The New Economy and Economic Growth in Europe and the US

The strong productivity growth of the US and Scandinavian countries in Europe in the 1990s has raised the question whether the ICT sector — information and communication technology (that is computers plus telecommunications plus digital services) — is the new driving engine of high growth in leading OECD countries.

In the 90s we have witnessed a remarkable boom in the US economy. Growth in the second half of the 90s has returned to levels prevailing on average before the 1973 break. Also TFP growth has accelerated and returned to rates known from the 60’s. One possible explanation for the US experience is the rapid adoption of new information and communication technologies (ICT) by US companies. While in the US the nominal ICT investment to GDP ratio has almost doubled, it only increased slightly in Europe. Unfortunately a direct comparison between Europe and the US is difficult because, data availability and quality is inferior in Europe. Various attempts have been made so far to look at the impact of ICT in Europe. SCHREYER (2000) and DAVERI (2000) have analysed the growth impact of ICT investment on growth within a growth accounting framework. Also Van ARK (2000) looks at investment and production, however, he uses a methodology which is not directly comparable to existing US studies. All these studies conclude that there is a growth contribution from ICT investment and production in Europe. Based on this evidence the paper explores the growth and employment effects of ICT investment and production in Europe and the US.

The OECD countries have witnessed considerable differentiation in economic growth in the 1980s and 1990s on the one hand, on the other hand the rate of innovation — as measured by patent applications — has increased in the US and Europe in the 1990s (COUNCIL OF ECONOMIC ADVISERS, 2000; WELFENS/AUDRETSCH/ADDISON/GRIES/GRUPP, 1999). The US has achieved a considerable lead in economic growth vis-à-vis Europe in the 1990s which was characterized by an unusual increase in labor productivity in second half of the economic cycle in the US (COUNCIL OF ECONOMIC ADVISERS, 2001). US labor productivity growth in the period 1973’1995 was 1.4% p.a., but in 1995’2000 it reached 3.1%. It is unclear what the reasons for the robust US productivity growth is. The Council of Economic Advisers has argued that falling computer prices and rising computer expenditures of wholesale trade, banking and the ICT sector itself play a crucial role for US growth in the 1990s.

The purpose of this study is to assess the potential macroeconomic benefits which would accrue if the conditions ultimately arise for the new economy to take root in Spain. The paper is divided into four sections. The first contains a theoretical analysis of the potential macroeconomic benefits of the new economy in the context of various economic models. Section two carries out two empirical exercises to quantify the new economy’s potential impact on the Spanish economy’s main macroeconomic variables. The third section addresses the microeconomic repercussions of the new economy. The final section reviews Spain’s initial conditions and degree of adaptation to the new economy by comparing a number of indicators with other countries.

In Germany the telecommunication market was effectively de-regulated and liberalized by the end of 1997 in the US according to the Telecommunication Act of 1996. The local loop monopolies and Baby Bells are now under attack for the first time. Several regional Bell operators have merged since 1998/99, which seems to indicate that only large local network operators can successfully enter the competitive long distance market. In the EU there is a gradual increase in competition in telecommunications markets, although national markets are still rather fragmented when compared to US states. Falling prices in fixed network telephony and mobile telecommunications have improved to prospects for launching digital services which mobile users can use almost everywhere. Moreover, faster transmission speed allows the combination of more visual elements with traditional text information so that e-content is more interesting and more useful for both the business community and the households.

