International Finance and Internet - Essay Example

Countries reacted by restricting movements of capital and establishing fixed exchange rates. Starting from 1973, industrial countries began to reduce restrictions on capital and exchange rates were driven by forces of competition between markets. Modern theory of trade encourages trade liberalisation towards global welfare. Trade liberalisation would enable countries to specialize in producing products they have comparative advantage at producing at more quantities and less costs. Eventually the world would enjoy more products at lower costs.

The integration of innovations in Information and Communication Technologies (ICT) with trade liberalisation has lead to the emergence of International E-Commerce (IEC). IEC is a subset of e-commerce and it is defined as an on-line commitment to sell a product that result in the import or export of goods or services cross-borders. IEC still accounts for a small portion of overall international trade (USGAO 2002). Investment in ICT generated new financial instruments leading to invention of new means of conducting business worldwide.

The Golden age of European economic growth (the period between 1950 and 1973) was superseded by the United States productivity growth that outperformed European productivity growth. . During the 1990s there was spectacular progress in ICT production, which encouraged more capital investment in ICT causing ICT equipment to become much cheaper. ICT production became larger relative to GDP in the United States. EU has lagged behind the United States in ICT investment and in the contribution made by ICT to labour productivity growth.

For most EU countries except Ireland, ICT production accounts for smaller proportion of GDP than in the United States (Crafts 2003). Weak investment in ICT in Europe is related to regulation. Employment protection legislation, which raises firing costs, is an obstacle to the reorganization of the labour force and work practices which are central to obtaining the payoff from ICT. Although Europe has moved in the direction of deregulation and some countries have a strong advantage over the United States in human capital, the continued strength of employment protection remains as a drag on ICT capital investment.

ICT investment is likely to boost growth (Crafts 2003).2.1 Economic Effect of Information and Communication TechnologiesIt is assumed that innovative ICT will make financial transactions easier, secure and at a lower cost. It is possible to lower transaction costs since information costs make up a great portion of the transactions costs. Transaction costs are mainly operation cost. In the B2B segment, the use of e-commerce technologies, i.e. primarily electronic information exchange among enterprises, optimizes production, inventory keeping and distribution (Wenninger, 1999).

Automating transactions may markedly reduce the procurement cost before, during and after a transaction,