Information and Communication Technologies in Japan, Germany and the U.S.: Institutional Frameworks, Competitiveness and Learning Processes

 The information technology sector highlights the strengths and weaknesses of Japanese industrial policy, both past and present.  In computers and telecommunications, Japanese policies to promote indigenous technology have limited competition and focused funding on technologies such as the development of large mainframe computers and a fiber optic network.  While this approach has produced some successes, overall Japan has found itself surpassed by information technology industries in the US, where policies have emphasized market flexibility and lower prices.  Recently Japan has attempted to catch up by pursuing an “e-Japan Priority Policy Program.”  While this has produced rapid growth in broadband internet access, regulatory protection of NTT continues to saddle Japan with expensive basic telecommunications services.

 The paper briefly puts the telecommunications markets of the U.S., Japan and Germany in perspective. It furthermore provides on overview of the development of the regulatory framework in the U.S. with an emphasis on the Telecommunications Act of 1996. Finally, it analyses some aggregate statistics to verify broad consequences of regulation on competition in the U.S.
The paper highlights the following issues:
(1)    US, Japanese and German telecom markets are characterized by different
・    population density (U.S. a seventh or tenth of Germany/Japan)
・    cellular penetration and digitisation (U.S. ca. 30 % lower in penetration and
     10 % lower in digitisation)
・    internet/PC penetration (U.S. 20 % or 50 % higher in internet/PC)
(2)    Until 1996, the regulatory framework in the U.S. was characterized by
・    reducing barriers to market entry while
・    keeping operators from serving multiple segments (e.g., local and long distance
     telephony) and
・    using price cap regulation for incumbent carriers
(3)    Since 1996, the regulatory framework in the U.S. was changed to
・    allow operators to serve multiple segments (e.g., local, long distance,
equipment, cable TV, programming)
・    enforce strong access and interconnection rules
・    shift towards intervention-regulation of prices and universal service obligations
(4)    Results in terms of competition, price/productivity improvement and
     performance/quality have been strong
・    in high-speed internet access
・    long distance and local telephony
・    but less obvious in mobile telephony

 The role of government interventions and regulations has strongly different traditions in the media, IT and telecommunication sectors. The media industry is traditionally attributed a function as the bearer of social, cultural and ethical values within our society. Whereas private communication has traditionally been unregulated, broadcast content has traditionally been regulated to some extent (public broadcast). The computer / IT industry developed in an unregulated manner, under the application of the general competition law. Although the telecommunications sector is fully liberalized in Germany – as well as in all other European countries – there still does exist a complex set of sector specific regulation, which are currently under review. 
These different approaches of government interventions may be challenged by the convergence of the telecommunications, media and IT sectors. On the one hand convergence may outpace existing sector-specific regimes. On the other hand sector-specific regulation may even be extended in the future to include markets not yet regulated, e.g. mobile telephony and new markets, e.g. Internet services. The question arises how to achieve the proper role of government intervention in a comprehensive institutional framework, leaving markets as much freedom as possible.
The focus of this paper is on those elements of the Internet periphery and Internet service provision which are strongly based on telecommunications, in particular Internet access and Internet backbone. Access to the Internet requires a connection between the Internet user and the interface to the Internet service provider (ISP). Several access technologies exist: copper, fiber optics, two-way cable TV infrastructure (CATV network), powerline communication and radio in the loop. One may differentiate between narrowband and broadband Internet access.
From a rather short run perspective the local loops of the established carriers are still – at least to some extent – monopolistic bottlenecks, with a consequent need for sector specific regulations (price cap, accounting separation, discriminatory free entry). However, neither from the (short run) perspective of narrowband Internet access nor from the (longer run) perspective of broadband Internet access does the recent introduction of regulatory unbundling (in particular line sharing regulation)  of the European Parliament and the German Regulatory Commission seem to be justified.
Transit and peering arrangements among Internet backbone providers (IBPs) are not subject to sector-specific regulations. The agreements that cover interconnection between IBPs are characterized by private negotiations and are subject to non-disclosure rules. From the economic theory of regulation it follows that there is indeed no need for ex ante regulation due to the absence of network specific market power. The input market of communications bandwidth is competitive and each IBP can develop its own logistic concept to optimize its own backbone and set of transit and peering arrangements.

