment. CAIR = Centre for Artificial Intelligence and Robotics.

2.4. McKinsey-NASSCOM Approach

The third rudimentary approach is to compare Silicon Valley with Bangalore. The McKinsey-NASSCOM Report uses the framework of critical ingredients; namely, idea-generation, anchor companies, research centres, and universities to compare Bangalore and the Silicon Valley, California. Table 13.10 summarizes the comparison between Silicon Valley and Bangalore. The table clearly indicates the marked similarities between Silicon Valley and Bangalore. The presence of established anchor companies, prestigious research and academic institutions, coupled with the availability of venture financing, has attracted increasing numbers of IT companies to Bangalore. This, in conjunction with the city-related factors mentioned earlier, has led to the success of the IT cluster in Bangalore.

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3. Government Initiatives

Based on the Urban Competitiveness Approach, there are several government-related factors that could help Bangalore retain its competitiveness. These are discussed below. 3.1. Government-Related Factors

The government of Karnataka plans to encourage incubation centres, which are primarily private-sector initiatives. The government will also set up a few incubation centres that provide complete start-up facilities including computer systems and telecommunication links for a limited period of time. Entrepreneurs are expected to pay a reasonable rent for the premises and then move out, in a short period, to commercial space. Karnataka already has incubation centres provided by the private sector. The government of Karnataka and the STPI are planning incubation centres at Bangalore and Hubli. These centres will be set up in active consultation with the private sector so that the centres function effectively. 3.2. IT Corridor

The government of Karnataka has recently announced plans for the introduction of a special IT corridor in and around Bangalore. This corridor will be planned with the active assistance of, and in consultation with, reputed international agencies that have experience in IT parks. The aim of the corridor is to provide for parks of world-class quality. Exclusive parks for international companies or countries will be encouraged. The corridor will also be self-contained and have state-ofthe-art facilities — including schools of international standard, housing, water, electricity, as well as facilities for amusement and leisure activities. 3.3. Electronics City

Karnataka first established Electronics City in 1985. This city, spread over 330 acres, provides IT entrepreneurs with land, water, incubation centres, and excellent communication facilities. This has attracted corporations such as Infosys, which has headquarters located in Electronics City. The government has already planned Electronics City

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Phase II, which involves developing an additional 303 acres of land for IT entrepreneurs. 3.4. Export-Promotion Industrial Park

This is a 288-acre exclusive park for export-oriented industries. The park is situated near International Technology Parks Limited (ITPL) and has excellent facilities — water, electricity, and communications infrastructure. The General Electric Company has chosen to locate its India Technology Centre here. The centre is expected to employ over 700 top scientists in biotechnology. This project may fuel a reverse brain drain from foreign countries to Bangalore. 3.5. Software Technology Parks of India

This institution has played a pivotal role in the development of the IT industry in Karnataka. It was set up by the government of India (through the Ministry of Information Technology) with the objective of promot6 ing the export of Indian computer software. The STPI began with only thirteen companies in 1992 and as of the year 2000 services 396 worldclass companies that are involved in integrated circuit design/commu7 nication software. The STPI has already established earth stations in Manipal and Mysore. It will soon be establishing an earth station in Hubli. In addition, the STPI is planning an earth station in Mangalore where several IT companies, led by Infosys, have established software development centres. A private fibre carrier already has submarine cables running just 6 kilometres away from Mangalore, and the government is currently working with the Department of Telecommunication on a high-bandwidth connection that will be available at Mangalore. Other earth stations are being planned throughout Karnataka. 3.6. IT Backbone

All district headquarters in the state of Karnataka and also 140 out of 175 talukas8 have already been connected with a fibre optic network. The video-conferencing facility of the government of Karnataka is functioning on this network. The state has received a number of requests from the private sector to set up high-bandwidth networks, and has

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stated its commitment to make high bandwidth available to all its citizens. The government of Karnataka is also committed to complete lib9 eralization and simplification of the right-of-way procedures. 3.7. Bangalore Agenda Task Force

