EXECUTIVE SUMMARY

Introduction

Electronic commerce has the potential to radically alter some economic activities and the surrounding social environment.

Electronic commerce over the Internet is a new way of conducting business. Though only three years old, it has the potential to radi-cally alter economic activities and the social environment. Already, it affects such large sectors as communications, finance and retail trade (altogether, about 30 per cent of GDP). It holds promise in areas such as education, health and government (about 20 per cent of GDP). The largest effects may be associated not with many of the impacts that command the most attention (e.g. customised products, the elimination of middlemen) but with less visible, but potentially

more pervasive, effects on routine business activities (e.g. ordering office supplies, paying bills, and estimating demand).

 

It emerged in the wake of regulatory reform and various technological innovations...

A combination of regulatory reform and technological innovation enabled e-commerce to evolve as it has. Although the precursor of the Internet appeared in the late 1960s, Internet e-commerce took off with the arrival of the World Wide Web and browsers in the early 1990s and the liberalisation of the telecommunications sector and innovations that greatly expanded the volume and capacity of com-munications (optic fibre, digital subscriber line technologies, satellites).

The effect on the marketplace...

Electronic commerce transforms the marketplace. E-commerce will change the way business is conducted: traditional intermediary functions will be replaced, new products and markets will be developed, new and far closer relationships will be created between business and consumers. It will change the organisation of work: new channels of knowledge diffusion and human interactivity in the workplace will be opened, more flexibility and adaptability will be needed, and workers’ functions and skills will be redefined.

 

... the impact on interactivity...

E-commerce over the Internet vastly increases interactivity in the economy. These linkages now extend down to small businesses and households and reach out to the world at large. Access will shift away from relatively interact expensive personal computers to cheap and easy-to-use TVs and telephones to devices yet to be invented. People will increasingly have the ability to communicate and transact business anywhere, anytime. This will have a profound impact, not the least of which will be the erosion of economic and geographic boundaries.

 

... and openness...

Openness is an underlying technical and philosophical tenet of the expansion of electronic commerce. The widespread adoption of the Internet as a plat-form for business is due to its non-proprietary standards and open nature as well as to the huge industry that has evolved to support it. And also, expectation of openness is building on the part of consumers/citizens, which will cause transformations, for better (e.g. increased transparency, competition) or for worse (e.g. potential invasion of privacy), in the economy and society.

 

... and the relative importance of time are fundamental to understanding the economic and social impact of electronic commerce.

Electronic commerce alters the relative importance of time. Many of the routines that help define the "look and feel" of the economy and society are a function of time: mass production is the fastest way of producing at the lowest cost; one’s community tends to be geo-graphically determined because time is a determinant of proximity. E-commerce is reducing the importance of time by speeding up production cycles, allowing firms to operate in close co-ordination and enabling consumers to conduct transactions around the clock.

Changes brought about by e-commerce require new frameworks for conducting business and a re-examination of government policies relating to commerce.

The force that drive e-commerce will require a re-examination of the framework for conducting business and a questioning both of the efficacy of government policies pertaining to commerce and of traditional commercial practices and procedures, most of which were formed with a much different image of commerce in mind. Beyond these narrower considerations, electronic commerce is seen by many as having important implications for consumer protection, tax collection and trade and competition policies. These changes have helped to elevate electronic commerce to a high position on many

 

Given the embryonic state of electronic commerce, policies should be crafted with care and with due recognition of its fragile and evolving nature.

At present, electronic commerce over the Internet is relatively small (some $26 billion) but is growing very rapidly and may approach a trillion dollars by 2003-05. Clearly, electronic commerce is in an embryonic stage, and technology and market dynamics are still casting its basic shape. This is especially true for the business-to-consumer segment, where concerns about security of payment, potentially fraudulent merchants, privacy of personal data, and diffi-culty and expense in accessing e-commerce merchants affect its growth potential. While the appeal of convenience and mass customisation may promote business-to-consumer e-commerce, its success is not assured. l ectronic commerce sales compared to various benchmarks

The business-to-consumer segment is potentially very important...

