When companies like Ericsson announce progressive lay offs of twenty thousand staff, after a first quarter pre-tax loss of 5.4 billion Swedish kronor (US$500 million), you suspect that there is big trouble brewing. When a global giant like AOL-Time Warner announces a first quarter US$50 billion loss, your suspicions grow. It is no wonder that equities market melted around the world.

A quick perusal of the media might even have led you to conclude that the bricks brigade was justified in its belief that the fate of the clicks clique was sealed. Soon everything would be back to normal - as that word was understood in the business world for most of the second half of the 20th century.

It was (and remains) tempting to go along with that view, which is almost comforting in its implied certainty, its confidence that the world and the economy in the 21st century will grow and develop much as they did in the 20th century.

There is an alternative view, which we ignore at our great peril. That view is that we are at a point of inflection, a point from which even greater and faster waves of change are going to engulf and alter every aspect of our modern lives.

If we manage the transition well, the benefits could be considerable. For example, a credible study found that generalized use of e-commerce could increase Australia's gross domestic product by 2.7 per cent, around US$7 billion, by the year 2007. The prospects for the US would be comparable, as would be the case with any developed country.

Another study has shown that increased involvement by businesses in the Australian online economy would increase annual GDP by up to 2.6% and would also increase employment. Again, these findings would apply equally to the US economy.

This essay is an illustration of what an alternative view of our future might entail, as we move towards the middle of the first decade of the 21st century. We will start with a brief discussion of a fundamental and much misunderstood term, the new economy.

What is the New Economy?

The new economy is about the new tools, based on the acquisition and exchange of information, which enable new business models, industry structures and forms of organization. The emphasis is not on technology, but on modes of organization and on business models.

In the new economy, information and knowledge gradually replace financial and physical capital as the drivers of value creation. Information and knowledge are bracketed together because information per se is akin to an inert substance.

Information has no inherent power of action, motion, or resistance; one must add something to make it useful and that something is belief (in the form of expectations), derived from experience (or knowledge = information + belief).

The new economy is necessarily a global economy, developing beyond the range of international governance structures and challenging the form and the raison d'être that has supported nation states over the last couple of centuries. Countries themselves are being changed through economic pressure, while the emergence of truly global companies is leading to ever-greater size and greater capacity to challenge national governments.

The resources we need, particularly financial and human capital, are becoming more mobile. As a result, policy and industry changes abroad are being transmitted more quickly into our economy and society, increasing the pace of domestic change and decreasing the time for government policy responses.

In these circumstances, it is easy to see wisdom in the view that “governments should do much less…detailed short-term intervention...and [spend more time] thinking about the overall framework.”

What does this mean, in practice? It means that governments should be concerned with identifying fundamental frameworks and with building the national capability to navigate unpredictable and complex futures - for more than one possible future faces us, as we will see shortly. That capability may be described as a national innovation system.

Countries such as the USA and Australia are fortunate in this, as each country has some experience as a nation that would help to build such a system. Let us look at each country in turn.

Images of the USA

The USA is the largest and most powerful economy in the world and the most technologically advanced society. Throughout the middle and latter parts of the 20th century no one could doubt the strength of the US economy (and its military power). However, for a period that extended across the 1970s and the 1980s there was good reason to doubt the capacity of the USA to innovate.

Prior to the Clinton years, during the Reagan and Bush presidencies, the USA won the Cold War and became the only superpower, but the pundits saw these years as the prelude to the end of US economic supremacy. These were the years when most of us thought that Japan had usurped the place the USA had occupied as the pre-eminent innovator, and even Hollywood was impelled to present images of Japan rising, while the US star was waning.

The 1990s changed all that and, with the wisdom of hindsight, it was always going to be the case that the USA would remain at the top of the pile. Why is this so? As a visitor to the USA and as an observer of American society and culture, rather than a resident, my belief is that there are identifiable factors that drive innovation in the USA.

