Literature Review on Digital Economy - Essay Example

?Running Head: Literature Review on Digital Economy Literature Review on Digital Economy [Institute’s Literature Review on Digital Economy The field of IT has always held mass potential for improvement and development in the world, in relation to economic growth as well as the standard of living across the globe. However, due to several internet-related disasters and failures in the recent past, policymakers are hesitant to exploit this potential of Information Technology. Experts report that during the time of introduction of this tool to the world, policymakers explored the possibility of IT making a large impact, but in vain. This failure of IT became reinforced again in the 1990s, when IT began to revolutionize the world economy but again plunged into disaster with the “dot-bomb” implosion, the 2001 recession, and the NASDAQ collapse. These disasters have led to experts and policymakers forfeit confidence in the concept of IT and digital revolution. Nicholas Carr (2003, pp. 10) evaluated this technological tool by claiming that the improvements that it had the potential to bring about had either already been introduced, or were in the process. This statement represented the prevailing view of IT at that time, as people had started considering it insignificant for individual firms as well as the overall economy. This conclusion was a premature and incorrect one; as the technology went on to completely revolutionize the economy much more than initial prediction. This literature review aims to analyze the reasons behind this faltering confidence during these times. As one can observe in the world today, digital development in the economy is at a level that far exceeds earlier forecasts. However, contrary to predictions, this revolution has not come about due to a rise in e-commerce and other internet-related phenomenon. Instead, the main factor behind this revolution was the way people have managed to adopt IT in almost every aspect of life, inside as well as outside work. This digitally enabled economy was then able to achieve immense growth and prosperity in every aspect: education, business, trade, as well as monetary policy. One large factor behind this accelerated growth was the investment that firms made in software, hardware, as well as services related to IT and communications. It boosted productivity up to five times more than other capital such as buildings and plants could. The large role of IT in this major economic development is apparent in the fact that sixty-seven percent of total factor productivity growth during the period of 1995 and 2002 was due to IT implementation in the US (Jorgenson et al, 2005). It also boosted the labor productivity in developing nations, and it is considered the main driver behind innovation and productivity growth in the recent years. Despite the major contributions of IT to the economy, not much research has gone into exploring the depths of this contribution. Through this literature review, we attempt to carry out this exploration. More specifically, we will be looking into the contributions of IT in ‘improving the quality of goods and services. A common misconception is that the scope of digital economy is limited to e-commerce. Its actual scope includes all applications of technology in the economy, including that of hardware, applications, and telecommunications. Each of these tools of IT has important applications in areas such as intercompany transactions, data management, internal processes in organizations and vendor-customer relations. These benefits apply to firms regardless of whether they belong to the public sector or the private sector. The revolution to the economy that information technology has brought about is comparable to the revolution that hardened steel brought to the industries a century ago, when it taught them how to construct steel tools that helped boost productivity immensely. Furthermore, it is difficult to grasp the true pervasiveness of IT in the world. It not only exists in technological gadgets such as computers, cell phones, and digital cameras. It is even a part of simpler domestic products such as vehicles, microwaves, and washing machines and industrial products such as machinery, lasers, and security systems. This is apparent in the fact that 70 percent of the microprocessors used in 2006 were incorporated into ordinary items such as televisions, cars and planes, rather than computers. This gave even these items the functionality and connectivity of a computer, enabling them to interact with other such tools through a technological network. Furthermore, this technology is becoming cheaper and easier to implement, thus vastly accelerating the growth of its use. Research shows how the benefits of technology in boosting economic productivity were initially difficult to realize. The key to realization was for IT users to figure out the multiple ways in which technology could improve the efficiency and effectiveness of their processes. This task became easier as the costs of IT implementation decreased further each year (Cohen et al, 2001). This realization has been helping with the growth acceleration over the last 40 years, bringing it to a point where it is almost impossible to count all the new applications of technology under implementation in the world today. There were several social, political, and economic factors contributing to this growth in IT usage. However, the main reason behind this pervasive expansion of IT implementation was the constant development of more and more affordable, innovative, and user-friendly technology. These three constant improvements have together made the IT industry a force to be reckoned with. Furthermore, IT has greatly improved the standard of living for individuals as well. This does not simply relate to the increased efficiency in production, but