Huub Meijers

Internationalisation of European ICT Activities

This report provides a synthesis of the results of a research project on the Internationalisation of European ICT Activities. It starts by overviewing the theoretical frameworks applicable, then proceeds to evaluate available evidence based on trade, foreign direct investment and patent data. This macro-data is followed by micro-data supplied by case studies. Finally, the report draws conclusions and makes suggestions for policy. The mission of the JRC is to provide customer-driven scientific and technical support for the conception, development, implementation and monitoring of EU policies. As a service of the European Commission, the JRC functions as a reference centre of science and technology for the Union. Close to the policy-making process, it serves the common interest of the Member States, while being independent of special interests, whether private or national. LF-N A -2272-EN -C

Diffusion of the Internet and low inflation in the information economy

Abstract The adherents of the so-called ‘New Economy’ claim that we are entering a new era with high output growth, low unemployment and low inflation. ICT investments in general and the increased use of the Internet play an important role in this claim. In the literature we find three different explanations for the low inflation experience. Increased productivity growth combined with sluggish adjustment of wages, improved credibility of monetary policy and improved functioning of the labour market. This paper provides another explanation where adoption of Internet as a cost reducing and efficiency improving technology changes market structures and affects the mark-up margins of firms and thereby the relation between costs and output prices. The diffusion of the Internet as a cost saving technology is introduced in a model with network effects and dynamic market structures. The latter two result in an endogenous diffusion process of the use of the Internet for business-to-business commerce. However, there is also some feedback from the increased adoption of the Internet. Diffusion also affects the market structure and therefore the gains of the efficiency improvements obtained by doing business via the Internet. The combination of the diffusion of the Internet, the characteristics of network effects and the dynamics of the markets can explain variation in the mark-up on production costs explains at least a part of the low inflation experience. However, the model also predicts that the inflation suppressing effect of the increased use of the Internet eventually will cease and that inflation will increase in the longer run. The paper adds two new elements to the existing literature. First, it describes a model that combines network effects with changes in market structures to explain the diffusion of a cost reducing technology, i.e. the Internet. Second, it uses this model to explain the current low-inflation experience.

Introduction and Main Policy Lessons

The world economy is currently facing a wave of internationalisation or globalisation which can only be compared to that of the second half of the 19th century after the invention of railroads, steamships and the telegraph. The Information and Communication Technologies (ICT) sector is highly affected by these changes and the internationalisation of ICT activities has become a major topic in policy debates and discussions. Next to increasing volumes in trade in ICT goods and services is the increasing tendency to relocate ICT sector production facilities firms’ research and development activities to locations outside of their home countries. However, it should be noted that ICT is not only subject to internationalisation and fragmentation, in fact, it is also a major enabler of the process. ICT allows for an easy exchange of information between various locations, and therefore helps to co-ordinate a geographically dispersed production structure.