Contents

1. Introduction

2. Defining Electronic Commerce

3. Growth of Electronic Commerce: Reality and Potential

4. The Impact of Electronic Commerce on the Efficiency of the Economy

5. The Impact of Electronic Commerce on Firms= Business Models, Sectoral

Organization, and Market Structure

6. Electronic Commerce, Jobs and Skills

7. Societal Implications of Electronic Commerce

8. Ottawa Conference Agreements and Future Work

Introduction

Globalization is a term that fits perfectly the information and communication services industry, an industry that has grown by leaps and bounds during the past two decades through significant technological breakthroughs and outstanding contributions to production and productivity levels throughout the world economy. National economies will rapidly become integrated into the global "information economy" in which the information-intensiveness of most goods and services will increase and in which the development of electronic commerce will be a key element. Electronic transactions, and perhaps also electronic money and electronic cash, will also become a feature of the daily lives of the citizens of the "information society".

The literature that has been generated on the subject has been prolific, with speeches, articles and books predicting everything from a virtual revolution to a gradual evolution. There is one organization, however, where this most vibrant and most influential sector of the economy is being studied for the purpose of making it more competitive and more universally enjoyed. It is the OECD, the Organization for Economic Cooperation and Development and its Directorate for Science Technology and Industry (DSTI) which through its committees provides a forum in which national policies can be analyzed, discussed and compared and thus be made more effective, a forum for consultations aimed at improved convergence or compatibility of national policies, and a location where analytical work and quantitative indicators are developed. The relevant committee and its working groups are comprised of senior government officials and experts from OECD member countries; the Committee is called the Committee for Information, Computer and Communications Policy (ICCP), and its four subsidiary bodies are the Working Party on Telecommunications and Information Services Policies, the Working Party on the Information Economy, the Working Party on Information Security and Privacy, and the Working Party on the Indicators for the Information Society. Other areas of the OECD conducting research on electronic commerce are the Directorate for Food, Agriculture and Fisheries, and the Directorate for Education, Employment, Labor and Social Affairs. The former recently prepared a report on the growing use of the Internet in the trading of agricultural commodities entitled "Private Sector Mechanisms for Dealing with Price Variability: Opportunities and Issues." This report, which forms part of its work on the reform of agricultural policies and its implications for markets, discussed the rapid growth of virtual exchanges for physical commodities (spot markets), and for agricultural futures and options. A number of policy implications of this development are identified, including regulatory issues and it is proposed that further work be undertaken on these. The latter is planning work on the implications for education, particularly the role and quality of educational software on the schooling of the future.

In addition to the aforementioned work, the OECD has also organized conferences that have helped considerably in enhancing international cooperation in the electronic commerce field. One conference, entitled ADismantling the Barriers to Global Electronic Commerce@ took place on November 19-21, 1997 in the city of Turku, Finland and was hosted by the Government of Finland in cooperation with the European Commission. The conference drew together government and private sector policy makers who took stock of the issues and of recent steps to resolve them and discussed the policy principles on which actions may be taken to remove barriers and promote the fruitful development of electronic commerce. A second conference, entitled AA Borderless World--Realizing the Potential of Global Electronic Commerce,@ took place in October 1998 in Ottawa, Canada. This high level symposium, which ministers from many countries attended, was the venue where consensus on definitions and principles for the operation and use of global information networks for electronic commerce were further considered. Many background papers were prepared by the OECD for this ministerial conference, the most important ones of which are summarized below in separate sections, giving the reader a feel for the wide range of subjects that are of concern to individuals, businesses, and governments worldwide.

Defining Electronic Commerce

One of the chapters of the background document prepared by the OECD for the Ministerial Conference explores electronic commerce definitions by a variety of sources. Some definitions include financial and commercial transactions that take place electronically such as electronic data intercharge (EDI), electronic funds transfers (EFT), and all activity relating to credit and debit cards; such transactions have been in use for decades and are measured in the trillions of dollars a day. Other definitions limit electronic commerce to retail sales to consumers for which the transaction and payment take place on open networks such as the internet; such transactions have existed for about four years and are only recently being measured.

