*{Innovation and Global Growth
A Discussion Paper
November 2000

PART II.} *partie=titre From International Trade to Innovation *partie=nil

*partie=titre Innovation and Digital Opportunities *partie=nil

In the preceding section of this paper we have argued that innovation stemming from
technological and managerial advances can lead to productivity gains when the regulatory
environment surrounding the labour, capital and product markets is conducive to competition
and adaptation. New technology and new approaches require that society accepts and
encourages new business and new markets that may necessitate that some old ways of doing
business be modified or abandoned.

Technical and managerial innovation which allows the “commoditisation” or super-high
availability of information is particularly capable of bringing massive productivity gains to
existing production processes and segments of processes which otherwise could not remain
competitive in the market. This is why, whereas many types of scientific and technological
innovation are important, the current discussion on productivity is focused on the impact of
information technology, and services associated with it, on innovation throughout the
economy.

In order for innovation to actually generate productivity and income impacts at the economywide
level, the necessary inputs and conditions must also be widely available. A crucial
policy challenge for the wave of innovation-led growth, at its current phase, can therefore be
characterised as a problem of expansion and distribution of “digital” opportunities. To the
extent such opportunities can be spread in the economy and between countries, they can
contribute to and encourage economic development. Trade liberalisation is a key energiser of
this global imperative.

It should be noted that the trade that sustains this “new economy” dispersion around the globe
is particularly noteworthy for its technology-based, positive impacts upon other national
policy areas such as environment, education and labour.

Importantly, trade can assist the promotion of adjustment in industries and firms faced with
the challenge of adapting new opportunities to facilitate continued growth. One of the
implications of the new economy is that it strengthens the case for trade and investment
liberalisation in traditional sectors (OECD). The benefits of technological change will only be
fully realised if traditional sectors are able to operate more freely and flexibly by responding
to and confronting new markets that are the result of innovation and digital opportunities.

On the other hand, to the extent new opportunities fail to spread quickly they can contribute to
the formation of what one might call “traps” where the "have not" falls further behind the
digitally innovative "have”. By virtue of not being able to keep up with the changing
requirements for skill, knowledge and context, groups without access or the skills to utilise
digital technologies may fall further behind those with access.

Currently, public policy discussions which are carried out under the catch word of "digital
divide" seem overly focused on the divide, and do not stress sufficiently either the opportunity
aspect or an understanding of when inadequate endowment turns into a trap. In order to
reduce the risk that discussions on the "digital divide" become a self-fulfilling prophesy,
discussion needs to focus on developing greater understanding of how to advance digital
opportunities. The world trading system offers the best path.

*partie=titre Policy Link between innovation and the regulatory framework *partie=nil *{4}

The following broad conditions must be in place for digital opportunities to spread quickly in
the context of economic activity:

• inputs of information and communications technologies (including software) must be
widely available in a market-based environment;

• regulatory environment has to be strongly in favour of competition and business creation;

• incentives have to be correct for skill acquisition and necessary changes in the
organisation of the workforce;

• important changes are required in the attitudes and capability at all levels of society
regarding the application and use of information technology in business and non-business
contexts; and

• continuation of strengthening standards world-wide for intellectual property rights
protection is needed.

While the availability of inputs may appear to be a crucial issue, it is in effect an aspect where
there is a great deal of clarity as to what policies are most appropriate. Even in the absence of
any charitable activities to make ICT tools available to disadvantaged segments of our
societies (and such activities remain significant) the quality/price ratio of them has been
dropping rapidly and is expected to continue to evolve in a positive manner unlike any other
category of commodity in recent economic history. *{5} The real challenge for the policy
community there is to encourage and utilise effectively what is a rapidly widening sphere of
affordability.

The availability of new technology tools is merely a first, albeit essential, step. The digital
opportunities that we are interested in spreading are embodied in new business *{6} opportunities.
In particular, any serious impact on productivity from the adoption of new business models
generally takes the form of opening to market forces aspects and portions of the production
and supply chains.