... but further examination of business-to-business e-commerce is warranted, given that it dominates overall e-commerce activity.

The near-term (2001/02) and future (2003/05) growth of e-commerce is much more likely to be determined by the business-to-business segment, which currently accounts for at least 80 per cent of total e-commerce activity. Three factors will contribute:

 

Countries will dismantle barriers to global electronic commerce at different speeds...

... and this may raise competitive concerns and pose possible risks to the efficient development of global electronic commerce.

The United States accounts for about 80 per cent of the global total of electronic commerce. While its share will probably decrease, it does not face some of the constraints that confront Europe and Asia, such as high cost and the lack of sufficient bandwidth and the slow pace of planned liberalisation of the telecommunications sector.

 

Electronically delivered products in particular require a re-evaluation of existing rules and practices.

E-commerce’s most significant impact will be on sectors that primarily transmit information (postal service, communications, radio and TV) and those that produce it (finance, entertainment, travel agents or stock brokers). Electronically delivered products such as soft-ware, travel services, entertainment and finance are leading prod-ucts in both the business-to-business and business-to-consumer markets. Because of the intangible nature of such products, existing rules and practices will have to be re-examined.

 

It is the impact on costs ranging from...

A key reason why electronic commerce, especially the business-to-business segment, is growing so quickly is its significant impact on business costs and productivity.

 

... the cost of owning and operating a physical establishment...

Even though some Web sites cost hundreds of millions of dollars, simpler sites can be designed and constructed for tens of thousands. In general, it is less expensive to maintain a cyber-storefront than a physical one because it is always "open", has a global market, and has fewer variable costs. For exclusively e-commerce merchants who maintain one "store" instead of many, duplicate inventory costs are eliminated.

 

... to carrying an inventory...

... to conducting a sale...

A key factor in reducing inventory costs is adopting a "just-in-time" inventory system and improving the ability to forecast demand more accurately. Both of these can be accomplished through the adoption of electronic commerce, which strengthens the links between firms.

 

... to placing an order...

By placing the necessary information online in an accessible format, electronic commerce merchants greatly increase the efficiency of the sales process. This can improve the productivity of sales people by a factor of ten (although in some cases it simply shifts the costs to consumers).

 

... to customer support and after-sales service...

The electronic interface allows e-commerce merchants to check that an order is internally consistent and that the order, receipt, and invoice match.

 

... to simple purchase orders and...

Through electronic commerce, firms are able to move much of this support online so that customers can access databases or "smart" manuals directly; this significantly cuts costs while generally improving the quality of service.

 

... product distribution that is expected to fuel strong growth in the business-to-business segment of e-commerce.

Internet-based e-commerce procedures now make it possible to apply EDI-type systems to relatively small purchases, thereby dras-tically reducing errors, ensuring compliance with organisational norms, and speeding the process. Although shipping costs can increase the cost of many products pur-chased via electronic commerce and add substantially to the final price, distribution costs are significantly reduced electronically delivered products such as financial services, software, and travel .

 

E-commerce has the potential to be the application that ushers in large productivity gains that prove the worth of ICTs.

E-commerce over the Internet exploits a group of technologies information and communication technologies (ICTs), software that links ICTs into a network regardless of the brand of hardware or soft-ware, and relatively easy to use, universal, graph-ical interface and browsers with an application with broad appeal, commerce.

However, as this segment of e-commerce grows and firms integrate their operations ore closely, policy issues arise concerning security and potential anti-competitive effects.

Achieving these gains is contingent on a number of factors, including access to e-commerce systems and the requisite skills. However, what is unique about e-commerce over the Internet and the effi-ciency gains it promises is the premium placed on openness. Another source of efficiency associated with e-commerce is the opportunity for "boundary crossing" as new entrants, business models, and changes in technology erode the barriers that used to separate one industry from another. More generally, e-commerce highlights differences and similarities that may exist between products and industries, and suggests the need for a consistent regulatory environment.