 – Presentation slides are available at the venue

 The need for regulation in the German market for telecommunications is based on the requirements of transition from monopoly to liberal markets, on technical features of networked systems as well as on a specific socio-cultural approach to media and communication. Some of the issues to be regulated need government intervention, others are better resolved in self-regulation schemes. However, there is no straightforward answer to which approach is appropriate, as optimal solutions also depend on actual market configurations, the state-of the-art in network technology and the international integration of markets.
On the one hand, the present framework of regulatory institutions and instruments is historically grown from the process of market deregulation, on the other hand it reflects European telecommunication policies characterized by strong efforts to realize a competitive Single Market and a desire to harmonize approaches to regulation among Member States. Despite the principle of subsidiarity and a fair degree of freedom in implementing EU directives, regulatory patterns in Germany are, thus, increasingly shaped by European telecommunication policy.
The European perspective on self-regulation is embedded in a more general search for ‘better regulation’ manifest in a series of recent directives, decisions and communications. Here an optimal mix of government, co-regulation, and self regulation is discussed, and some suggestions are made to endow self-regulation approaches with a higher degree of certainty and reliability by binding them to framework conditions, guidance by regulators or co-regulation schemes. The often deplored over-regulation in Europe and a reluctance to allow for self-regulation can be interpreted in a perspective of ex-ante and ex-post regulation as well as in a perspective of co-ordinating European national policies.
The paper will present the European approach to self-regulation with respect to a few recently discussed issues. It will then briefly discuss the advantages and disadvantages of self-regulation solutions and relate them to the current regulatory needs in Germany. Examples for successful self-regulation in the field of standard-setting and in content control will be used to illustrate the balance between regulatory institutions in Germany on the one hand and between the national and the European level on the other.

 The paper starts from the point that e-commerce creates new problems of uncertainty. This uncertainty leads to low growth rates of e-commerce. The under-average growth of e-commerce in Japan in international comparison which was in 2000 e.g. 0,25% vs. 1,37% in the US is perceived as a political relevant problem in Japan since chances of increasing productivity are not sufficiently used, the genesis of new markets is hindered, and the success of the ambitious  “IT revolution strategy” is at least partly questioned. Answers to the new form of uncertainty are actually given by new rules being necessary for e-commerce, such as the Specific Commercial Transaction Act (2001), the Law of Personal Data Protection (2001) or the Act Concerning Electronic Signatures and Certification Services (2000). Nevertheless, the most adequate solution for the problem of uncertainty is especially expected by the instrument of self-regulation, here defined as self-binding rules of private associations, defining its content, enforcement and adjudication. In the last years, this instrument is discussed in the theory of economic policy as adequate – supposed working enforcing mechanism – by several reasons. One of them is e.g. the rising problem to what degree the state possesses in reality the potential to govern, or whether a state should better be understood as a non-governable system of sub-systems which would necessitate the decentralized formulation of rules. The Japanese actors follow this interpretation. Examples are e.g. guidelines formulated by the Prime Ministers Office, the METI or the Keidanren. The principle of self-regulation is implemented by associations carrying out e-commerce or building up infrastructure for e-commerce, such as JADMA, ECOM or JIPDEC. The paper discusses that self-regulation can be a general adequate political solution for reducing uncertainty and for creating trust, but that it seems to be questionable to choose it as an general adequate institutional framework for Japan.

 The 1990s is often referred to as the Lost Decade in Japan, where the bursting of the asset bubble economy left it mired in a prolong recession.  In contrast, the “new economy” in the United States and Europe was taking off, fueled by a strong bull market and spearheaded by highly innovative dot-com companies.  The research question driving our analysis, then, is whether Japan lags behind other countries in the diffusion of e-commerce, and what implications does this have for the flagging Japanese economy? 
To address this research question, my main analytical concern is the extent e-commerce does and does not diffuse across industries and within establishments, and the consequent impacts on firm performance.  We begin with the Center for Research on Information Technology and Organizations (CRITO) research framework, which examines the forces for globalization and e-commerce readiness as the pre-conditions for the diffusion and adoption of e-commerce.  In Japan, these factors are embedded in the social organization of corporate groupings (keiretsu) and its political economy (iron triangle).  Thus, we extend the baseline CRITO model by adding these “relational” factors.  We believe this provides more purchase in understanding the configuration of e-commerce diffusion and adoption and its subsequent impacts on business. 
The main data source for this study is a telephone survey conducted in Japan by the International Data Corporation during the period February 18, 2002 – April 5, 2002.  Establishments were selected from three major industry sectors that are known to be more advanced users of e-commerce—that is, manufacturing, distribution (wholesale and retail), and finance (banking and insurance).  The number of respondents is 227 establishments, evenly split by industry as well as establishment size (from 25 to 249 and 250 or more employees).  In addition, we use primary data from the Fujitsu Research Institute and other secondary sources in order to draw out the relational side of the diffusion and adoption story.
Overall we found that keiretsu firms play an important role in adopting business-to-business technologies, but the small and medium-sized enterprises in the retail sector and companies in the bank and finance sector are more active in adopting business-to-consumers technologies.  These differences in the diffusion of e-commerce across industries, on one hand, reflect the ability of companies to overcome the barriers and inefficiencies in the existing political economy.  The uneven adoption of e-commerce within establishments, on the other hand, reflects how well information technology applications speak to the strategic priorities in a company’s business plan.  Consequently, the relational context in Japan partially explains the variations in performance—that is, efficiency, coordination, and commerce—of adopting firms.