The OECD study takes a middle-of-the-road position, concerned only with activity that generates value within a company and with suppliers and customers, and occurring over open, non-proprietary networks. It is these type of networks that are key to understanding the phenomenal popularity of electronic commerce. Earlier forms of electronic commerce such as EDI or EFT required pre-existing relationships, dedicated communication links, and expensive and complex equipment, the main users being large businesses and their first-tier suppliers. Although these forms will continue to exist, recent emphasis on electronic commerce is due to the internet=s open, non-proprietary protocol, to the development of the World Wide Web (WWW) which uses a standard coding system (hypertext markup language - HTML), and to the development and diffusion of browsers that provide a standard interface for accessing WWW sites. Furthermore, these technologies are able to use existing communications systems with minimal new investment while telephone systems, computer systems, and cable TV systems are being interconnected thanks to widespread regulatory reform, increased competition and intensive innovation.

The study also suggests that future work would clearly benefit from adoption of a definition that would provide consistency in the collection of data and the performing of research. Business, labor and consumer representatives should be consulted in developing such a definition and because there are bound to be differences of opinion, a flexible definition based on a core concept which can be expanded later to include other aspects of electronic commerce may be the most practical approach.

Electronic commerce activity is estimated at $26 billion in 1997 from practically nothing in 1995. It is predicted to reach very roughly $330 billion in 2001-02 and $1 trillion in 2003-05. The United States generates about four-fifths of worldwide electronic commerce, with Western Europe about 10 percent and Asia 5 percent. In Europe, the United Kingdom and the Nordic countries are the current leaders.

Business to business electronic commerce dominates total value of electronic commerce activity, accounting for about 80 percent of the total. Electronic links between businesses are not new, having existed for decades in the form of electronic data interchange supplied by value-added networks (VANs), with some of the largest players being firms involved in supplying the infrastructure for the Internet.

Three factors are likely to contribute to the fast increase that is expected in the business to business electronic commerce activity: a) a reduction in transaction costs and improvement of quality customer service; b) a defensive reaction to competitors engaging in electronic commerce; and c) insistence by large businesses that all of their suppliers link to their electronic commerce system as a condition of doing business. In addition, small and medium-sized enterprises (SMEs) will be increasingly entering the electronic commerce market as many barriers such as problems of security and reliability will be overcome in the next few years.

In the business to consumer sector of electronic commerce the largest segment involves intangible products that can be delivered directly to the consumer=s computer over the network. It is composed of five broad categories: entertainment, on-line games, on-line gambling, music and video; travel services particularly airline reservations; newspapers and magazines; financial services such as banking and stock brokerage; and e-mail. In the tangible products category, the main items sold electronically are electronics such as computers, books, music CDs, flowers, clothing, food, and drink.

Factors that could influence the growth of business to consumer electronic commerce differ significantly from those of business to business. Consumers have repeatedly expressed concern about security of payment, potentially fraudulent merchants, and privacy of personal data. Also the difficulty and expense of accessing merchants due to the cost and complexity of the PC, which is currently the primary access devise, could be a deterrent to a broader adoption of electronic commerce. However, once a simpler access device is provided, the main drivers of business to consumer electronic commerce appear to be convenience, choice, personalization, amusement, and savings.

The future of electronic commerce will obviously depend on general economic conditions prevailing around the world during the next several years, but the strongest impact will be felt in the business to business segment where growth will be significant rather than the business to consumer segment where growth is likely to be modest and sector-specific. But despite the dominance of the business to business segment, most research and most available data focus on the business to consumer area; it is therefore apparent that future research should rectify this imbalance by concentrating on the economic and social impacts of the dominant sector.

Estimates suggest that the United States generates a preponderance of total world-wide electronic commerce activity; the cause of this imbalance and its likely duration is another area that deserves more scrutiny. Further research, especially improved measurement, is also needed in leading electronic products, such as software, travel services, entertainment, and finance because of the potential policy implications; in addition, statistics that measure the level, growth and composition of electronic commerce are necessary to focus the policy debate.

Since electronic commerce is still in its early stages of development there have been innumerable discussions predicting that information and communication technologies (ICTs) might lead to economies in which transaction costs are nearly zero, with producers selling directly to consumers over computer networks. Of course, such thinking is based on speculation and anecdotal evidence and since ICTs mostly affect transaction costs, this section analyzes such costs both internally and between firms.

