Implications of New Economy and Changes in Industrial Structure - Research Paper Example

Introduction The new knowledge-based economy is moving on the skates of globalization. World economies are getting changed but the impact on service sector of these changes is felt the most. As a result, research preferences also have to be changed. Service sector has increased multifold to include services like banking, janitorial, education, entertainment, logistics and healthcare among others. In developed countries, service sector is the major employer so the impact of globalization and information technologies on the economy cannot be measured without considering the service sector. It will help in policy formulation keeping the global trend in policy shift in view. Trade agreements with other countries cannot be entered into without understanding the economic impacts of the service sector. Problems appear in data measurement in service sector. Research in this sector is crucial to fill-in the knowledge gaps caused by insufficient data (Copeland, 2003). Globalization and the services are interlinked as services make globalization possible and at the same time bear the risks as well as offer opportunities. Telecommunication and transport are crucial services linking countries. Any change in the trade policy, competition policy and technology impacts these businesses that have made the whole world a global village. Earlier, international trade used to happen for goods but rules are changing for trade in services, as they are no more tools of domestic policy. The North American Free Trade Agreement (NAFTA), the World Trade Organization (WTO), and the General Agreement on Trade in Services (GATS) are governing investment in services but there is need to measure the cost of putting limitations to trade in services and its results on trade liberalization. Innovation has gained importance, as the world is coming closer, creating policy level challenges arising from the introduction of new technology and the economics of new world markets (ibid). Implications of new economy Changes in Industrial Structure The industrial mechanism have gone global and become knowledge-driven via new technologies. It is applicable to both products and services but although the process of change is slow but is rooted in the past. In comparison to changes taking place now, a lot of changes happened in the timeline of 1971 to 1991 when share of high knowledge industries was greater. It shows that nothing happened all of a sudden. Actually, Canada was behind some other countries in knowledge-intensive globalization of services, as found in the report of the Organization for Economic Co-operation and Development (OECD) in 1992 (Copeland, 2003). Organizational Change The new economy has brought about changes in total output of different industries. The communication and trading costs have subsided, creating new opportunities for companies to manage their production. With-in industries, changes are taking place, as in the United States, production is changing vertically. Outsourcing has increased both domestically and globally. Specialized firms are getting job contracts in stead of doing all by themselves in single vertical location. Information technology has transformed the workplace organization, especially in service sector. Decision making is no more centralized and job responsibilities have increased with the use of new information technology. Demand for trained labor and mechanism for settling wages has also changed as a result (Copeland, 2003). New Economy and Labor Markets The new economy labor market is skill-oriented. Demand for skilled workers has shifted outwards. Although wage reward has been stable in Canada for example even though supply has been better of educated workers, which goes well with outward demand shift. It is an industry phenomenon because it is happening in all segments of industry where skill up gradation is taking place not because of any change in labor demand led by change in the structure of industries. It holds true of slow change in industrial structure as stated above. Another perplexing issue confronted is that total earnings of life time have taken a down turn of today’s youth in comparison to what old generation used to earn with the same skill set. Technological changes impact demand of workforce but at the same time the workers’ expertise affects the composition of industry and speed of innovation. It means the supply of workers may impact the production style. In standard open economy models, it can be predicted that shortage of skilled labor won’t affect relative wages among countries but may affect the production of services in the economy. We can derive the meaning that in the long run skilled workers may not get higher wages but the quantum of skill-based services will be affected. It indicates that factors like education and immigration policy can play a major role in the evolution of the economy. Other than technological advancement which can impact the demand for labor, policies also impact the supply and skill set of workforce, which eventually changes the production method. Thus, changes in information technology affect the type and standard of work. The new communications technology has changed the job features. Telecommuting is happening at increased pace. The number of independent contractors has increased. A particular set of jobs and employees are more affected than others. In this context, it is important to know whether the new telecommunications technologies have raised the level of productivity