The government has constituted the Bangalore Agenda Task Force, which is headed by Mr Nandan Nilekani, the Managing Director of Infosys Technologies. This is one of the efforts of the government to actively involve the private sector in planning and providing infrastructure for its citizens. The Bangalore Agenda Task Force has already suggested several plans for establishing critical infrastructure for Bangalore, which is to be implemented in the short term and the medium term. The government has committed itself to honour and involve private initiatives to improve the infrastructure and standard of living of its citizens. 3.8. Bangalore International Airport

The state has already made available over 2,000 acres of government land for the location of an International Airport near Bangalore, and has appointed a special officer for this project. Thus far, seven bidders of international standing have shown interest. When the successful bidder has been chosen, the project will proceed as a joint venture between the government of Karnataka, the Airports Authority of India, and the bidder. In addition to the airport, a six-lane highway has also been planned. 3.9. Carnegie Centre for Software Engineering at Bangalore

The government of Karnataka, in a joint venture with Carnegie Global Technologies, the Indian Institute of Science (IIS), and LG Soft India has established the Carnegie Centre for Software Engineering at Bangalore. This centre is expected to offer services in consultancy, training, and education in the whole Asia-Pacific region. Karnataka’s suitability for this project is demonstrated by its success in the SEI CMM certification — WIPRO, in Karnataka, was the first recipient of Level 5 certification, and of the nineteen Level 5 companies world-wide, twelve are located in India, and eight in Bangalore.

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3.10. Anti-Piracy

The government of Karnataka believes in protecting the intellectual property rights of IT companies. The government has committed itself to encouraging the registration of more patents and to take steps against the piracy of patented products. The government will also constitute a high-level committee that will review serious piracy cases and initiate appropriate action. 3.11. Dot.Com Companies

Dot.com companies, together with the Internet, have been making B2B and B2C transactions more efficient. This has resulted in cheaper products for the poor and middle-class people. It has been estimated that dot.com companies and e-business has resulted in reducing inflation in the United States. Similarly, the government is also committed to encouraging e-business in the state of Karnataka. While encouraging private-sector initiatives in B2B and B2C, the government will also offer several public services like water bill payments, electricity bill payments, and property-tax collections to e-business companies. 3.12. Mahiti Bonds

The government of Karnataka proposes to allocate Rs3 billion by floating Mahithi bonds. The proceeds of the bonds will be utilized for human resource development, training schools, IT institutes, polytechnics, colleges, pharmaceutical and engineering colleges, training centres for uneducated youth, incubation centres, earth stations, IT parks, and communications infrastructure. The money will be used based on an action plan suggested by a high-powered IT task force. The government expects an enthusiastic response for the Karnataka Mahithi bonds from IT companies, IT professionals, companies involved in trade and industry, as well as the people of Karnataka. 4. Factors That Could Sustain Bangalore’s Competitiveness

City-related factors that will allow Bangalore to sustain its competitiveness are:

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Figure 13.2 The Software Development Diamond

Technology

Organizations

People

Communications Source: Krishna, Ojha, and Barrett (1998).

• • • • •

the availability of high-technology professionals; the availability of research institutes and laboratories; the existence of a major centre for high-technology production; a favourable physical climate throughout the year; cheaper costs of living than Mumbai/Delhi.

In the software industry, elements that together determine the developmental system, as conceived by Krishna, Ojha, and Barrett (1998), are shown in Figure 13.2. Since the onset of trade liberalization and the advent of Indian IT multinationals, such as Infosys, which are professionally managed (in contrast to earlier “paternalistic” family-owned businesses which thrived during the pre-reform period), the organizational aspects of the IT industry will see a major change. The “liveability” factor will ensure that Bangalore city sustains its attractiveness to skilled professionals. Although city-related and government-related factors are favourable towards sustaining competitiveness, one also needs to look at parallels in terms of driving forces elsewhere in successful clusters to confirm the sustainability of urban competitiveness. In terms of anchor companies, research centres, universities, and venture financing, there are many

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parallels between Silicon Valley and the IT cluster in Bangalore. The foreign direct investment (FDI) theory that has been formulated over time in response to the nature, pace, and direction of multinational firm investments overseas is inadequate to explain the behaviour of “knowledge firms”. The various streams of FDI theory can be classified into the following: • • •

microeconomics-based theories; macroeconomics-based theories; multi-disciplinary theories.

