THE INTERNET AND THE NEW ECONOMY

The new millennium opened on an optimistic note. The annual World Economic Forum in Davos, Switzerland, proudly sang the praises of the “new economy.” The January 31 issue of Business Week ran a feature on this subject, identifying seven factors to achieving a “high-productivity, low-inflation” economy. To proceed along the road to the new economy, countries are urged to “boost investment spending on information technology” as a share of gross domestic product; “restructure corporations to cut costs, improve flexibility, and make better use of technology”; “open financial markets”; “develop venture capital and IPO [initial public offering] markets to aid innovative companies”; “encourage an entrepreneurial culture”; “increase the pace of deregulation”; and “adjust monetary policy to the realities of the New Economy.”

The United States and Sweden lead the world in the share of gross domestic product they invest in information technology, or IT, both with figures of around 4.5% (estimate for 1999). Japan invests just 2%, less than half of these countries; it trails most other Western nations as well, and also comes in behind Singapore. Many Davos participants expressed the hope that Japan would quickly climb aboard the new-economy bandwagon and reap the benefits of sustained growth. This may entail sweeping changes in the economy and industry, though, as the information revolution underpinning fast-paced growth ushers in changes as far-reaching as those wrought by the Industrial Revolution.

While it seemed slow to get off the starting blocks, Japan has been catching up with the IT revolution at a rapid pace, and as a result prices of IT-related shares have been soaring. Sony Corp., regarded as an emerging player in the Internet market, for instance, had seen the price of its shares rise steadily from March 1999 to as high as ¥32,250. But it took a nose dive in January 2000 after President Nobuyuki Idei declared that a more appropriate level, given the firm’s earnings, was around ¥20,000.

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Many observers point to this episode as an illustration of the fragility of the Net-related stock market. Internet companies generally fall into one of two categories: those providing front-end services, such as Internet connections and Web contents, and the back-end firms that support these activities, like IT and telecommunications manufacturers, software developers, and Internet providers. The number of Net businesses is rising, and their share prices are soaring. Shibuya, which was once the exclusive haunt of fashion-conscious Tokyo teens, now houses a growing number of Internet firms.

Some have welcomed these developments as heralding the arrival of the e-business era in Japan. But others remain skeptical. There has recently been a trend in the United States, for instance, for investors to be more selective about Net- and IT-related companies. Share prices no longer automatically rise based solely on future expectations; investors are now placing stronger emphasis on profitability, as demonstrated by America Online’s purchase of Time Warner. Excessively high prices that anticipate profits centuries down the line cannot be sustained for long.

By drawing from these lessons, Japan needs to utilize the IT revolution to promote reforms in the economy. For this, it is necessary to gain a full picture of what the IT revolution entails. The biggest change is the dramatic drop in the cost of information transactions. This will naturally generate new demand for information and communications devices and lead to increased production of them. Another big transformation is that whereas information exchanged bidirectionally had hitherto been between individuals, it can now be conducted between large groups of people. The drop in the cost of information means, moreover, that the conditions for what is known in economics as “perfect competition” may actually come into being. Economic systems premised on there being an asymmetry of information--such as indirect financing, complex distribution networks, and the bureaucracy, which used to hold a monopoly on certain information—are gradually losing their raison d’être. The industries and companies that once played a mediating role in the flow of information and goods, in other words, are no longer needed. At the same time, the formation of seamless distribution and transport systems as well as an efficient financial system with solid capital markets is becoming more important.

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How should manufacturers react? The option taken by Sony Corp. was to evolve from a maker of consumer electronics into a comprehensive media and entertainment enterprise; it is now making forays into the financial sector. Meanwhile, automakers are moving into the Net market on the strength of their involvement with car navigation systems. Nissan Motor, under the profit-seeking direction of Chief Operating Officer Carlos Ghosn, is now furiously cutting costs and building a merit-based employment system. Japanese manufacturers once excelled at slashing costs, but companies like Nissan, which have lost their competitive drive and creative energy, now need foreign chiefs to rejuvenate management thinking.

By gaining a full grasp of the potential of the IT revolution unfolding before our eyes, companies should be able to reduce procurement costs further, pinpoint market demand, and overhaul sales strategies. The biggest challenge now facing corporate managers is restructuring their organizations to take complete advantage of emerging business opportunities. (NARIAI Osamu, Professor, Reitaku University)

© 2000 Japan Echo Inc.