While the impact of e-business is felt throughout economic sectors, and a great deal of
attention has been given to the fortunes of e-commerce directed at the individual consumer,
currently the most pervasive impact of e-business activity is registered in the commerce
between business (B2B). *{7}

While the part of manufacturing in B2B commerce is significant, a great deal of potential ebusiness
activity is also likely to be found in the services sector, including finance,telecommunications, logistics management, education, and energy which are creating the
reality of a global infrastructure for the world economy. That is not only because of the fact
that service industries constitute the bulk (ranging from half to three quarters) of the GDP in
advanced economies, but also because these sectors have tended to be most shielded from
competition so far. An increasing number of enterprises and sectors find themselves
compelled to combine a manufacturing activity with services to the customer in the
increasingly competitive environment. Technology-based innovation has the greatest
possibility to be a mechanism for bringing within them higher private sector productivity as
well as more efficiently and effectively delivered public service.

The implication of these trends is clear: spreading the productivity impact of new technology
and new operational models across the broad range of sectors in the economy in large
measure requires enabling a widening selection of sectors to open to an increased degree of
competition and market contestability. It is difficult to see how one can promote
e-commerce without promoting competition and regulatory reform in telecommunications,
financial services, distribution, transportation, energy, health, education, entertainment,
government procurement. This is where the link between productivity and competition needs
to be further studied. *{8}

*partie=titre International linkages as ultimate regulatory reform *partie=nil

It is not enough to review the regulatory structure of a market and remove barriers to market
entry; there must also exist enterprises willing and able to enter the market. This is especially
the case in sectors characterised by large fixed investments and well-established incumbent
firms. Foreign competition has traditionally been one of the more powerful sources of
competition for a market. The tendency that new techniques and new managerial innovations
- basically new competency in any particular new venture - has a tendency to be nurtured and
developed in specific locations in the world ("centres of excellence") implies that its spread in
the world economy can only take place by an intensification of cross-border trade and
investment linkages. *{9}

It should be understood that, as the velocity of investment and change has increased in the
private sector, the regulatory reform efforts of government have lagged behind. This is
especially true of those barriers that inhibit the establishment of a robust, global services
infrastructure.

There are two salient points about international trade in services. First they are characterised
by a high degree of world wide segmentation and barriers to cross border trade. Secondly,
despite determined efforts at the WTO, there is a perception that discussion on further
commitments for trade liberalisation remains stalled. The implication of this is that, whereas
many governments in the world today are publicly committed to prioritising such objectives as
new technology, e-business, productivity and growth, there has been insufficient progress on
one of the most crucial policy areas which impacts on these objectives.

The status of international commitments in the area of market access in online supply of
services are summarised in two Charts attached to this paper. The information on the Charts
is based on a study by the OECD Trade Directorate *{10}. The data represent cross-border market
access commitments by selected countries and by selected sectors which we feel are
representative of ones that will become real users of electronic commerce. We plotted thedata using three types of shading - black for no commitments, grey for partial and white for
full. There are a number of messages in these Charts:

First, Figure 1 on Information Technology Services confirms that, with the exception of a few
countries, the market is essentially open. This means that the "technology" of electronic
business can be relatively easily provided across most borders. There are still issues
surrounding definitions and where some services actually fit in within existing commitments,
but these could be thought as issues within the realm of the solvable.

Figure 2 on E-commerce Trade Commitments depicting the cross-border commitments of
selected sectors tells a very different story. First, the amount of black and grey on this chart
relative to white confirms what has been said about services commitments in the Uruguay
Round for some time - there were not many real commitments that were made. For the most
part, there is no certainty about the ability to do, or to continue to do, electronic commerce
across borders in many sectors.

Second, we believe the relative amount of grey on the right-hand side of Figure 2 tells another
story. Those sectors and sub-sectors were primarily negotiated as a part of the sectoral
Financial Services Annex. This chart clearly shows that progress was made in those separate
negotiations relative to the overall GATS themselves. Thus, there may be some merit in
supporting a sectoral focus.