For microeconomics-based theories, the focus is either on competitive advantage overseas or on intra-industry rivalry among firms and the oligopolistic “follow-the-leader” behaviour. The macroeconomics-based theories focus on how differences in macroeconomic conditions (such as wages) or developmental stages of countries govern the pace and direction of FDI. Both approaches fail to explain the emergence of the IT cluster in Bangalore — wages in Bangalore for skilled workers more than doubled in the 1990s and “sweat equity” is an accepted norm. To cite wage differences to support the emergence of the IT cluster would be a naïve proposition, at best. Furthermore, since the “goods” produced by the IT cluster fall under the intangible knowledge goods category, the industrial organization (microeconomics)-based theories cannot adequately explain the emergence of the IT cluster in Bangalore. Finally, new theories that have emerged are multi-disciplinary in nature (such as the Krishna, Ohja, and Barrett study) and include insights from human geographers and other social scientists to explain the occurrence and sustainability of the IT cluster. Such an approach indicates that the “cultural clusters” that emerged initially in Bangalore have largely contributed to Bangalore earning the status of “hot-spot” (by “hot spot”, researchers refer to the ability of a city/state to train, retain, and attract new talents). Detailed interviews were conducted with various opinion-makers in Bangalore to understand how Bangalore has finally emerged as a “globalized city”. Some of the salient observations are summarized below:

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• • • • • • • • •

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a knowledge-driven industry thrives on linkages and Bangalore provides the necessary linkages with research institutions and academic bodies; the availability of a variety of skills at short notice; the physical climate and other “liveability” factors; the cosmopolitan culture of the city; sharing culture/team-building environment that is common to Karnataka; super speciality institutes such as Indian Institute of Science and the Indian Institute of Information Technology; a middle-class dominated “city-economy”; favourable initial starting conditions, such as a large pool of skilled personnel comprising second-generation manpower emerging from employees of public-sector units; the natural emergence of IT corridors in Bangalore.

The strategy of the Karnataka government is to evolve a “Silicon quadrangle” comprising Hubli, Mysore, Mangalore, and Bangalore. Hubli, which has an abundant supply of low-skilled labour, would grow into the IT-enabled services segment, providing services such as legal medical transcription services. Mysore is likely to evolve to become a high-value niche area providing products such as embedded software, while Mangalore, the commercial centre of Karnataka, is likely to be a catalyst for e-commerce-related activities. Such a strategy on the part of the government and the IT industry is conducive to balanced regional development that will enable Bangalore to retain its status of Silicon City without disruptions due to adverse social fall-outs of increased prosperity in one city or region. Finally, certain factors contribute to reinforcing the IT cluster. The emergence of Indian multinationals that cater to the managerial as well as emotional needs of skilled workers through a relatively flat organizational structure reduces worker turnover in the IT sector. Furthermore, the entrepreneurial drive from graduates of specialized technological institutes in starting new ventures is essential in promoting continued innovation in the IT sector. While no single theory explains the phenomenon, various approaches yield insights that are crucial towards increasing our understanding of the process.

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5. Concluding Remarks

Recent evidence of productivity growth in advanced economies can be attributed to advances in the IT industry; and the race for strategic alliances to pluck productivity growth has catapulted Bangalore’s status considerably. What determines Bangalore’s competitiveness has been briefly analysed in this chapter. Differences in the software products that countries trade in are determined by the productivity of the inputs used in the productive process. The classical trade theories that explain how competitiveness comes about — theories of absolute advantage and comparative advantage, which concentrate on absolute and relative skilled labour efficiency — do not explain the success of the Bangalore cluster where compensation packages of skilled labour have risen considerably to match international levels. The neo-classical theories of international trade, which look at factor intensities, also does not adequately explain the emergence of the Bangalore cluster, as factor intensities cannot be very different in Bangalore vis-à-vis other metropolitan areas in India. A more recent approach to explain why some cities are more successful than others in the development of clusters (Porter 1990), even when factors are against them, also does not adequately explain Bangalore’s competitiveness. Out of the four major determinants of competitiveness identified by Porter, two link factors — demand conditions (inadequate domestic demand for software) and firm structure and strategy (firms do not compete in the traditional sense) — do not hold in Bangalore. Only recently has the state government initiated policies to increase the role of IT in the state economy and address issues related to the digital divide in the state context. This has led to four possible explanations that can be broadly grouped under the following approaches: • • • •

alternatives to neo-classical trade theories; alternatives to Porter’s model — the Software Diamond; international comparisons with similar successful clusters; an urban economics-based approach.