also the immense improvement in quality of the provided goods and services. IT has helped improve this quality through two main ways: better information about quality, and increased capacity for customization. It enabled them to more efficiently gather information about the feasibly improving the quality of their products, and taught them to tailor products according to each customer’s specific demands. Through these ways, it has greatly enabled the manufacturers to build long-term and profitable relationships with their customers. Quality Monitoring Brief analysis of literature has indicated that IT enables organizations to keep a check on its production-related processes. This helps improve the quality of the products, since inefficiency and mistakes are minimized. Hospitals, for example, can benefit greatly from this development. Through one control panel, single personnel can monitor dozens of rooms at one time, through both audio and video surveillance. Such implementation helped two ICUs in Norfolk, VA improve the quality of their services, by reducing their costs by 25 percents and decreasing the number of deaths by 27 percent (Mullaney, 2006). Moreover, IT implementation reduces the preparation time per patient and allows them to receive medical attention more promptly (Gabor, 2004). This improvement of service quality brought about by IT implementation also stretches to the government. They are able to assess their plans and evaluate their strong and weak points using programs such Baltimore’s City Stat program. Based on the New York COPS program, it enables the government to sort several types of essential data into usable form, such as the response-time it has to different situations, the number and categories of complaints by citizens and the wages paid to employees of different levels (Hill, 2006). One of the main ways City Stat improves effectiveness is by making managers accountable for their divisions, who can then pass on the responsibility to their front-line managers. This not only increases the transparency of the government systems, but also encourages the citizens to enhance their performance and eliminates wastage in processes. An example of this is the Credit Alert Interactive Voice Response System, a HUD-initiated Federal government database. This system enables lending agencies of the Federal government to perform credit checks on their customers. This way they are able to avoid allowing mortgages for FHA insurance to those who have a history with foreclosure or default. A survey from 2005 gives further evidence about the worth of IT. It revealed that between 44000 to 98000 people die every year due to unplanned drug administration. It went on further to show how IT implementation in the healthcare industry can help save two million such unplanned drug administrations, and thus prevent approximately near to two hundred thousand people from getting hospitalized (n.d, 2005). The after-sales service process can also benefit from IT greatly. For example, Boeing attaches RIFD tags to the parts it sells for its new Dreamliner. These tags mention several useful pieces of information about that are relevant and necessary for after-sales services (Hill, 2006). These details include the history of that part, the places where it was produced and serviced last and the dates for these events. Each such detail makes it more convenient for the customer to make use of the after-sales services available to them. Furthermore, the incorporation of GPS technology helps companies that own fleets increase the efficiency of their systems. It helps them be constantly aware of the idle times, and inefficient miles per gallon being used at every point, so that they can correct any flaw in the system right away. Moreover, IT helps the consumers stay aware of the quality of different products available in the market. This increases the competition amongst firms because they are then made to compete against the rivals to produce the better quality product. This advantage did not exist before this pervasive implementation of technology. Companies could sell their products without striving to make them of the highest quality, because consumers did not always have enough information about the quality that different companies provide. They would only become aware of the poor quality after purchase, and even then, would have no means to share their bad experience with that company’s products with anyone they knew. On the other hand, the company would also be unable to obtain any feedback from its customers (Stross, 2006). However, IT has now made online surveys and forums possible, through which these customers can share their reviews about product quality with not only other customers, but also with the company, who will utilize this feedback effectively and prevent further bad reviews. It is due to this reason that only 2 percent of companies reported to the EU that IT has had a negative impact for them; with more than half of the rest saying that it has had a positive impact. In addition, since the customers can now share their views and experiences with certain products, it thus helps other potential buys to be more aware of the pros and cons of their purchase. Such rating systems exist on most major websites such as Amazon, eBay and Netflix. They not only help the consumer stay informed about the different products available in the market, but also about which company offers the best quality or the lowest prices. A recent example of this was of a repair technician from Comsat was found sleeping during his working hours. The disgruntled customer did not have to write a formal letter of complaint that would eventually have no consequence. Instead, he shared his views online, and soon other customers as well as the company knew. Comsat began to correct the mistake of theirs, and was soon able to cover the damage it did to their