The impact of electronic commerce on a company=s internal and transaction costs falls into three broad categories: the cost of executing the sale, (involving physical establishment, order placement or execution, customer support and after-sales service, and staffing); costs associated with the process of production inputs (relating to the absence of the need to carry a large inventory); and costs associated with making and delivering the product (especially for digital products such as financial services, software and travel).

Just as electronic commerce reduces the internal costs of many transactions, it also impacts a company=s relationships with other businesses, the so-called value-added chain, as the product travels from raw materials to final sale. Specifically, it impacts the costs of services provided by third-party agents or brokers, known as intermediaries, by displacing them, hence the term Adisintermediation.@

This OECD paper also analyzes the impact of electronic commerce on prices, stating that the translation of lower costs into lower prices is not automatic. Among the many reasons for the lack of significant price discounts due to electronic commerce is the embryonic state of business to consumer commerce and the fact that on-line merchants add value in the form of convenience. Also merchants are unwilling to undercut their traditional distribution channels even though their on-line costs are lower. Ultimately, the impact of electronic commerce on prices will depend on competition as the ability to search thousands of electronic commerce stores in a few minutes or through an intelligent software agent improves and as the expected growth of electronic commerce generates more entrants.

The policy implications of the effect of information and communications technology could be so dramatic that a lot more work is needed to assess impact on productivity and to explore the notion that it could lead to a sustained higher level of economic efficiency. What is also needed is continuing monitoring of the restructuring of intermediary functions, since although electronic commerce could significantly reduce production costs in some areas, widespread disintermediation -- producers selling directly to consumers without the help of wholesalers or retailers -- seems unlikely.

Future research would also be helpful in the area of cost to price transition. Sectoral studies on a variety of consumer and business products should be undertaken to measure the impact of electronic commerce and identify factors that encourage or discourage price competition. And although the level of pricing is important, it is clear that electronic commerce will change the structure of pricing as more and more products become subject to differential pricing associated with customized products and market segmentation. Consequently work is needed to understand how these charges may affect the structure of price setting, the frequency of price changes, and price measurement.

Models, Sectoral Organization, and Market Structure

New business strategies and processes have been developing during the past several years as the result of the adoption of information and communications technology. Although electronic commerce is still in its infancy, its adoption, together with new networking capabilities, are allowing firms to communicate, transact and collaborate with greater ease, flexibility, and at greater depth than ever before. The costs related to these activities can be lowered, creating a more fluid production process and leading to changes in the organization structure of firms.

Various new structures are analyzed in this paper such as cyber-traders (operations that do not have a significant physical presence and operate exclusively in cyberspace) and virtual firms (a commercial collaboration among firms and individuals in an electronic environment in which entry and exit from the structure is flexible and determined on an as-needed basis). The paper also examines the microeconomic link between business models and organizational change by addressing issues such as the role of early adopters in enforcing new business process, and the impact of electronic commerce on disintermediation and on the emergence of new players.

Competition is once again touched upon and the question put forward is whether or not a direct relationship exists between the adoption of electronic links and open market structures. The answer seems to be that electronic networks as a market place might help create dominant long term positions with the following factors favoring such a development:

a) Innovation: The first aim of players entering a new market is to select innovative products by segmenting the market to suit them and by helping to define ground rules.

b) Network externabilities: The first player to enter an electronic network benefits from positive network externabilities on a global scale and can acquire an edge in terms not only of reputation but also of price advantage.

c) Barriers: Players on the network can extend their market and globalize their offerings because of the absence of geographic and time barriers that were common in traditional markets.

d) Niche markets: This factor relates to the development of niche markets in intangible products with a high information content. The greater the information content of a product (financial services, books) the easier it is to buy and sell through a network.

This chapter of the OECD background papers focuses on the potential impact of electronic commerce on jobs and skills. At this stage of electronic commerce development, its impact is very small but in the longer run its effect might be significant. Also job gains and losses may differ by industry, by geographic area, and by skill group.

To assess the impact of electronic commerce a wide range of heterogeneous industries are analyzed. The distribution sector is directly affected since electronic commerce is a way of supplying and delivering goods and services. Other industries indirectly affected by upstream and downstream linkages to electronic commerce activities are those related to ICTs (the infrastructure that enables electronic commerce), content related industries (information related goods and services, entertainment, software and digital products), and transaction related industries (financial services, the postal sector, advertising, travel, and transport).