Third, looking at individual countries graphically confirms another phenomenon of the
negotiations - some countries have fallen behind with few or essentially no commitments. A
sustained commitment to market openness plays a critical role in increasing the size of
markets available to innovators, including in small domestic markets. Likewise, securing
broader and deeper cross border commitments will play a critical role in the diffusion of
innovative technologies and business practices, particularly by providing investors with a
more predictable environment within which to commit productive resources over the long
term. (OECD)

The overall message, however, is that if there is going to be certainty (and investment) in
global electronic commerce, there is a tremendous amount of work to be done in securing
broader and deeper cross-border commitments.

*partie=titre A note on “digital” opportunities *partie=nil

As noted, the need to develop innovation opportunities brought by digital technologies, and
avoid "digital divides" has appropriately captured significant attention from policy makers at
the highest level. It may be beneficial to distinguish several dimensions in which digital
opportunity and divide issues may influence relative economic performance:

i) within countries, in particular for our attention, within OECD member countries;

ii) among the developed market economies (DMEs) (more or less OECD countries); and

iii) between the DMEs as a group and emerging market economies (EMEs) and developing
countries as a group.

Currently business is engaged in substantive policy discussions in the BIAC-OECD context *{11}
and elsewhere on both the first and third dimensions, and the results of studies underway will
be of significant value to both business and the governments. However, there may be some
merit in highlighting the second dimension mentioned above. Even if this may be seen as a
special case of inter-country comparisons, there are implications for the decision makers of
OECD countries in a purely domestic policy context.

Until recently it could have been held with some confidence that, apart from a small number
exceptions, most OECD countries were at a similar "stage of development" with structurally
similar economies and broadly comparable human development indicators (such as literacy,
skills etc.). The speed of change brought by technology-driven innovation can challenge this
picture significantly. Early glimpses into "e-commerce readiness" and "ICT readiness" papers
show a remarkable contrast with the picture drawn above.

There are wide differentials in the relative levels of OECD countries with respect to such
indicators as to the penetration rates of new technology tools (computers, mobile
communications devices, Internet pages, secure servers, etc.), prices of services associated
with them (cost of access, interconnection) and new types business transacted on new media.
Available data show that these differentials are at a scale which is not obviously justified by
the differentials in current per capita income or education levels observed between the
different high-income OECD economies, or their level of over-all technological development.

There is a potentially significant implication to be drawn. The differentials currently observed
between OECD countries in terms of using the new digital opportunities may be reflecting not
only differences in opportunity between "haves" and "have nots", but also between those who
"want" and “do not want” to embrace change. In the current stage, when innovation
opportunities evolve extremely rapidly, differentials in approach and attitude in a relatively
small number of policy areas between otherwise similar economies may lead to important
gaps between OECD countries in the foreseeable future with respect to productivity, per
capita income and ultimately "development status".

This aspect of the digital divide problem should be of great concern to the OECD as an
organisation which is founded on the notion of "structural similar economies led by likeminded
governments." The OECD is particularly well placed to explore the observed
differences arising between its members in the early adoption of innovative technologies and
what may be equally large differences in the policy and practice with respect to
regulation/self-regulation, education, labour market, openness to international trade and
investment, and other policy areas that are directly related with the utilisation of new
technologies and innovation.

*partie=titre From International Trade to Innovation *partie=nil

Multilateral trade policy has an important complimentary role in helping countries harness the
growth and development potential of the new economy. For over 50 years the GATT/WTO
system has made a major contribution to economic growth and improved living standards
around the world. It is vital that this system remains strong and that it be adjusted and
improved in the context of today’s dynamic global marketplace.

Seeing launched a new WTO Round is a prime objective of BIAC. This includes advancement
of the built-in WTO agenda on services. BIAC would also like to emphasise the importance
of intellectual property rights protection and existing agreements and commitments made
within the WTO.

The WTO negotiation mandated by the Uruguay Round, Services 2000, is a critical element in
maintaining and expanding world prosperity. In general, the overarching objective of
governments in the negotiations should be to both broaden and deepen the commitments made
in the GATS. Contestable markets in every sector and in every WTO member are the ultimate
goals.