The availability of a variety of skilled labour inputs, dynamic economies of scale, and technical progress in Bangalore city, endowed with research

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institutions and a significant middle-class population, can be a partial explanation for the emergence of the Bangalore IT cluster as an alternative to the neo-classical trade theory. Porter’s national competitiveness model fails in the context of knowledge-based industries where offshore production is possible. The development of new communications technologies that allow the offshore development of software and the emergence of professional and flatter organizations in the postliberalization scenario partly explain Bangalore’s success. A modification of Porter’s model into the Software Diamond — incorporating societal, communication, technical, and organizational factors — is useful in gaining an understanding of the development of the Bangalore IT cluster. The fact that there are marked similarities between Silicon Valley and Bangalore (the existence of anchor companies, research/academic institutions, and venture-financing companies) also provides insights. The transformations of Bangalore over a period of time and the accompanying “liveability” factors (congenial climate, moderate cost of living, and so on) may be the catalytic factors, according to urban economists. NOTES The authors of the Bangalore study would like to acknowledge the input provided by Ms Swaroopa T.K., Officer on Special Duty, IT Department, Government of Karnataka, and the research assistance provided by Ms Anjali Tandon of the National Council of Applied Economic Research (NCAER). 1. The Software Engineering Institute Capability Maturity Model (SEI CMM) is a model for judging the maturity of software processes in an organization. It rates organizations according to five levels of maturity, with Level 1 being the initial stage where processes remain ad hoc and Level 5 being the optimizing stage. For a detailed overview of the SEI CMM, see Paulk, Curtis, Chrissis, and Weber (1993). 2. Appendix Table A13.1 provides detailed statistics for the IT industry in India over the 1990–98 period. 3. Bangalore has a disproportionate share of the IT software industries in India. Appendix Table A13.2 summarizes Bangalore’s share of India’s software industry. 4. Electronics City is an industrial park spread over 330 acres exclusively meant for electronics industries. See the preceding discussion in the text for a fuller explanation. 5. Krishna, Ojha, and Barrett (1998) explore this issue in detail in the Indian context.

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6. The STPI is now an autonomous body. 7. Earth stations, also known as global gateways, are sub-centres of the main STPI, and provide similar services on a cost-effective basis. For example, the Manipal gateway is 30 per cent cheaper than the then Bangalore STPI. 8. Talukas are “blocks” within districts, one level below the district and two below the state. 9. Right-of-way procedures involve the issuance of permission for the laying of optical fibre cables along highways and roads belonging to the state. REFERENCES Dataquest (Cyber Media India, New Delhi), August 1996. Dataquest (Cyber Media India, New Delhi), 31 May 1999. Krishna, S., A.K. Ojha, and M. Barrett. “Competitive Advantage in the Software Industry: An Analysis of the Indian Experience”. Paper presented at the IFIP 9.4 5th International Working Conference, Thailand, 18–20 February 1998. Mitra, R. “Software Development in India”. Mimeographed. Washington, DC: World Bank, 2001. National Association of Software and Service Companies (NASSCOM). The Software Industry in India — A Strategic Review. New Delhi: NASSCOM, 1999. Paulk, M.C., B. Curtis, M.B. Chrissis, and C.V. Weber. “Capability Maturity Model, Version 1.1”. IEEE Software 10, no. 4 (July 1993): 18–27. Porter, M. The Competitive Advantage of Nations. New York, NY: Free Press, 1990. Software Technology Parks of India (STPI). “Exports from Bangalore STP”. Bangalore: STPI, 1998. Srinivas, S. The Information Technology (IT) Industry in Bangalore: A Case of U rban Competitiveness in India. Working Paper series. London: Development Planning Unit, University College London, 1998. Venkatesan, R. Rural Industrialization and Poverty Alleviation. Bangkok, Thailand: Economic and Social Commission for Asia and the Pacific, 1999. World Bank. India — Country Economic Memorandum. Report no. 15882. Washington, DC: World Bank, August 1996.