E-commerce is unlikely to eliminate intermediaries, although their role is likely to change.

While e-commerce can dramatically reduce some production costs, it does not really offer a "friction-free" environment. Rather, owing to new costs associated with establishing trust and reducing the risks inherent in this type of activity, it requires new intermediaries.

 

To date, e-commerce has not caused widespread price reductions, but lower costs associated with e-commerce should lead to lower prices as competition is felt, especially in services.

The translation of cost reductions into price reductions is not auto-matic. It is contingent on sufficient competition. Currently, price reductions attributable to e-commerce have only been evident in a few sectors However, the lower costs asso-ciated with e-commerce should lead to greater product, market and international competition, especially in services, and thus to greater price competition.

However, various factors might have a negative impact on competition in electronic markets.

Even if the growth of markets for services on electronic networks is increasing competition, it is not clear that there is a direct relation between the adoption of open links and open market structures.

Electronic commerce will change the structure, if not the level, of pricing...

... and this will affect the ability to measure accurately changes in prices and inflation.

It is clear that electronic commerce will change the structure, if not the level, of pricing, as more and more products are subject to the differential pricing associated with customised products, fine market segmentation and auctions, and as the ease of changing prices increases. Changes in the structure of price setting will affect the ability to measure changes in prices and inflation accurately.

 

E-commerce favours flatter organisational forms and a flexible work force.

E-commerce encourages streamlined business processes, flatter organisational hierarchies, continuous training, and inter-firm collab oration.

 

E-commerce entails new ways of competing in domestic and international markets.

The Internet opens up certain proprietary relationships, extends relations between sectors, makes the electronic market accessible to smaller businesses and allows them to address international markets. The nature of competition as well as firms’ strategies and com-petitive advantages in domestic and international markets also change.

Smaller companies can benefit disproportionately from the opportunities offered by information technologies and electronic commerce.

Smaller firms may in fact benefit from the opportunities offered by electronic commerce as they are unencumbered by existing relationships with traditional retail outlets or a large sales force. They may adopt a business model that forces larger, established competitors to restructure their existing relationships or be seen as non-competitive.

 

Indirect, long-term employment effects due to demand for new or existing products are likely to offset shorter-term adjustments, although effects are likely to differ across countries.

There is concern that some of the efficiencies associated with electronic commerce will result in widespread dislocation of jobs. It seems more likely that, in the short term, there may be net employment creation as firms experiment with both modes of commerce, that, in the medium term, there may be some losses, especially in certain sectors, but that, in the longer term, the combination of new products, extended market reach, and income gains and lower prices derived from productivity increases will lead to net employment gains as increased sales of software, online services, audio-visual, music, publishing and yet-to-be invented products off-set losses due to displacement of other products. e 3. I T j obs unf ill ed owing to skil l shortages

E-commerce is likely to accelerate upskilling/multi-skilling trends…

What is clearer is the fact that electronic commerce will cause changes in the mix of skills required, driving demand for information technology (IT) professionals. For electronic commerce, IT expertise also needs to be coupled with strong business applications skills, and therefore requires a flexible, multi-skilled work force. Apart from contingent skills needed to support electronic commerce transactions and applications, there will be a more structural and long-term shift in the skills required to perform economic activities on line.

 

These skill requirements place new demands on schools and vocational training facilities.

These skill requirements place new demands on schools and vocational training facilities. Becoming computer-literate can be a significant additional cost, one which is likely to vary as a function of age and educational background. A system of education that familiarises young students with the technology of the Internet can greatly reduce skills acquisition costs and decrease differences in participation rates in electronic commerce in the various segments of a society’s population.

 

Changes in the labour force caused by e-commerce underscore the need for flexible labour markets and active labour policies that help workers adjust.