The significance of technological activities as an essential determinant of the economic performance of industrialized economies is generally acknowledged today. It is also undisputed in the meantime that information and communication are becoming increasingly important as comprehensive functions in the economic order. Telecommunications play a central role in this. Thus at the beginning of the 90s the global market volume of the information services amounted to approx. 500 billion ECU, whereby 330 billion ECU fell to telecommunication services and approx. 170 billion ECU to software and computer utilization (cf. WELFENS/GRAACK (1996), p. 9). In clear contradiction to the theoretical insight and economic relevance, however, is the consideration of the level of technology resp. the technological progress and the role of information and communication in macroeconometric production models. So when estimating production functions (e.g. a Cobb-Douglas production function), technological progress is commonly approximated only by a linear time trend. This procedure reveals a series of weaknesses. On the one hand, the inclusion of a time trend does not provide an explanation for technical changes, i.e. the causes or sources underlying technical progress are not distinguishable. At the most, the order of magnitude of the technical progress can be estimated. On the other hand, no changes in the rate of technical progress can be identified, rather technical progress grows uniformly, as if dropping from heaven.

Perhaps one of the least understood phenomena accompanying the increased globalization at the beginning of the 21^st century has been a shift in the international competitiveness of high-wage countries towards innovative activity. An important implication of this shift in competitive advantage is that much of this innovative activity is less associated with footloose multinational corporations and more associated with high-tech innovative regional clusters, such as Silicon Valley, Research Triangle and Route 122. Only a few years ago the conventional wisdom predicted that globalization would lead to the demise of the region as a meaningful unit of economic analysis. Yet the obsession of policy-makers around the globe to “create the next Silicon Valley” reveals the increased importance of geographic proximity and regional agglomerations. The purpose of this paper is to explain why and how geography matters in determining competitiveness in a globalizing economy, and how this has resulted in the emergence of the strategic management, not of the firm, but of the location.

Between 1993 and 1995, the majority of German service firms introduced new organizational practices or changed the organizational structure (OC) of the firm as well as introduced new information and communication technologies (ICT). Among the most important types of organizational change are total quality management systems, ISO 9000 followed by lean administration including flatter hierarchies and decentralization of decision-making.² Furthermore, a substantial fraction of the firms reported that the most significant type of organizational change are ICT-enabled organizational changes, i.e., software for planning, order processing, controlling, logistics as well as internal and external connection of computers.

The shift of economic activity from large towards small units in manufacturing industries in developed countries has been widely documented.² This shift is one of the most important dimensions of the industrial restructuring process which has taken place in the last quarter of the 20th century. The extent of the employment shift away from large firms and/or establishments has been different across countries but has been quite substantial in many cases. CARLSSON (1996, 1999), for example, shows for U.S. manufacturing that the employment share of the Fortune 500 firms has decreased from almost 80% in 1975 to 65% in 1990 and to 58% in 1996. A range of reasons for the decline in the share of largeness in manufacturing have been discussed in the literature, ranging from declining importance of economies of scale to manufacturing firms returning to core activities. In the current study an investigation is made on whether the extent of the shift of economic activity from large to small businesses has affected economic performance. This part of the chapter draws on CARREE (2001). In addition the size class distributions in the German and U.S. manufacturing industries in a recent year (1997) are compared. The main motivation behind the topic of this study is that consequences of the increased role for small and new enterprises have been barely examined empirically, even though the industrial structures and the speed of the industrial restructuring process have been different across countries and industries.

Risk capital is of unique importance for young and innovative firms because of the high initial and ongoing sunk cost investments to create innovative products or processes and a relatively long waiting time for highly uncertain returns. This paper’s focus is on financing knowledge-based firms, which are the core of the socalled New Economy or Internet Economy (see AUDRETSCH, 2001). These New Economy Firms (NEFs) use specialized knowledge as their main productive factor. Knowledge refers to a complex set of information needed to create innovative products or processes, which is not easily transferable. Moreover, knowledge belongs to a great extent to individuals, so firms have the problem of providing incentives for their employees to use their personalized knowledge efficiently. There is also the danger that employees will leave and use their experience to set up their own NEFs.

Talking about structural change in financial markets hardly raises any eyebrows these days. People seem completely aware of the fact that many banks are cutting down their regional networks, reducing employment, going into online business, and changing their organisational structures. What is less clear is what is driving these changes.