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Appendix Table A13.1 IT Industry in India 1990/91

1991/92

1992/93

1993/94

1994/95

1995/96

1996/97

1997/98

CAGR

In million U.S. dollars Hardware Domestic Export Total

436 105 541

423 111 534

370 52 422

490 93 583

590 177 767

1,037 35 1,072

1,050 286 1,336

1,244 201 1,445

19.8% 11.0% 18.9%

Software Domestic Export Total

115 128 243

140 164 304

163 225 388

230 330 560

350 485 835

490 734 1,124

670 1,085 1,755

950 1,750 2,700

36.8% 45.8% 41.6%

Maintenance Others

93 210

99 228

90 207

117 233

142 297

155 435

182 534

221 663

13.9% 19.2%

1,087

1,165

1,107

1,493

2,041

2,886

3,850

5,029

26.7%

Hardware Domestic Export Total

8,500 2,050 10,550

9,680 2,530 12,210

12,080 550 12,630

14,800 2,800 17,600

18,300 5,500 23,800

35,600 1,200 36,800

37,800 10,300 50,100

46,040 7,430 53,470

30.1% 25.5% 29.8%

Software Domestic Export Total

2,250 2,500 4,750

3,200 4,300 7,500

4,900 6,750 11,650

6,950 10,200 17,150

10,700 15,350 26,050

16,700 25,200 41,900

24,100 39,000 63,100

35,100 65,300 100,400

48.9% 57.6% 54.0%

Maintenance Others

1,800 4,100

2,260 5,230

2,700 6,200

3,500 7,000

4,400 9,200

5,320 14,900

6,560 17,240

8,240 24,510

24.3% 29.0%

21,200

27,200

33,180

45,250

63,450

98,920

137,000

186,620

37.8%

Grand total In million rupees

Grand total

CAGR = Compound annual growth rate. Sources: Updated from NASSCOM (1999, p. 194) and Dataquest, 31 May 1999, p. 68.

Appendix Table A13.2 Bangalore’s Share in India

Bangalore

India

Share of Bangalore (%)

Area (million hectares) Population (million; 1991 census) Per capita income (Rs.) City domestic product (Rs. billion) GDP of India (Rs. billion)

0.22 4.17 20,811 110 —

328.8 846.3 10,771 — 10,082

0.07 0.49 — — —

Software exports from STPI (Rs. billion)

46

115

40

STPI = Software Technology Parks of India. — = No data available. Sources: Government of Karnataka, Department of Planning; STPI (1998).

© 2002 Institute of Southeast Asian Studies, Singapore

Reproduced from Information Technology in Asia: New Development Paradigms edited by Chia Siow Y ue and Jamus Jerome Lim (Singapore: Institute of Southeast Asian Studies, 2002). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. 321 Index Individual articles are available from < http://www.iseas.edu.sg/pub.html >

A ACNielsen NetWatch 122 Advanced Info Services System Company (AIS) 204 ASEAN Economic Ministers Meeting (AEMM) 69 ASEAN Free Trade Area (AFTA) 9, 68, 107, 173 ASEAN Information Infrastructure (AII) 9, 133, 166, 167 ASEAN Investment Area (AIA) 9, 162, 173 ASEAN School Network 133 ASEAN-10 basic statistics on social and economic variables 165 ASEANWorld master portal 133 Asia and Pacific Centre for Transfer of Technology (APCTT) 169 Asia-Pacific Economic Co-operation (APEC) 107 Asian financial crisis 18, 44, 69 B Bangalore Agenda Task Force 312 Bangalore versus Silicon Valley 309 Berne Convention 230 borderless marketing 18, 135 build-to-forecast 275

build-to-order 275 build-transfer-operate (BTO) 204, 212 businesses-academia-government interaction 179 C cable subscription 122 Carnegie Centre for Software Engineering at Bangal 312 cellular phone penetration 63 cellular subscribers 125 Centre for International Co-operation in Computerization (CICC) 169 changing of mindset 81 China Internet Network Information Centre 127 City of the Future 297 Civil Service Computerization Programme (CSCP) 155 Communications Authority of Thailand (CAT) 10, 135, 202, 219 communications infrastructure 117 communications network sectors 49 Computer Crime Act 11 Concept Request for Proposals (CRFP) 183 configuration-to-order 275 consumer electronics 53, 55