The first is history, as manifested in culture. The USA was settled and created by entrepreneurs and by non-conformists - though some of the latter proved to be conformists in disguise, starting with the Puritans. The process of conquest and settlement has created a myth that drives and sustains American self-confidence and fuels a risk-taking culture. Americans do not shun failure, as Australians do, for example. Being a bankrupt in a sunrise industry can be a badge of honor in the USA if failure was the result of a daring and innovative approach to business.

Then there is demography. Thanks to the continuing influx of migrants, especially Latinos, the USA remains a young nation and youth generally prevails over age and wisdom in the innovation stakes. Also, the American melting pot continues to provide opportunities for diversity and diversity is another important ingredient of innovation.

Thirdly, there is size. The sheer size of the American economy generates innovation. It is possible for the US economy to support a thousand flowers blooming, with the expectation that at least a few will provide an opportunity to make a buck. Smaller economies cannot afford this luxury; every dollar counts and small economies do not attract much investment to start with.

Let us not forget government. The US Federal Government is a powerful driver of innovation. Without US tax dollars spent in defense-related industries, such as aerospace, the USA would not be the creative powerhouse that it is today. Government purchasing funds large companies, which, in turn, fund large R&D efforts, knowing that, eventually the wheel will go full circle and that the US Government will purchase the innovations the R&D labs turn out.

Lastly, there is education. One might debate whether the average American is well educated, if a liberal education and awareness of the world beyond US shores were the benchmarks. However, the US university system is the best in the world and produces growing numbers of bright, knowledgeable and entrepreneurial graduates, outpacing any comparable system elsewhere. Moreover, because US universities are so well enmeshed in the world of business, there is synergy between educational and business objectives that benefits both.

I may have missed some factors, but I think the images I have chosen tell the right story, as they explain why the US innovation system is and is likely to remain the best in the world. Let me now offer a contrasting view, by painting a sketch of the country where I live, where I am not a mere observer.

Images of Australia

There is a pervasive view here and abroad that while Australians are early adopters of new technologies, Australia is not a “new economy”. Australia is generally regarded as an old economy, relying on primary industries or manufacturing to support its relatively high standard of living.

This is not helped by the images we project abroad. From Nicole Kidman to our golden beaches, to the Outback to selling our wines and our lamb and so on, our promotion of Australia abroad is in line with the view that it is a land of milk and honey, the proverbial lucky country - not a go-getting, entrepreneurial, knowledge-based society.

A factual example might help us to understand what is actually going on. In Australia ten years ago, mining, agriculture and manufacturing stock made up 74% of the stock market's value, with finance and services stock adding up to only 26%. Those proportions have reversed in the last decade, with mining, agriculture and manufacturing making up one third, and finance and services stock two-thirds.

Another pertinent fact: Australia is one of the leading countries in the world in terms of Internet infrastructure, penetration and use. According to benchmarking studies Australia was ranks highly in the world, together with countries such as the United States and Sweden.

Don't misunderstand me, it would be foolish not to sell Australia as a great tourist destination and exports of primary or manufactured products will continue to be very important economically and socially, even in the 21st century.

However, if Australia wants to attract the level of interest and investment required to build our future, it needs to project a more complex, sophisticated image. Australia needs to establish itself as a unique tourist destination, as a producer of resources for the world, and as an innovator in technology and its economic and social uses.

In the words of Michael Krokenberger, the 21st century will require us to build a “cool, light and dry economy”, based on “innovation, knowledge, doing more with less, value adding, being clever”.

This is not new for Australians - and there are lessons here that can be replicated elsewhere.

Building on Old Virtues

Over the years, Australians have pioneered many imaginative solutions to social, cultural, political and technological problems.

The Australian bent for innovation is due to many causes, including the circumstances of the original settlement by Europeans. The harshness of the natural environment, the fragility of the soil and the scarcity of water, together with the blend of many cultures that have settled in Australia, have demanded creative problem solving. Australians have a talent for crafting ingenious solutions to complex problems.

Some solutions responded to uniquely Australian problems, like the stump-jump plough for agriculture. Other great Australian ideas had more universal application, like the black-box flight recorder for aircraft. Many of these innovations have been widely adopted in other countries, often in societies that are larger, wealthier and more powerful than our own, such as the USA.