 In turbulent business environments of today, companies face the need for organisational changes more than ever. Three factors drive the need for accelerated change: heterogeneous demand, globalisation of markets and competition and technological (disruptive) innovations. Information and communication (I&C) technologies play a vital role in change and reorganisation processes. The dramatic performance increase, miniaturization and integration of I&C technologies often lead to completely new applications to products and processes on company and industry. In light of the growing number of I&C technology applications, companies become aware of their constituting elements of information and communication processes and the related potential for structural realignment. As a consequence new performance qualities and design forms of I&C processes evolve, which continually alter the capabilities and methods of economic value creation.

Traditionally, a variety of factors limit corporate efficiency and effectiveness: especially physical distance and confinement, pressure of time, knowledge deficiencies, production bottlenecks, and lack of flexibility. The application potential of new I&C technologies to competitive processes leads companies’ focal attention on how to overcome these traditional barriers and boundaries. Besides incremental realignment these technologies have to be utilized to develop entirely new business solutions. A rethinking of traditional concepts of corporate structures and functions as self-contained, permanent, integrate and clearly defined put fundamental organisational innovations on the agenda. As a result, some new entrepreneurial concepts and organisational forms of economic division of labour within and between corporations are already observable, such as modularised or partially virtualised enterprises. They are often more problem-specific and enable flexible value-added processes within open, symbiotic networks. Moreover, they deploy I&C technologies in innovative coordination mechanisms, such as telecooperation, electronic markets or interorganisational system integration. But still, these are quite rare observations. Why are these innovative organisational models still not widespread in mainstream business solutions?
Choosing a theory to discuss this presentation’s underlying question we will base our argumentation on the theory of New Institutional Economics that has recently received noteworthy attention in academic literature. The scarcity of economic goods and the inevitably corresponding need of reducing it through the division of labour in economic processes form the core theoretical problems of organization and coordination. The theory of New Institutional Economics emphasizes the significance of information and communication for the coordination of economic activities – and on that basis forms a very suitable basis for discussing the impact of I&C technologies on organisations. The impact on efficiency of economic coordination through I&C technologies can be presented in the paradigm of transaction cost theory that proposed in the 80s an overall shift towards proportionally more market coordination as opposed to hierarchic forms of coordination. This “move-to-the-market”-hypothesis is mainly based on efficiency gains in transaction costs through the implementation of new I&C-technologies. This hypothesis has more recently been challenged by the “move-to-the-middle”-hypothesis, which distinguishes in a more detailed analysis between different kinds of transaction costs. This argumentation already provides some insights on “new” deficiencies as a result of I&C technology based coordination, but still gives not a full explanation. So far the theoretical perspective of the presentation.
To complete our argumentation we provide evidence from German firms to discuss the impact of I&C technologies in practice, with a focus on the customer interface. The customer interface, as a focus of many companies, has been heavily influenced by last decades developments in modern I&C technologies. This influence is manifested in today’s Customer Relationship Management (CRM) movement or even paradigm. Existing business models tended to oversee the customer interface as part of the organisation and its increasing influence on corporate success. The deployment of I&C technologies with its multimedia richness, interactivity, global accessibility and low cost communication and information processing at the customer interface offers new promising ways to interact with a large number of former anonymous customers. In unprecedented ways companies can get into dialog with a great number of potential and current customers and integrate them into value creation at great scale. The concept of Customer Integration into value creating activities has become widely appreciated by companies in many different branches of industry because it forms the underlying approach for strategies like CRM and Mass Customization.
We will discuss two case studies from German firms in the shoe industry and their quite different approaches of organising their customer interfaces. The first one, Adidas-Salomon, is emphasizing the direct and personal contact with its customers through human experts to sell expertise and knowledge to customers along with the product. The second one, Creo Interactive, has chosen to take the e-approach of only using the internet as the single channel to interact with its customers. Both companies have made their own and quite different experiences with their approaches. From our perspective this should form a sound basis for discussing the potentials and limitations of modern I&C technologies for organizations to interact with the customers and integrate them in a firm’s value chain for highly individualized offers. This leads to restrictions that are caused by many social aspects which are not considered in current theoretical models and explanations of the New Institutional Economics and Transaction Cost Theory.