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copyright protection 7, 142, 183, 229, 230, 235 cross-country harmonization 141 customization to suit preferences versus standardization 138 cyber laws 13, 140, 160, 179, 180, 183, 185 CyberCare 192 Cyberjaya 179, 185, 186, 187 Cyberport 181 D Data Protection Act 11 DeLong’s Law 144 demand-supply human resource gap 99 Department of Post and Telegraph (DPT) 203 deregulation of the communications infrastructure 65 diffusion of innovations 16 digital convergence 49 digital divide 3, 4, 6, 9, 11, 17, 23, 28, 31, 33, 43, 70, 72, 139, 166, 170, 171, 188, 191, 192, 217, 233, 243, 247 digital signatures 13, 183 E E*Trade 136 e-ASEAN Framework Agreement 9, 17, 133, 164 e-ASEAN initiative 70 e-ASEAN, potential benefits of 168 e-ASEAN project 12 e-ASEAN Task Force 12, 70, 132, 133, 140, 142, 164 e-cheques 129 e-commerce 4, 7, 10, 12, 73, 74, 112, 116, 118, 123, 131, 132, 135, 136, 137, 138, 140, 141, 142, 156, 160, 167, 169, 185, 188, 205, 208, 209, 217, 218, 219, 222, 223, 225, 229, 231, 257, 260, 316 E-Commerce Act 135 e-commerce code 13 e-commerce matrix 114 e-commerce readiness 28, 31, 33

e-filing 159 e-fulfilment 141 e-government 6, 135 e-Government Action Plan 159 e-procurement 113, 139, 143, 187, 188 e-readiness 5, 65 e-services 187 e-Thailand 10 eCitizen Centre 134 eCitizen website (Singapore) 142, 159 Economic Commission for Latin America and the Caribbean (ECLAC) 306 Economic Creativity Index (ECI) 174 Economic Development Board (EDB) 155 Economic Planning Unit (EPU) 189 electronic data interchange (EDI) 9, 39, 112, 113, 136, 155 electronic infrastructure 84, 85, 105 electronic payment 141, 142 electronic transactions 112, 132 Electronics Transactions Act 11 Export-Promotion Industrial Park (India) 311 F flagship applications 9, 18, 180, 181, 182, 184, 187, 188, 190, 192 flexible specialization thesis 281 Forrester Research 113, 130 Framework for Global Electronic Commerce 219, 221, 222 G GATS modes of supply of services 227 GeBIZ website 134 General Agreement on Tariffs and Trade (GATT) 225 General Agreement on Trade in Services (GATS) 216, 225 general-purpose technologies (GPT) 1, 16 GINet 209 global information infrastructure (GII) 163, 167, 169 global organizational networks 150, 152

© 2002 Institute of Southeast Asian Studies, Singapore

Index global production networks 37 global supply chain 143 globalization 23, 38, 80, 177 GO-ASP Partner Programme (Go-APP) 161 Government Information Network (GINet) 10, 207 Government Information System Plan (GISP), 135, 145. See also Philippine Government Online Greenspan, Alan 22 gross national product and personal computers 104 Group of Eight (G-8) 240, 264 H harmonization of e-commerce-related commercial law 8 high-speed data flows 66 high-tech exports of ASEAN-5 103 high-tech human capital indicators 93 high-technology exports 101 home PC ownership 60 households in Asia with cable 126 human capital endowment 99, 105, 106 human development index (HDI) 245, 268 I ICT, impact on social development 3, 79 ICT industry development and diffusion 48 ICT infrastructure in economic development 6, 76, 248 ICT market-place 133 ICT penetration indicators 62 ICT physical infrastructure 81 ICT production and diffusion 51, 64 ICT revolution 51 ICT skilled manpower 81 ICT21 Masterplan 134 Indian software companies 300, 301 Indian software exports 301 Indian software industry 298, 301, 302 India’s IT industry 299 info-structure 10, 81, 178, 181, 185, 187