Australians do not innovate for the sake of novelty or in an effort to be different or to impose their preferences on others. They take a hard nosed and pragmatic approach, focused on realizing the undoubted social and economic benefits technology makes possible. The School of the Air and the Royal Flying Doctor Service are good examples of the positive results that can be obtained by marrying technological solutions to social needs.

A Vision for the Future

How is all this relevant to the rest of the world? Wherever we may be, we live in a global economy. All nations are in competition for the resources needed to make the transition from a traditional to a knowledge economy. There are global competitors, such as the US, the EU and Japan, and regional competitors such as, for example, Australia, Singapore, Korea, and Hong-Kong.

To be effective competitors, developed economies must position themselves as knowledge/service economies, in a world where other economies are catapulting over historical barriers to catch up to us and to overtake established leaders.

If this were a race, then first place would not be in doubt; it belongs to the USA, at least until the latter part of the 21st century, when China may return to the central position it has occupied for most of history. That leaves the rest of us to compete for minor placings, or, alternatively, to avoid oblivion, in the shape of cultural, economic and technological stagnation.

The world is changing fast. Ireland's GDP per head is now higher than Australia's, as is Singapore's. On the other hand, New Zealand, which used to be level with Australia or thereabouts is now way behind economically. Similarly for Argentina, powerhouse of the early 20th century and consigned to the economic doghouse in the early 21st century.

Every developed country has a choice to make: do we go forward, as the Irish have done, or do we stand still, as New Zealand and Argentina have done?

The Foundations of Positive Change

The aim in developed countries should be to promote competitiveness and participation in the global economy. This encompasses both social and economic objectives. There is a strong synergy between economic objectives (“competitiveness”) and social objectives (“participation”), because a sophisticated demand side is crucial to the development of an innovative indigenous knowledge economy.

As more people go online, the network externalities inherent in the technology grow, as do the chances of achieving a critical mass of online activity. Greater cultural receptivity to technology and its uses is likely to engender both greater demand and greater capacity, in a virtuous cycle.

Among its competitors, Australia has some inherent advantages. Australia has low research and development costs, relative to at least some competitors, and relatively sophisticated business service markets. Australia also has a sound regulatory framework - which may prove to be a growing weakness for the USA in the wake of Enron, WorldCom and so on - and an improving environment for competition.

However, smaller economies (such as Australia or Belgium or Thailand or Chile and so on) face significant challenges.

The scale and depth of markets for capital, skills and other resources are small compared to the USA or the EU. This means that countries need to specialize, but without painting themselves into a corner, without ending up in an “ecological” dead end. Australia, in particular, is a long way from the key global centers of economic activity and corporate decision-making - small countries need to compete for notice, for a place at the tables where decisions are made that will shape the future of the world.

Although Australians regard themselves as innovative, translating that into economic and social gains is hampered by a risk-averse culture (hence the importance of cultural receptivity). There is also a negative feedback loop between scale and capacity to manage risk.

The Keys to the Future

In most developed countries, government and private sector activity has focused on the supply side of the knowledge economy equation. For example, Australia has a deregulated telecommunications market and a legal and regulatory environment that facilitates the deployment of telecommunications infrastructure and the development of new communications products and services.

The Australian Government has also provided financial assistance to commercially disadvantaged communities to enable the deployment of telecommunications infrastructure.

In recognition of the potential demand that exists in such an environment, industry must continue to develop new products and services for electronic commerce, security and authentication, mobile communications and general information management. The telecommunications carriers must continue to deploy infrastructure (including broadband), but only in response to known demand.

With all that, the rate of increase in Australian households going online is declining as the number of connected, technically literate households reaches saturation point. All countries will reach this point, even the USA.

If the objective is continuing economic growth and increasing community connectivity, the emphasis must shift to the demand side, to focus on the needs of users of the technology, rather than the suppliers.

One of the main challenges for industry and government is to identify value propositions for users. New products and services need to be tailored to the community and be compatible with users' lifestyles. The technology must integrate itself into the cultural and social fabric and at the same time immerse people in it.