Bank supervisors around the world are primarily interested in safeguarding the financial sector’s viability. Bank supervisors share the common objective of seeking to promote sound supervisory standards, as weaknesses in the banking system of a country can severely threaten financial stability and thereby the economy as a whole. This task is nowadays much more complex than in former times due to dramatic structural changes that have been taking place in the financial sector over the last few decades (e.g. globalisation and liberalisation of financial markets, consolidation and increasing competitive pressure, the introduction of the euro, and changes in customer behaviour). One of the major driving forces — some experts say the most important — of these structural adjustments is the technical progress in information and communications technology (ICT) and especially the introduction of the Internet into the banking business.

Electronic commerce has the potential to fulfill the promise of globalization to create a true global marketplace in both, quantitative and qualitative terms. International Data Cooperation has estimated that e-commerce will amount to US$ 2.5 trillion in the year 2004¹. Since e-commerce is in essence borderless, much of this electronic commerce will result into electronic trade. FORRESTER RESEARCH (2000) argues that in 2004 US$ 1.4 trillion of exports will be traded online, thus constituting about 18% of global exports². Even if one does not believe fully in such projections — estimates often vary widely — the future quantitative relevance of global e-commerce is undisputed. Moreover, and even more important, the very borderless nature of the Internet may turn e-commerce into the globalizing catalyst of the future world economy for two reasons. First, it has the potential to transcend the stubborn effects of national borders that still restrict international trade below intranational levels. Secondly, the Internet may become the driving force for an increasing fragmentation of global production.

The internet is often linked to the death of distance. Since it does not matter whether the recipient of an email or data file is in the same city, country or continent, the spread of internet multiplies the transborder activities of consumers and producers. The internet economy or — to use the more comprehensive term — the information and communication technologies (ICT) increase the need for clear rules to accompany the rise in transborder activities. At the same time, however, ICT reduce also the ability of governments to monitor and regulate the transborder activities of its citizens. This contribution examines possibilities and requirements for governing the cyber space and discusses the varying scopes for standardization, coordination and cooperation.

Like Cage, economists are inclined to attribute the failure to embrace new ideas to irrational fear. Standard approaches to growth and change assume that given new ideas, it is indeed the old ideas that should be the most frightening. To be sure, new ideas present uncertainty and risk — we might invest in the wrong idea at the wrong time, apply it in the wrong way, or fail to successfully implement a new idea. But with rational expectations, cash flows properly discounted, and investment suitably rewarded, risk should not present an obstacle to progress. As Schumpeter observed, the status quo is a false friend that lulls us into complacency and stagnation. It is only through the “creative destruction” of old ideas and the entrepreneurial implementation of new ideas that economies grow and societies prosper (SCHUMPETER, 1947).

The most visible change in recent years has been the explosive increase of information technology, first of all the Internet. It is seen as one of the keytechnologies of the 21^st century. In consequence, there is an enormous number of issues which could be discussed under the topic of this paper ranging from the environmental impact of changes in work and personal relations up to new ways in politics and conflicts. This paper will primarily pay attention to the environmental impact of e-commerce and only briefly touch some of the other points.

The lack of reliable, up-to-date data is often referred to as a major obstacle to gaining a better understanding of the development and impact of information and communications technology (ICT) in economy and society. As a matter of fact official statistical institutes are having a hard time trying to keep track of the dynamics of the digital economy. They find it particularly difficult to adapt structures and nomenclatures to the rapid changes in the ICT sector. However as a result of its growing significance overall demand for data on ICT has been increasing continuously. This has prompted commercial market research companies to try and fill in the gap. There is now a large variety of such companies offering customized market research including statistical information and forecasts.¹ Moreover, there are a number of political initiatives, some of them lead by the European Union or the OECD to improve the statistical knowledge of the modern ICT driven economy. See SIGMA (2001) for an account of the challenges that the new economy poses to statistics and the various approaches taken at the national as well as the international level to come to grips with them.