reputation (Hill, 2006). Similarly, when a customer became exasperated by AOL’s recorded telephone service, he shared his experience on the internet. Soon the world knew about the inefficiency and poor quality of AOL’s customer service, sending them a warning against repeating their mistake. Such instances of improved quality are expected to increase with the rise of use of technology (Stross, 2006). Mass Customization Economic experts often define standards of living by the number of choices a consumer has in the economy. More choice means each consumer has more of a chance of finding a product in the market that will suit his or her personal choice and needs better (Schwartz 2004). IT helps an economy expand the choices it presents to its customers, by reducing the cost of doing so and resulting in the “long tail”, as Chris Anderson from Wired Magazine calls it. Furthermore, Anderson (2004) finds that due to the presence of the internet, the marketplace now has potential for even the most obscure products. Brynjolfsson and his colleagues (2003) elaborate on this point, by discussing on how Amazon.com can hold around 2.3 million books in its centralized inventory, whereas even a very large physical store can hold no more than 100,000 books. Thus, Amazon can afford to hold even those books that may not sell for a whole year. This alone helps them gain an additional advantage worth 731 million dollars to 1.03 billion dollars over other bookstores. This long tail is also found in music and film industries, plus any other product, which can be sold online. Posters.com, for example, contains over 300,000 posters in stock and Ties.com holds more than 2500 distinct ties in inventory. Netflix holds over 65,000 movies in DVD for online rental, whereas a physical video rental store could hold a maximum of 3000 movies. In addition, Rhapsody is able to sell music online, out of which 40 percent cannot even be found in physical music stores. Viewership of videos has also increased highly due to the online presence of Youtube. Internet users view 70 million videos every day, which they may otherwise never get a chance to watch. This helps consumers interact with other consumers as well as buyers, to share their experiences or to advertise their products. Clap Your Hands Say Yeah, an emerging Indie band, is an example of a party that has benefited from this (Anderson, 2004). They were able to sell over 0.1 million copies of their album without even purchasing a record deal. Similarly, a video of an outstanding juggling performance by Chris Bliss remained relatively unnoticed until 2006, when someone shared it on YouTube, making it a viral success with over 20 million views. While the American citizens benefit greatly from all these advantages of the internet, 60 million of these citizens derive these benefits without even residing in the large metropolitan cities. Without the internet, these consumers would be at a major disadvantage since they would not have as many large specialty stores located near their homes, thus limiting their consumer choices. However, through the internet, these customers have around 30 times more shopping choices than they would have even in a large city like New York. A rancher residing in a place like Wyoming can access and purchase the same selection of music and books though iTunes and Amazon, as a large city dweller would. Furthermore, the internet has made it possible for these consumers to also avail services without being physically present in the relevant areas. They can enroll for online college courses and receive an education online, and they can even set up telephonic conversations with doctors while residing in remote, rural areas. Furthermore, IT not only helps expand consumer choices and product availability, but also helps a mass producer incorporate customization into his or her production process. Without the assistance of technology, customization of a product that has been produced in a factory setting would take a lot of effort, time, and money. However, with the concept of ‘mass-customization’, a producer can now mass produce the product and just leave the one detail to be customized, unfinished. This makes the customization process more efficient, as the remaining detail can then be finished according to customer specifications. Furthermore, it used to be necessary previously to uproot and replace machines every time a new function needed to be added. Offices would have to face a lot of trouble in having to reprogram their systems from scratch every time a new application needed implementation in the system. However, with the aid of IT, companies are able to construct ‘flexible’ factories and offices that help make these changes with much less hassle. Few experts (Bartel et al, 2005) proved this advantage by studying firms who had switched from mass-production top production in smaller batches, greatly improving customer feedback. This advantage can also exploited by clothing stores as well as shoe stores, which can now afford to provide their customers with outfits and footwear tailored for their specific sizes and designs. Particularly, fifteen billion dollars worth of goods were based on customized production in 2002. Companies can also customize their services in this manner. A study by Edelberg (2003) found that lenders were able to find customers based on individual risk assessment, which enabled them to offer lower rates. This was only possible due to the increased storage capacity and underwriting technology available in the 1990s. This feature has been greatly appreciated by companies all over, in accepting online payments and creating customer accounts. References Anderson, C. 2004. “The Long Tail.” Wired Magazine. Retrieved on April 30, 2012: www.wired.com/wired/archive/12.10/tail.html Bartel, A. P., Ichniowski, C., and Shaw, K. 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