 The effects of the “New Economy” have been highly debated in the literature. While the innovations underlying this phenomenon have been praised as comparable to electricity and the steam engine, others have been highly skeptical. This presentation will take a trade perspective and analyze on the industry level which effects ICT has on the volume as well as the patterns of trade. This allows us to highlight why countries like Germany and Japan were not able to reap the benefits of ICT to the same extent as the United States have. It will also take a more micro level perspective and suggest how these changes will affect the industrial organization of countries absorbing the benefits of ICT.

 Recent economic research targeting Fortune 1000 firms has shown that information technology investments complement other productivity innovations–including changes in business methods, alteration in the organization, and innovations is customer-supplier relations–to produce substantial productivity returns over periods of five to seven years (Brynjolfsson & Hitt, Review of Economics and Statistics, in press).  According to this research, whereas analysis of one-year returns shows moderate returns on information technology investments, long term returns are substantially higher, in part because they take into account the complementary structural and strategic innovations that take time to implement.
This presentation will review theory, research and case examples of the strategic application of communication and information technology to improve productivity and enhance competitiveness of firms headquartered in the United States. When implementation of such technologies is accompanied by changes to corporate strategy, culture, and organizational design, these innovations can have a longer period of freedom from imitation by competitors.  Trends in such applications often involve partnerships and alliances, in which the different firms not only coordinate with each other but learn from their partners as well.

 The importance of technology for designing and managing organizations has long been a standing concern of Organizational Theory. The traditional approach focuses on the technological impact on organizations in order to inform organizational design how to match effectively the inherent technological demands. Technology is conceived as an external force which demands adaptation along prescribed patterns (“Technological Imperative”).
This view has doubtlessly its merits. Facing new technological developments, especially in information and communication technology, it is however beginning to loose its validity. Nowadays, technology can no longer be properly conceived as a fixed bloc that enters the organization.
My presentation focuses on these changes and advocates the view that the technological process has become an interactive one. Organizations increasingly shape technologies and, even more important, the shaping is not a single act or a short period right at the beginning of the implementation, it rather turns out to be a continuous process. Organizational Technology therefore is more and more in a constant state of flux. The relationship between (information) technology and organizational design transforms Itself into a learning process.
The empirical part of the presentation reports on evidence supporting this new view. It summarizes findings from research in US-organizations and presents results from a recently completed research study conducted by the author. The German study is about the introduction and the handling of SAP in a medium sized enterprise (retail business). The findings emphasize the open character of the process and the learning- induced modifications that have taken place during the five years after SAP introduction. The process actually turns out as technology shaping.
Two significant practical implications emerge from our analysis. The first implication is that, in contrast to past research there is scope for different optimization strategies in handling and shaping technology. As a result organizational technology can be become an individualized feature, a special “strategic“ resource of an organization that might build the basis for creating a competitive advantage. A second implication of our findings is that they may help to find proper designs for supporting the interaction processes between technology and organizational configurations.

 One of the best ways to determine the effects of deploying a communications technology would be to evaluate if the operators have successfully delivered the 4-Tier Benefits of Wireless Network Deployment, i.e. whether they have delivered benefits at the end user level, operator level, country level and the global level. Operators who have successfully captured these benefits would not only become a formidable player in the market place; they would also be able to create a win-win relationship for all stakeholders involved.
The 3G development in Japan is a good example to elaborate on this scenario.  In a market where both WCDMA and CDMA 1X networks co-exist, KDDI’s CDMA 1X is clearly winning the game due to its technology selection, strong marketing, and unique service and product advantages.  In contrast, while NTT DoCoMo has the first mover advantage in being the first to launch 3G services in Japan, it has a much rockier start given its level of network coverage at launch, handset choice, availability and functionalities. These issues have been enhanced, however, in recent months and we are now seeing a significant improvement in subscriber uptake since June 2003.
On a global scale, Asia, particularly Japan and Korea, is also ahead of the pack on both 3G and mobile data deployment when compared to US and Europe.  This can be explained from three perspectives, namely technology, end-user and business.  On the technology front, CDMA 1X, which is the 3G technology of choice for Japanese and Korea operators, has already been proven and launched in various parts of Asia and US.  On the end-user front, Japan’s mobile data market is among the most developed in the world.  On the business-front, Asian countries are paying much less 3G license fee than their European counterparts, which results in a more viable business environment for the operators.  The effective segment-focused marketing approach and win-win profit sharing model with content providers in Japan and Korea also support their leadership.
Going forward, we believe Asia will continue to be the epicenter for technology development and commercialization beyond 3G, as driven by government and industry initiatives, its industry expertise, its market size and potential.