Electronic commerce: The Economic Significance of Electronic Commerce
Electronic commerce: The Role of the WTO
Electronic commerce: The Role of Electronic Commerce in the Modern World Economy
Three factors contribute to the significance of electronic commerce to the world economy today: the rapid growthof the Internet, its ability to facilitate cross-border trade, and its ability to reduce transaction costs.
Although it became publicly accessible only with the inception of theWorld Wide Web in 1990, the Internet now has more than 1 billion users. In the early years of the World Wide Web, usage almost doubled from year to year, and it continues to grow. The benefit of conducting business online increases exponentially with the number of connections.
The Internet facilitates production and distribution across borders so that, for example, consumers in one country can respond to an advertisement published in another country for a product that was developed using a design teamcollaborating (using the Internet) in five other countries. Electronic commerce increases the range of services that can be traded internationally (e.g., medical, legal, educational, and gambling services) and can assist in opening markets that were previously closed. The dramatic increases in both online retail sales and advertising revenues are themost visible evidence of a much broader growth in electronic commerce in the global economy.
Electronic commerce has the potential to generate benefits beyond those of trade liberalization on its own. Benefits for suppliers and vendors include reduced transaction costs, reduced barriers to market entry, more rapid product innovations, and economies of scale. One source of reduced transaction costs is the possibility to dispense with traditional intermediaries (for example, in relation to the travel industry). In many cases, electronic commerce dispenses with the need for physical presence at the point of sale or for the provision of services, which candrastically reduce expenses relating to premises or personnel. Benefits for consumers include increased market transparency and reduced search costs, even if they make the final purchase in person. These benefits are particularly noticeable for consumers in smallermarkets,whomay not have enjoyed the same level of price and quality competition as consumers in larger markets. Challenges to increased consumer use of electronic commerce include concerns about information privacy and fraud, which have not been completely resolved. Governments also benefit from electronic commerce because it reduces the cost of providing services to their citizens, while offering greater transparency and accountability.
These three factors have certainly altered the conditions in many preexisting markets for goods and services, but two markets are particularly useful in demonstrating these factors. First, consumer-toconsumer commercial transactions, facilitated by accessible online financial services, community, and auction sites, now have the potential to operate on a global, cross-border level. It is difficult to draw a bright line between consumer-to-consumer and business-to-consumer transactions, as the removal of many barriers to entry have allowed some consumers to play a role that was once available only to established global players. This reveals one reason for the exponential benefit of growth in the Internet’s user base: unlike previous communications technologies, which facilitated one-to-one or one-to-many marketing and sales, Internet-based e-commerce allows a many-to-many business paradigm to become practicable.
Second, the market for digital products and services (those that can be supplied to the purchaser electronically) is arguably the most substantially affected by the growth of electronic commerce. Once they are provided in a digital format, goods such as music, movies, and software have negligible production costs for additional units and equally negligible delivery costs. Over the Internet, their delivery time is limited primarily by bandwidth and connection speed rather than distance or the speed of physical transport. Services that can nowbe provided digitally across borders are increasingly being outsourced to take advantage of cheaper labor markets. This phenomenon, called business process outsourcing, began in its modern incarnation with the outsourcing of software development to India. India remains the market leader in business process outsourcing exports today and has moved into many other areas such as sales and customer service call centers aswell as intrabusiness services for example, information technology support and human resources. Other developing countries, such as Brazil and China, have also experienced strong growth in this area. As the uptake and speed of Internet connections increase, the sale of digital products and services is likely to have a substantial impact on the world economy, not only in its own right, but also due to its disruptive effects on related ‘‘offline’’ industries.
Conversely, many factors militate against electronic commerce completely replacing traditional nonelectronic business models. Thus, despite its growth, the uptake of electronic commerce was slower thanmany expected. Asmentioned earlier, the security of online payment and information transfer remains a primary concern. The market for digital products is especially affected by the lack of costeffective micropayment methods (i.e., for low-value transactions). Additionally, due in part to the threat of fraud, or possibly more for sociological than economic reasons, many consumers and businesses prefer physical presence over electronic transactions, especially to conduct a physical inspection of goods before purchase. This has led to the perception that online retailers ‘‘freeload’’ off retailers with physical stock and showrooms, as customers can investigate the product in person in a retail store and then purchase it froman online store at a reduced price. Some manufacturers and suppliers refuse to sell to online retailers in order to protect their existing showroombased retail outlets. Furthermore, although the growth of the Internet has been substantial,many use the Internet for recreational and communication purposes rather than commercial ones, and a majority of theworld’spopulation is stillwithout regular Internet access.
Nevertheless, as electronic commerce matures and develops, it will undoubtedly play an increasingly important role in the world economy.Many of the impediments that it is presently facing are technological in nature, and given the speed atwhich new developments occur in information technology, it is only a matter of time before many of them are overcome.