This kind of top down and bottom up integration is not easy to achieve. However, the development and widespread adoption of compelling applications in fields such as health, education, community development and entertainment will drive the further development of the knowledge economy.

To achieve this, application providers need to go beyond “digitization” and automation of existing services, to exploit new capabilities. There is a need to move beyond applications and content generated for the high user audience of males aged 13-25 years, those working in the high tech sector and white collar workers in IT intensive industries.

For this to happen, it will be necessary to tap into the needs and lifestyle expectations of retirees - a fast growing group with an interest in leisure and quality of lifestyle and recognize the trends in consumer demand towards greater customization and interactivity, giving communities the skills and tools to directly participate by making their own content. After all, what is relevant for most of us is what's happening in our local community.

This level of online adoption would embed the technology into the day-to-day lives of families and communities.

New Challenges

There are two main challenges facing the industry in the identifying and development of compelling applications: a shortage of widespread, affordable broadband infrastructure; and the apparent lack of commercially viable market for new, high-bandwidth content products.

In a deregulated market, telecommunications carriers will deploy broadband infrastructure only where there is sufficient demand. In the current environment, few risks are taken with demand forecasts and rightly so. Content publishers will purchase high-bandwidth, sophisticated content only when it is profitable to do so.

These challenges give further emphasis to the need for applications developers to identify and provide products that are culturally relevant and compatible with peoples lifestyles and have high levels of “embedded value” - these are “compelling applications”.

The development of compelling applications will require increased interaction between the technology and the creative sectors - between the scientists and engineers and the designers and artists - to encourage innovation and creativity.

There is also a challenge for government - national, state and local - to ensure that the decisions made in the past do not shackle innovation. Existing networks of interests, public and private, will and must come under pressure, as the new economy reshapes value chains.

The future will be better served by focusing on innovation, creativity, and on forging partnerships across traditional boundaries.

Creating the Future

Developed countries will want a diverse, creative, innovative and financially successful communication industry, where value is created through content and where business models drive technology - and are not driven by regulation. We all want communities and individuals to have access to the content they want, at a price they are prepared to pay. The means of delivery should not be a concern for the user.

We need service providers selling packages of services tailored for each market, with options tailored for individual preferences within those markets. The same range of services may be delivered by broadband Internet in one location, by digital television in another, and by a combination of technologies in yet another.

We may need regulations governing gambling, adult content and spectrum management, but the rest could be left to the market and to general legislation protecting privacy, intellectual capital and so on. The incipient regulation by stealth of the online entertainment in the USA may well be rued by those who want to grow the market, rather than short-term shareholder profits.

A diverse mix of communications technologies is the key to universal access. It may well be the case, for example, that cable services dominate in large cities where a large proportion of the populace is wired and technology savvy. Meanwhile, retirees in Florida may prefer high definition entertainment programming based on digital broadcasting infrastructure. Sports fans could keep up with their chosen sports by watching multi cast subscription television, by cable, satellite or whatever means is best in each area.

It may not be enough that many of the above services are currently available via the Internet. For example, Australia has one of the highest Internet penetration rates in the world, but Australian Internet take-up rates have slowed and may plateau at around fifty per cent, leaving a sizable proportion of the population without access to networked technologies.

Service delivery via the ubiquitous television set would not be a panacea, but would increase penetration significantly. The objective should be to ensure that people can gain access to government services through a selection of means appropriate to each community and the individual selects the means of delivery, as well as content. Commercial interests could value add to free government services, providing packages tailored to consumers.

For example, a small business may combine e-commerce capability with entertainment for the family and the capacity for narrowcast advertising in the local area. A local government authority may use its service delivery platform to provide services to ratepayers and to service small businesses in the area, in association with a commercial provider that provides access to the “outside world”.

To sum up, while the challenges before us are great, the possibilities are endless, flowing from an orderly transition from the regulated, technology-focused world of today to a world where the focus is on consumers and on content. In the USA, as well as in Australia, the future belongs to the innovators, not the regulators.

References:

• Ananova.com
• ABC.net
• NOIE.gov