323

info-structure indicators 185 Infocomm 21 (Singapore) 84, 157, 159, 161, 181 Infocomm Development Authority (IDA) 157 infomediaries 136 Information Age 180 information appliances (IAs) 279 information content sectors 49 information economy 51 information infrastructure 18, 27, 39 information revolution 150 Information Society Index (ISI) 17, 157 Information Technology Agreement (ITA) 170 informatization of society 4 informatization sector 49, 241, 242 Infrastructure for Electronic Identification (IEI) 156 Inland Revenue Authority of Singapore (IRAS) 159 innovation-generating investment 85 institutional framework 258 instrument of democratization 80 integrated global organizational networks 148, 150 Integrated Land Use (ILUS) 155 integrated services digital network (ISDN) 155 integrating related technologies 147 intellectual property laws 183 intellectual property rights 3, 8, 79, 184, 229 “Intelligent” Island Vision 153 International Advisory Panel (IAP) 183 International Data Corporation (IDC) 111 Internet bandwidth 258, 259 Internet Corporation for Assigned Names and Number (ICANN) 3, 231, 237 Internet dial-up accounts 124 Internet domain hosts registered, number of 63 Internet hosts 121 Internet penetration in ASEAN-5 87, 95 Internet readiness 28, 31, 33

© 2002 Institute of Southeast Asian Studies, Singapore

Index

324

Internet service providers (ISPs) 10, 219 investment incentives for R&D 65 IT adoption 25, 36, 37, 44, 93 IT and economic performance 22, 26, 85 IT and productivity 28 IT and telecommunication indicators 98 IT as productivity tool 39 IT capacity-building 84, 99 IT capital 45 IT hub, formal 173 IT industry in India 299, 319 IT infrastructure 105, 106, 107, 154 IT investment 25, 45 IT investment, factors driving 27 IT investment, returns of 45 IT investment and economic performance 27 IT literacy 85 IT and economic performance 23 IT test-bed, regional 173 IT use, level of 35 IT-led innovations 24 IT2000 Masterplan 133, 156 IT2000 report 156 IT21 Plan 145 J just-in-time system 278 K Knowledge Workers Exchange (KWX) 189 knowledge workers, or k-workers 188, 193 knowledge-based economy 6, 14, 159, 178, 188, 189, 193, 239, 241, 255, 262, 264, 269, 270, 272, 273, 289 knowledge-based industries 51 knowledge-driven economy 177 L legal and regulatory framework 81, 263 Local Enterprise e-Commerce Programme (Singapore) 161 Local Industry Upgrading Programme (LIUP) 156

M McKinsey report 18 Mesdaq 190, 194 Metcalfe’s Law 112, 144 Ministry of Communication and Information Technology (MCIT) 160 Ministry of Transport and Communication (MOTC) 203 multi-factor productivity growth 24 multimedia applications 183, 184 multimedia development applications 181 Multimedia Development Corporation (MDC) 10, 179 multimedia environment applications 181 Multimedia Super Corridor (MSC) 9, 10, 18, 84, 106, 135, 144, 178, 179, 180, 185, 186, 192, 193, 244 multiplier effect 42 Mutual Recognition Agreements (MRA) 133 N National Computer Board (Singapore) 153, 156 National Computerization Plan (Singapore) 153 National Electronics and Computer Technology Centre (NECTEC) 10, 201, 207, 213 National Information Infrastructure (NII) 18, 856 National Information Technology Committee (Thailand) 237 National Information Technology Council (Malaysia) 191 National IT Plan (Singapore) 155 National Science and Technology Development Agency (Thailand) 202, 213 network effects 24, 31 network externalities 3, 16, 23, 24, 162, 173, 174 Network for Electronic Transfers (NETS) 129