Another section of this chapter reviews the literature on the economy-wide impact of the growth of electronic commerce-related industries on employment. Most of these studies are based on macroeconomic modeling simulations of different scenarios or on static input-output modeling. They rely on different and often strong assumptions, but by taking a representative sample in terms of sectors analyzed and methodology used, some conclusions are drawn on the potential aggregate effects of electronic commerce on employment.

Another section deals with electronic commerce and the skills mix. Electronic commerce is driving demand for information technology professionals but it also requires such expertise to be coupled with strong application skills, thereby generating demand for a flexible, multi-skilled work force. Consequently electronic commerce seems to be accelerating the upskilling trend of low-skilled clerks, cashiers or market salespersons. How effective this retraining is and also how realistic it is for low-skilled workers to find jobs in other growth sectors is also examined.

Future OECD research on the interrelationship of employment and electronic commerce is suggested in the following areas:

a) The direct employment impact of electronic commerce will depend on complementarity, substitution and market-size effects. Research is also needed to identify activities that have replaced existing ones, analyze their revenue growth compared with that of the sector as a whole, and identify those whose emergence has led to a readjustment of market shares and those whose effect has been to enlarge the market. Given the crucial role played by demand, demand trends for these new activities should be monitored and policy makers should be made aware of the factors underlying country-specific differences.

b) Case studies are needed to better understand impacts on sectoral employment. In particular, as the employment potential of electronic commerce is not the same across countries, the differences among countries in the production of Web-related hardware and software content, which seems to be driving employment gains, should be explored. Also, the impact on employment in the distribution sector, which will depend on differences in the sector=s regulatory and organizational structure across countries, should be investigated.

c) Research on country-specific differences in the size and growth potential of electronic transactions, as well as on countries= differences in on-line organizational models, is essential in order to evaluate the long-term impact on employment.

d) Work to identify specific skill needs for electronic commerce and opportunities for worker requalification is needed. Policies to cope with skill mismatches will have to be reinforced as the volume of electronic transactions increases.

The economic ramifications of electronic commerce are evident in a great many ways, but electronic commerce also forms part of a broader social environment characterized by the globalization of markets, the shift towards an economy based on information, and the growing importance of technology in everyday life.

Social relationships at many levels can be significantly affected by electronic commerce and its growing importance in economic life, according to this section of the OECD report. The full range of social impacts and their net effect cannot be measured precisely but there is no doubt that computers and information technologies have begun to make meaningful contributions to strengthening the social infrastructure through improvements in education, health, and the concept of community.

The speed with which information technology is transforming the economy and society makes it difficult to determine with absolute confidence the full range of social impacts and the net balance of social benefits and costs. A question for further investigation is whether the Internet and electronic commerce will contribute to existing distribution inequalities, whether it is essentially neutral or can help mitigate more general social inequalities. Since gaining access to the network is key for participating in the AInformation Society@, work should be conducted that analyzes what factors help and hinder access to the Internet such as cost, language and skills and whether these factors can explain differences observed across countries.

Work is also needed to better understand the economics associated with the use and protection of private information, and the means to evaluate the costs and benefits of various proposals to protect and expose private information. This might include firm and industry-level benefits, and related costs of assuring the confidentiality and integrity of personal data; the relative impacts of firm-based, sectoral-based and economy-wide standards for safe guarding personal information; and the effects on trade and investment of divergent levels of privacy protection across economies and jurisdictions.

Further research is needed to determine the net impact of electronic commerce on working and leisure time and its broader effects on the economy and society. In particular, it is important to know whether reduced leisure time retards or spurs the demand for new information-based products and services, and under what conditions. Furthermore, the speed implicit in electronic commerce should be evaluated in light of the capability of existing governing institutions to keep pace and in light of the potential volatility it may introduce into economic markets.

In order to maintain the momentum and preserve the coordination that was launched in Ottawa, the Secretary-General of the OECD pledged to convene a working-level meeting in approximately one year=s time to assess the progress made be the OECD or other public and private organizations on the issues discussed at the conference and on the newly proposed research program.