Reading report week 2 : Batbayar Peljee (M1)
The internet is taking over the world, all things are becoming digitalized and of course it is very good for people, for making complex procedures easier and using much less human workforce than ever before. Digital technologies are growing faster and faster day by day, this report is 2016 report, so I assume so much things have changed after this report. In this part of Chapter 1, authors discussed about how digital technologies can be divergent and how firms using digital technologies and how can it affect the firms.
Chapter 1 / Accelerating Growth
Digital technologies can lead firms and countries to diverge
Divergence—with benefits short of expectations
Firms’ use of digital technologies differs substantially across sectors and countries, and this divergence in the intensity of internet use in the same sector is confirmed by more detailed survey data in African countries in 2014. For example, the share of manufacturing and service firms’ internet using ranged from 22% in Tanzania to 73% in Kenya. Divergence was comparably large for manufacturing or service firms that sell goods online or use internet for marketing. Retail firms’ selling products online varies substantially across Latin America countries with a similar GDP per capita. For example, In Bolivia 52% of all firms in retail sector sold their products online in 2010, whereas it was only 14% in Peru, 27% in Panama, but 62% in Argentina. I think online product sale has grown all over the world now, in 2020. In Europe, the share of firms that use connected customer relationship management (CRM) platforms to facilitate sales, customer support etc. varies substantially across sectors and countries. In Australia, 60% of retail and wholesale firms use integrated CRM systems, but only 28% do in the UK, 20% in Poland, 12% in Croatia. These findings are consistent with previous studies showing that digital technologies diffuse much more slowly within developing countries than previous major technologies (for example, electricity or steam engine). The lack of internet usage in developing countries contributes to cross-country divergence in incomes. But why are the differences so large? There are two reasons.
- Physical barriers to internet use are fairly small for most firms in Urban area.
- Affordability of the internet across the countries
¾ of all retail firms in Panama do not conduct e-commerce. It might be related to regulatory barrier protecting domestic retailers because foreign firms are not allowed to operate in Panama’s retail sector. Market power-scale and monopoly effects can lead to anticompetitive behavior and thus effects bad results.
Entry cost for new entrants or switching costs for consumers is important. When the transaction costs close to zero, customers will choose most innovative firms which has the best search algorithm or online platform. Thus, entrepreneurs applying superior business models will be able to enter and disrupt the existing firm. However, network effects or anticompetitive behavior can create barriers for startups. For instance, Google has been accused of using its dominant position in the market for online display advertising to curb competition and push companies toward its other services. The room for anticompetitive behavior varies among digital products and services.
Firms using digital technologies need to invest in skills and reorganization
The successful use of technologies depends on firms’ complementary investment in skills and organization restructuring. There is even evidence that investing in ICTs without business process reorganization can reduce firms’ productivity growth. There were so many examples for this part. In the U.S. firms invest substantially more in training and development (skills), explaining why the impact of digital technologies on firm productivity is higher for U.S. firms.
So, just using digital technologies is not enough for company’s growth. In this pandemic, number of people who are working from home increasing, which makes it difficult to communicate and educate certain skills in person, especially for new workers. I think companies are struggling with reorganizing remote work system and raising effectivity of workers.
Countries need to invest in skills and logistics to enable firms to use ICT more effectively
Countries need to invest in payment systems, trade transportation and delivering infrastructure. Online retailers in some countries still struggle to deliver their parcels to domestic customers. In 38 countries in 2012, and 27 of them in Africa. Online payment services are available to firms in many countries but not in most African and Central Asian countries. Also, credit card was one problem. Less than 10% of the world population in developing countries had a credit card in 2012. Online payment system accounts, such as PayPal, MercadoPago, and PayU, are alternatives. But I think credit card users number increased dramatically all over the world now in 2020, as well as people using the alternative payment system has increased.
Countries need policies to encourage competition
The market leaders have little incentive to invest in technologies new to the firm since they do not face competitive pressures to reduce their costs, and because they can’t cover cost gap the laggard firms use vintage old technologies and focus on local market. There are so many examples of good influences of competition. For example, competition from China has induced the adoption of new technologies and ICTs in OECD countries, accounting for 15% of their technology investment between 2000 to 2007, and contributing to their productivity. However, in low- income countries start-ups seem to face barriers to more intensive internet use, which the oldest firms tend to overcome. Because in high-income countries, the youngest firms use the internet more intensively, on the other hand in low-income countries, the oldest firms do. Domestic firms in developing countries use the internet more intensively when they face pressure from foreign competition. Manufacturing firms in Mexico are more likely to invest in digital technologies if they are directly competing with imports from China. And it resulted increase for number of computers per employee, and their share of online purchases etc.
The future of markets
Competition is essential mechanism for the the internet to increase growth because the internet promotes competition, which encourages more firms to use the internet again. Firms that are directly or indirectly owned by the political rulers are likely to have higher market shares, and have higher profits, thus they tend to stifles competition, ICT adoption, and innovation among manufacturing firms. There are some evidences that support this fact. The dominance of politically connected firms and the resulting lack of competition seem to discourage all other firms in their industry from adopting digital technologies or innovating. In sum, If countries have an institutional environment that allows firms to obtain profits by lobbying for protection rather than investing in new digital technologies, it results very bad influence in overall system.