The Economics of Information Technology

The IT industry eludes precise definition. The Department of Trade and Industry (DTI) spent a difficult and fruitless year in 1983 wrestling with this problem, and were still searching for an accurate and comprehensive description in 1985.

This chapter reviews and evaluates the economic, political and geographical development of IT, examining the crucial issue of the appropriate role of the government, and analysing the global strategies of companies participating in the IT race between 1945 and 1980. Consequently, industrial development and government policies in the USA, Japan and Britain are the principal focus of attention.

The economic miracle that transformed Japan into one of the largest, most fiercely competitive economies in the world did not occur until after the Second World War. Faced with the total devastation of their industrial base, the Japanese used American financial aid not only to rebuild but also to transform the structure of their economy. By the mid-1960s and early 1970s, armed with advanced high technology and a loyal battalion of inscrutably efficient workers, Japan came to pose a serious and powerful threat to some of the world’s most prestigious economies.

By the beginning of the 1980s America had become increasingly concerned about the threat of Japanese competition; electronics companies in particular were calling for government intervention to curb what they considered to be an excessive level of Japanese imports. The Japanese strategy of targeting particular market segments, and then using their highly developed manufacturing techniques and marketing skills to produce and distribute high-quality low-cost products, had already won them the lion’s share of the world consumer electronics market (televisions, stereos, calculators, electronic toys and digital watches), and was beginning to threaten the US semiconductor industry.

Although by the 1980s Europe constituted approximately one-third of the world market for electronics, European manufacturers were in a weaks position, supplying only 10 per cent of the world and 40 per cent of domestic IT markets. In 1975 the European Community had enjoyed a trade surplus in IT of 1.7 billion ECU; by 1984 this surplus had been turned into a 5 billion ECU deficit. By 1981 the Japanese had completed their VLSI project, and were on the threshold of their Fifth Generation Computer initiative; while IBM, as a consequence of large-scale, innovative and highly successful research, commanded 50 per cent of the European computer market. By contrast, the position of European manufacturers, which were estimated to be devoting 80 per cent of their R&D expenditure to catching up, appeared to be far less secure.

The initiative for the British Fifth Generation Computer Project came from a small group of computer science academics. Early in 1981, on learning of the dangerous threat presented by the imminent Japanese programme, Tony Hoare of Oxford University, Bob Kowalski of Imperial College, London, and Donald Michie of Edinburgh University, took it upon themselves to write to the Department of Industry (DoI) to suggest that these Tokyo developments, and their implications, should be the subject of a thorough investigation. This letter went without reply. In September 1981 the DoI received an invitation from MITI to send observers to the conference with marked the launch of their Fifth Generation Computer Programme. Despite this earlier concern shown by Hoare, Kowalski and Michie, the ministry turned to other British academics, asking, among others, Roger Needham of Cambridge University, Brian Randell of Newcastle University and Philip Treleaven of Reading, if they would be prepared to attend the MITI conference, and then, in the light of their findings, report back to the government on what they considered to be appropriate strategies for the British to adopt. The academics were joined on the trip by Ron Atkinson of the DoI.

The major electronics IT companies of Japan, the USA, Europe and the UK, being multinationals with global strategies, are not constrained in their activities by national boundaries, and while they have often been prepared to participate in government programmes, as a means of securing financial assistance, this has not prevented them from sacrificing the potential sucess of these schemes by collaborating or competing with each other. Certain companies, in an attempt to conquer opponents and win the IT war, have adopted a two-stage strategy, whereby they actively pursue cooperation with competitors to strengthen their position in the short run but only in order to obliterate these competitors turned partners in the long run. It is the economic, political and strategic motives behind these international alliances, together with their implications for national IT policies, which form the subject matter of this penultimate chapter.

This book, by reviewing the history of the IT industry, has attempted to describe and discuss those factors, both political and economical, which throughout the post-war period have contributed to the performance of certain companies and countries. We began this difficult and complex task by investigating the role national governments played in stimulating the early development of the computing and telecommunications industries. This was followed by an examination of the more recent Fifth Generation Computer initiatives in America, Japan, Britain and Europe. The last chapter analysed the strategies pursued throughout the early 1980s by a number of large European electronics companies.