in workforce or not. Research has indicated that technology has impacted crucially the distribution of income. As per Rosen (1981)), the most talented superstars earn very high in comparison to normally talented stars by bargaining better than others and making good use of technologies like the Internet to capture market and expand into new markets. For example a highly talented teacher can reach to thousands of students by using new technologies in comparison to many normally talented teachers just teaching a class at a time. Thus, changes in information technologies have brought about changes in companies and labor market besides the labor supply has changed the way of production (Copeland, 2003). Network Economies A number of industries like banking, transportation, shipping and communication depend on network externalities. The standard, value and effectiveness of services offered depend on the reach to a network of others. It can create issues regarding competition and trade policy. Any trade-off has to be set aside keeping in mind the role played by power in industry segments like banking and air travel and benefits accruing from an integrated network. Such sectors cannot survive without using the information technology that makes functioning of networks in different industry sectors possible. Networks from one country to another require regulatory systems, as tension at borders between neighboring countries might affect the smooth working of networks. There could be obstacles to entry. Certain sectors like telecommunications, financial markets and logistics require network externalities to be robust. If there are differences in productivity, pricing and standard of services among different countries, it could be due to policy changes in a country or tension at the physical borders or there could be some other factors, which needs to be researched (Copeland, 2003). E-commerce The speed at which e-commerce is expanding the businesses horizon might impact economy immensely. Traditional distribution networks have got replaced with the consumers directly dealing with producers leaving no role play by middlemen. Internet businesses are getting the benefits of economies of scale, affecting the local businesses. Internet has brought the specialized consumers and producers nearer to fulfill the needs of such consumers and create a niche area for suppliers, which was otherwise not possible due to hurdles in getting access to distribution networks. Reach of distribution networks differ across industry sectors and their entry into a particular market depends on a number of factors. Public policy also affects e-commerce. Border tensions and tax issues could also pose problems to the advances of e-commerce (Copeland, 2003). There is general agreement among economists on the benefits of the new economy coming from the information and communications technologies (ICT). These benefits accrue from the investment, production, and exports of ICT likewise there are benefits from other business generating activities. But the integration of structural policies, networked ICTs and human resources can benefit the whole economy and increase the productivity growth to be made possible by exploiting the packaged ICT resources in a better way rather than through the ICT sector alone (Mann, 2002) . Using ICT for the growth of the whole economy depends on the condition of economic development, which differs from country to country. In certain economies the most crucial accessories of information and communications technologies could be cell phones or faxes and not the use of internet through a personal computer. Thus, it is clear that technologies that speed up the transformation process in an economy are determined by its standard of development (Mann, 2002). ICT use could be for various purposes in the New Economy but making effective use of networked ICTs with the involvement of trained human resources and through the support of structural policies, businesses can be transformed to the benefit of all – the consumers, the government and the businesses. Economic activities throughout the economy get changed and are equally crucial and significant for the whole economy as it is for the ICT sector (Mann, 2002). After all, why we want growth in productivity? It is because growth in labor productivity is the basis of all gains in real wages. The better growth in total productivity helps in the speedy growth of GDP with little inflation. It also indicates that the higher the productivity growth, higher will be sustainable living standards (Mann, 2002). As said above that policy conditions can create a viable environment for all stakeholders of ICT, there needs to be financial depth, open economy, pro-competitive, and elastic market regulations. But we should not assume that technology is a magical wand that can perform policy reforms. There are enough examples of businesses shying away from technology as telecommunication costs are a hindrance in bringing efficiency and also workforce can not become adept at technology usage all of a sudden; it’s not so easy to change work rules for efficient use of technology. All businesses don’t get finances for investing in technology. Due to lack of competition also, businesses don’t feel the inclination and compulsion to invest in technology for making new, cost-effective and better products and services (Mann, 2002). Financial depth is very crucial for transforming the environment as per the new economy because transformation of business activities cannot take place without a sound financial