International trade in services, particularly cross border trade, is conducted to a large and
increasing extent through electronic means, and information technology has greatly facilitated
cross-border provision of services. Accordingly , the provision of services via
communications networks is covered by he GATS in the same way as all other means of
delivery. Countries’ sectoral commitments under the GATS apply to transactions whether the
services are delivered over these communications networks or by more traditional delivery
mechanisms.

There is considerable evidence from various sources including the OECD’s own Open
Markets Matter that the expansion in the availability of affordable tools for innovation are
closely related to the competitive nature of markets in which they are transacted. In the first
part of this paper we have noted that the markets for these products are also characterised by a
high degree of internationalisation. That means that both a high share of final products sold
cross border, and a high degree of intra-industry trade due to spread of production facilities
and sources of supply.

In this respect, the post-Uruguay Round trade negotiations have achieved a significant level of
commitments to liberalise ICT goods in major trading economies including the December
1996 Information Technology Agreement (ITA) which is currently being expanded as ITA II,
the February 1997 Agreement on Basic Telecommunications (ABT) under the GATS, and the
May 1998 Declaration on Global Electronic Commerce. The policy priority in this respect is
to complete the implementation of existing commitments and ensure their extension to all
countries.

Trade liberalisation through Services 2000 offers the main chance for a quantum leap in world
prosperity. The information revolution or the “Third Wave” – has made innovation and
efficiency in the production of services integral to economic growth. Services inputs are now
a central factor in competitive success in manufacturing and agriculture. Telecommunications,
transportation, finance, insurance, distribution, energy, and information services underpin all
forms of international trade and all aspects of global economic activity.

*partie=titre Conclusions regarding multilateral and national trade policy *partie=nil

Policy makers need to be alert to the synergies at work in today’s economy that can spark
innovation. As they may not always be predictable, dialogue between private and public
sector policy makers is crucial to continue building the understanding and co-operation that is
essential to developing an environment where innovation can flourish and provide maximum
benefits to productivity and world standards of living.

Innovation stemming from technological (such as ICT) and managerial advances will lead to
productivity gains when the regulatory environment surrounding the labour, capital, and
product markets is conducive to competition and adaptation. An essential component to the
expansion and distribution of the income impacts of innovation is trade liberalisation. BIAC
strongly encourages continued OECD work in areas which impact the potential for innovation
to benefit economies.

In addition to the broad policy framework attuned to the new realities of the global
marketplace, the following are important trade-related objectives in enabling innovation.

• An early focus and agreement on the agenda for a new WTO Round
• Substantial outreach to LDCs to encourage their full participation
• Reinforced and implemented commitments
• An acceleration of the Services 2000 effort
• The strengthening of intellectual property protection
• The elimination of tariff inhibitions to products essential for ICT
• The permanence of tariff-free cyberspace
• Serious attention to trade facilitation and full implementation of the Valuation Agreement
• Elimination of non-tariff barriers
• Implementation of international standards and simplified conformance testing
• Expeditious accession

Policy makers should also continue to think globally with regard to issues such as
transparency, and technological neutrality, and keep in mind that strengthening the rulesbased
trading system is complementary to the development of ICT potential.. At the same
time, policy makers must remain alert to the potential development of impediments that could
result from short-sighted or overly restrictive policies relating to technology, innovation and ecommerce.
Strengthening the rules based global trading system is necessary to maximise
opportunities for innovation, and the enhance the ability for all to reap its benefits.