© 2002 Institute of Southeast Asian Studies, Singapore

Index network infrastructures 51 new economy 22, 24, 43, 72 nimbleness to adapt 147 non-tariff barriers 66 Nua Internet Surveys 111, 119, 123 Nusantara 21 (Indonesia) 18 O official development assistance (ODA) 264 One-Stop Change of Address Reporting Services (OSCARS) 155 openness to foreign talent 65 optimized distribution model (ODM) 275 Organization for Economic Cooperation and Development (OECD) 112, 202, 223 original design manufacturing (ODM) 18 original equipment manufacturing (OEM) 18, 278 original idea manufacturing (OIM) 18 own brand manufacturing (OBM) 18 P patents 103, 231, 232, 236, 290 PC penetration 87, 96, 107, 140, 142 PC penetration and GNP per capita in ASEAN 97, 105 Philippine Government Online 135. See also Government Information System Plan (GISP) primary school enrolment in ASEAN 89 production close to use 4, 41, 44 productivity paradox 3, 16, 23, 24, 26, 42, 43, 149, 174 public Internet kiosks 140, 143 Putrajaya 179, 185 R R&D expenditure and manpower in Singapore 163 regional network nodes 152 regional payments mechanism 133 regional trade network 133 Roach, Steven 25

325

S Sacher Report 113, 130, 140 School Links 155 SchoolNet (Thailand) 10, 207, 209 Schumpeter 99 science and technology infrastructure 107 Science Hub (Singapore) 162 scientists and engineers in R&D in ASEAN-5 94, 107 secondary school enrolment in ASEAN 90 Secure Electronic Transaction (SET) 127, 144, 167 Secure Socket Layer (SSL) Survey 119, 122 semiconductor wafer-fabrication 55 Seoul Declaration on the Asia-Pacific Information 163 Silicon Valley of India 297 Singapore Civil Service Computerization Programme (CSCP) 175 Singapore IT Hub 151 Singapore ONE (One Network for Everyone) network 133, 156, 158, 181 Singapore’s IT strategy 153 social and political impacts of ICT 71 Software Development Diamond 13, 308, 315, 318 Software Park (Thailand) 10, 200, 207, 209, 212 Software Technology Park (India) 303, 304 Solow, Robert 25 South East Asia Regional Computer Confederation (SEARCC) 169 T Taiwan Semiconductor Manufacturing Company (TSMC) 283 taxation, destination-based 223 taxation, origin-based 223 technological progress, exogenous 2 technology, impact on economic growth 2 technology, impact on productivity growth 3

© 2002 Institute of Southeast Asian Studies, Singapore

Index

326

Technology Park in Bangalore 302 technology standards 23 technology transfer 65 Technopreneurship 21 (T21) 162 Technopreneurship Investment Fund (TIF) 162 techonological progress, endogenous 2 TelecomAsia Corporation PCL (TA) 204 telehealth 187, 188 telemedicine 135, 183 telephone connection density 122 Telephone Organization of Thailand (TOT) 10, 202 tertiary education enrolment in ASEAN, 91 Thai Dot.Com 209 Thai Telephone and Telecommunications Private Company Limited (TT&T) 204 Thailand Development Research Institute (TDRI) 202 “The Net Imperative” 111 time-to-market 39 Total Access Communications Public Company (TAC) 204 Trade-Related Intellectual Property Rights (TRIPS) 230 trademarks 235 trans-border transactions 141 turnkey projects 301

U UNCITRAL E-Commerce Model Law 8, 133 United Nations Commission on International Trade Law (UNCITRAL) 132, 210, 229 United Nations Conference on Trade and Development (UNCTAD) 223 United Nations Development Program (UNDP) 189 United Nations Economics and Social Commission for Asia and the Pacific (UNESCAP) 169 Universal Service Program (USP) 72 V Verdoorn law 108 Vietnam Posts and Telecommunications (VNPT) 135 W WIPO Copyright Treaty 235 World Competitiveness Report 157 World Economic Forum (WEF) 171 World Intellectual Property Organization (WIPO) Copyright Treaty 230 World Trade Organization (WTO) 107, 170, 200, 222 World Wide Web Consortium (W3C) 3

© 2002 Institute of Southeast Asian Studies, Singapore