system. The financial system will weed out the bad opportunities and work to produce results on the right opportunities whether they are available at local or global level. Some risky global ventures need the support of some segments of the financial system which is not detrimental for the whole health of the whole economy (Mann, 2002). External openness is also crucial to receive the benefits of increased production in services provided from the global platform. The cost and performance of services depends not only on financial sector but telecommunications and logistic services are also equally relevant and crucial. Production of goods and services both gets increased due to liberal activities within the economy as much as from exports (Mann, 2002). Trade liberalization may pave the way for the physical shifting of some service industries. Such a shift may increase the adjustment costs in the short term but in the long run it may increase the level of production efficiencies or add to the product variety; domestic consumers may get dependable services at low cost. Another important issue to consider is difference in the motives of doing trade in different industries. These motives will become shared at some stage. So it is very crucial to comprehend forces propelling trade in services of various types and their interaction with goods industry. A lot of research has been made on the patterns of trade in goods but due to lack of dependable data services sector is comparatively without any reliable information the reason of which could be policy agenda not to attempt any explanation of a pattern in services sector (Copeland, 2003). Pro-competitive market rules promote new ideas, innovation and new means of fulfilling market needs. Without flexible market environment and competition in product and labor market guided by rules, it is not possible to achieve results of positive changes in policy implementation (Mann, 2002). Fiscal efficiency of any government can be tested with its participation in the new economy. Governments can be a part of the new economy through tax implementation, customs and procurement. Efficient usage of ICTs can impact positively on the financial resources to be used for other welfare functions like security, education, health and so on. Such ICT related functions performed at government level can be a testing ground for its beneficial usage by the private sector if the government is making effective use of the infrastructure by getting essential information online through employees (Mann, 2002). Different Modes of supply Some services types use modes of supply as substitutes. Different modes have different efficiency effects depending on whether they substitute or compliment. Income distribution is impacted by modes of supply. Big firms prefer direct foreign investment but this mode does not suit smaller firms with limited number of employees. Smaller firms prefer temporary shifting of staff to attend to the client needs. Thus, supply of services as per the trade agreements affects the industry structure. A flexible and liberalized strategy of reaching the customer by direct foreign investment also boosts innovation and competitiveness in the long run. Direct Foreign Investment The train of new economy is running fast on the bogey of direct foreign investment. Through this driving force, the service provider has access to the market by going to the customer location with the servicing facility. To get comparative advantage, firms create branches in other countries or locations to avail the benefit of differences in factor costs but changes at policy and technology level can affect the flow of investment. There exist barriers to direct foreign investment in some industries like financial and airlines. There is the possibility of major economic forces working to create hindrances to the flow of foreign direct investment in services. Discussing the features of new economy, according to Balakrishnan (2004) in the global context has its own implication for a nation’s economy. Globalization has speeded up the process of interdependence and competition among economies at the global market. This interdependence can be seen in trading of goods and services and movement of capital. Domestic policies as a result bear the impact of international policies and economic environment rather than the impression of domestic policies and market. While formulating policies, countries cannot ignore the repercussions of their policies and impact of international policies on their own country. Implications of the new economy at the global level are so many that research effort needs to be focused on its overall impact on the country-specific and world economy in general. It has limited the policy options at government level, pressuring the governments of not taking independent policy decisions at national level. References: Balakrishnan, C., (2004). Impact of globalization on developing countries and India. Retrieved January 25, 2010 from http://economics.about.com/od/globalizationtrade/l/aaglobalization.htm Copeland, Brian R., (October 2003). Services in the new economy: research issues. Discussion Paper Number 13. University of British Columbia. Retrieved January 25, 2010 from http://www.contactcentrecanada.ca/media/77621/researchpaperservicesintheneweconomy.pdf Mann, Catherine L., (May 2002). Globalization and shared prosperity: opportunities and challenges of the new economy. Institute for International economics. Retrieved January 25, 2010 from http://www.iie.com/publications/papers/mann0502.pdf Read More