These changes in the labour force caused by e-commerce underscore the need for flexible labour markets and active labour policies that help workers adjust to changes in these markets. This will be particularly important for those service sector jobs, such as those in retailing, that have not yet been exposed to significant technological change or international competition.

Societal factors merit policy attention in order to establish the social conditions that will allow electronic commerce to reach its full economic potential and to ensure that its benefits are realised by society as a whole.

Although primarily an economic phenomenon, electronic commerce is part of a broader process of social change, characterised by the globalisation of markets, the shift towards an economy based on knowledge and information, and the growing prominence of all forms of technology in everyday life.

re 2. Computer penetration rates, by household income, in Australia, and The correlation between income and access to the Internet means that policies to ensure access for lower income groups may be needed.

Internet penetration rates show a similar pattern. As a consequence, households with higher incomes have more opportunity to benefit from electronic commerce than those with lower incomes. While this phenomenon is common to the introduction of most new technologies (e.g. electricity, telephone, TV), it may warrant the attention of policy makers since e-commerce could provide access to a market with special properties, such as lower prices, that could particularly benefit the disadvantaged.

 

More generally, it is necessary to better understand the impact of faster and more interlinked exchanges on individuals, organisations,governments and communities.

Whereas technological development is taking place at an astounding and accelerating speed, reaching understanding and consensus, especially on social issues, is typically time-consuming. The nature of the Internet forces a reconsideration of the most effective way to govern and of whether centralised decision making can keep up with the speed and fluidity of the Internet. Another option may be to considered such that points to the need to develop a deeper understanding of the impact of faster and more interlinked exchanges on individuals, organisations, governments and communities.

 

A fuller understanding of what is needed to foster confidence in electronic markets, particularly among consumers,must be sought.

One of the hallmarks of electronic commerce is that, by drastically reducing transaction and search costs, it reduces the distance between buyer and seller, enabling businesses to target very small niches, develop individual customer profiles, and essentially provide a means of marketing on a one-to-one basis. Both the public and private sectors need a fuller understanding of the requirements for fostering confidence in electronic markets, particularly among consumers.

 

The focus of technology policy should be broadened to give greater attention to consumer goods and services and systemic objectives.

One of the key features of electronic commerce is the potential system-wide gains in efficiency to be reaped when firms are linked across industries. Fostering such system-wide improvements requires rethinking technology and innovation policies, such as technology diffusion programmes, which tend to focus on one industry, such as manufacturing, while in fact the largest contributions to system-wide gains may come from services, such as wholesale trade, transportation and retail trade.

 

E-commerce will generate pressures to reduce differences in regulatory standards for newly tradable products.

Issues of how to accommodate products bought and sold by electronic commerce in existing trade rules are being analysed at the WTO. E-commerce will increase international trade, particularly in electronically delivered products, many of which are services which have not yet been exposed to significant international trade but have been "traded" through foreign direct investment or have operated on a global level only for large corporate clients.

 

Competition policy will have to address new types of anti-competitive practices.

As the ease of forming business networks increases, as traditional market boundaries blur, and as technology undermines the rationale for the monopoly privileges granted to many service activities,competition policy will have to address new types of anticompetitive practices. Many e-commerce products benefit from non-rivalry (one person’s consumption does not limit or reduce the value of the product to other consumers), network externalities (each additional user of a product increases its value to other users), and increasing returns to scale (unit costs decrease as sales increase).

 

Current policies pertaining to commercial transactions should be looked at in terms of

their applicability to electronic commerce.

Electronic commerce raises many issues regarding the application of existing regulations and issues such as tax law, commercial codes and consumer protection which have received a lot of attention. In addition to these regulations to function e-commerce properly, cheap and easy access to information and communication technologies is needed; conditions that increase their cost will slow the diffusion of e-commerce and place industries that use information technologies at a disadvantage.

 

 

 

 

 

 

Figure 1 . Growth i n I nternet host computers a nd ma jor e-commerce dev el opments