*{NOTES

1 "A New Economy?: The Changing Role of Innovation and Information Technology in Growth"
(DSTI/ICCP/IND/STP(2000)/FINAL) and " Economic Growth in the OECD Area: Recent Trends at the
Aggregate and Sectoral Level "(ECO/WP1(2000)6), and a number of supporting analyses such as "The
Contribution of ICT to Output Growth" (DSTI/EAS/IND/SWP(99)4).
2 These considerations may appear besides the point to many readers from a vantage point of the largely
free market economy of the United States (where, incidentally, the impact of the Internet is so far most advanced
and arguably best measured and analysed.) They can, however, be extremely relevant in the context of other
OECD economies where labour and product markets are heavily regulated and state support to ailing sectors and
companies is routinely expected and sometimes obtained. Indeed, the principal motivation in OECD's focus on
the growth-innovation linkage appears to be a desire to understand the necessary conditions for the replication of
the US experience elsewhere.
3 Source: UNCTAD World Investment Report 1999, pp. xxi-xxii.
4 The discussion on digital opportunities and divides concerns the use of digital technologies not only in
economic activity, but also broader educational and social contexts. This paper has no pretension to cover all of
these but focuses on the former aspects.
5 Questions may be raised on the existence of truly competitive markets in some segments of ICT product
markets, such as operating system software. Even there, the broader economic analysis ought to maintain a
measure of "in comparison to what?" (which other sector of investment goods?). To put it differently, even in
segments where monopolistic practices may exist, the degree of market contestability may still be above what is
the case in most other investment good markets (such as transportation, education, etc.) This is however not a
reason not to tackle the genuine competition policy issues, but simply a call for a sense of proportion. (???)
6 Refer to footnote no. 1. What is stated in the context of business uses is equally applicable to nonbusiness
uses of digital networks and work models.
7 Some commentators tend to see a problem in the mere fact that B2B e-commerce far outweighs (by a
factor of 5 to 6) B2C and may be growing faster in the current juncture. While the relative growth rates of the
two segments may change in the fast-evolving nature world of e-business, the mere fact of B2B being several
times B2C would be broadly in line with what one would expect in a modern economy with high degree of
specialisation at the firm level, and where final value added is only a fraction of total transactions. OECD would
enlighten the e-commerce discussion by communicating this point in some visible fashion.
8 Including, as noted in the first part of this paper, an urgent attention to the development of reliable and
internationally comparable data on the services, in particular on productivity.
9 The virtues of "linkage intensive growth" have been elucidated numerous times, including by the OECD
(Open Markets Matter, 1999). It is in a way sad that in the last year of the twentieth century their relevance may
have to be argued anew in the highest policy circles.
10 Electronic Commerce. Market Access Issues -- Existing Commitments for Online Supply of Services,
July 1999 [TD/TC/WP(99)37].
11 Current OECD and BIAC projects include the following:
- JOINT BIAC/TUAC Management and Labour Experts Meeting: Human Resources in the New Economy:
Challenges and Opportunities for Education and Training, Paris, 22 November 2000
- OECD Workshop on Digital Divide, Paris, 7 December 2000
- Business-Government Forum on E-Commerce, Dubai, 15 January 2001
- OECD Emerging Market Economy Forum, Dubai, 16-17 January 2001
12 Source: "The Concept, Policy Use and Measurement of Structural Unemployment"
(ECO/WP1(2000)2/ANN1/CORR1) Table 1. Structural unemployment rate refers to the "Non-accelerating
inflation rate of unemployment" (NAIRU).
13 OECD, Implementing the OECD Jobs Strategy. Assessing Performance and Policy, Paris, 1999. Table B.5.,
pp. 182-183.
14 The "non-accelerating inflation rate of unemployment", which is a measure of the rate unemployment under
which the additional demand on labour resulting from economic growth leads to accelerating increases in wages
and therefore the economy-wide price level.
15 The last four columns of Table 1. Provide summary information on the status of regulatory reform in product
markets. The index on column (15), which is taken from a Policy Research Working Paper done at the World
Bank (under the responsibility of its authors only), represents a synthesis using data on the regulatory framework
from a variety of sources, (as described in the paper itself; see Sources of Data below). While there may
obviously be some problems with the comparability of source data, the authors go some way in developing a
methodology which relies on findings which are corroborated by a number of different sources. The original
World Bank index is given as a "normally-distributed" variable ranging from 2.5 to –2.5. For convenience, here
it has been converted to an index based on 100 for the highest performing economy in this dimension. Column
(17) shows a summary indicator of product market regulation prepared by the OECD, with a sectorial focus in
telecommunications, road freight, railways, passenger air travel, retail distribution and public procurement.
Columns (16) and (18) depict the ranking of countries for the indicators in columns (15) and (17) respectively.}