Can the Internet Boost the Economic Growth of mainland China?

Gaining Knowledge from the World Wide Web1

Abstract The internet has gained popularity in recent years. It provides a lot of useful information to all countries, both the rich and the ones that might be classed as economically backwards. While our predecessors could only obtain information by reading printed books and magazines, which can be rather expensive from a developing countries perspective, the presence of the internet substaintially lowers the cost of obtaining information. A reduction in transaction costs also implies a reduction in the costs of doing business, and this may in turn lead to an increase in economic growth. Nevertheless, some scholars hold the opposite view, and feel that it will only widen the gap between rich and poor countries as computers used nowadays are quite expensive. Those who can use computers are in a minority group. Can the internet boost economic growth in mainland China? This paper tries to review the relevant knowledge from the World Wide Web.

1. Introduction The internet generated a revolution in the economic geography in the 21st century, as modern neighborhoods are not connected with streams and roads but with wires and microwave signals. Nowadays, more than a quarter of the worlds population (1.8 billion people) uses the internet on a regular basis (Leamer and Storper, 2001). The virtual revolution is in full swing and it changes many aspects of our lives (Nicholas et al., 2011), ranging from email to electronic shopping, cyberspace has become an indispensible part of everyday life. The economy is now dependent on un-codified message transmissions which require a level of understanding and trust that has historically come from face-to-face contact (Leamer and Storper, 2001).

The paper should be cited as Li, Rita Yi Man (2011) Internet Boost the Economic Growth of Mainland China? Discovering Knowledge from Our World Wide Web, Global Business and Management Research: An International Journal, Vol. 3, No. 3-4, pp. 345-355
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Numerous studies have documented various dimensions of the internet such as its growth, political, economic, and social applications. While many of the previous studies focus on the economically advanced parts of the world, few have studied in the impact in the less developed world (Warf, 2010) such as mainland China. This paper firstly reviews the causes of economic growth in the 18th-20th centuries, followed by an analysis on economic growth due to the presence of the internet in literature. In view of the popular communication channel that is the World Wide Web, relevant knowledge on how the presence of the internet leads to economic growth will be discussed. 2. Causes of economic growth in 18th 20th centuries The economic geography in the 18th century was affected by the costs of moving raw materials to production locations where the raw materials were combined with capital and labor to make final products. Home and small workshop production were the norm until the end of the 18th century. Cities and towns were marketplaces and transportation nodes (Leamer and Storper, 2001). In the 19th century, better private property rights systems protected the intellectual innovation; the industrial revolution took place in Europe and quickened the pace of machinery invention. Mechanization in manufacturing gained importance, and it created pressures to centralize production in factories and cities. A deeper division of labor allowed companies to operate many more hours each day, and this led to an increase in production (Leamer and Storper, 2001, Li, 2011, Li, 2009). Because of improvements in the transportation network, transportation costs kept falling (Leamer and Storper, 2001, Ioannides et al., 2008), for instance, the steam engine, railways, the combustion engine, and the use of containers for transportation all lowered the cost of shipping goods. Just as the automobile, railways, and the airplane have performed a similar role for lowering the cost of moving people (Ioannides et al., 2008). In the 20th century, there was a tendency toward geographical fragmentation in the production chain. It was accompanied by the spatial agglomeration on parts of the chain, particularly the intellectual or immaterial activities such as marketing, accounting, legal, and finance work. Intellectual activities have risen greatly as value added activities. High divisions of labor made it uneconomic for a single firm to employ all these specialists on a full time basis. Businessmen outsourced many of these activities to specialized firms in order to produce intermediate intellectual inputs. As immaterial products could be transported virtually with limited cost, these
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intellectual activities were amenable to procurement at a distance: designed in New York, made in China and advertised in Chicago, for example. From this history we can conclude that economic progress over the past three centuries has come with an increasing division of labor in the 19th Century and intellectual activities in the 20th century (Leamer and Storper, 2001). Furthermore, there were two innovations in the 20th century which dramatically lowered the cost of communicating and transmitting information. The first one was the widespread adoption of telephony, fixed line first, followed by mobile. All these made long distance oral communication possible. The second major innovation was the internet and e-mail, which played a similar role for written documents with voice and images. Although these technologies may require substantial upfront fixed investments, they essentially eliminate the link between the distance between locations and the cost of communication once they have been set up (Ioannides et al., 2008). There can be no doubt that the rapid development in internet use has bought about another revolution in economic history in the 21st century. The Web affects individuals from different walks of life. With help from the World Wide Web, people can locate a recent research publication, find a national anthem for a school assignment, or examine a countrys current political climate for foreign investment decisions. The abovementioned transformations have taken place in a very short period of time, leading many of us wonder why todays children and teenagers are the so-called Google Generation, who have little or no recollection of a life before broadband, and grasped the information technology technique (Loke et al., 1999) to buy books on Amazon, use eBay to buy VCDs, and get T-shirts in Tao Bao. 3. Internet and economic growth Technology has profoundly changed the nature of business, leading to a higher productivity growth in our economy. Despite there being a limitation in obtaining data, the mechanisms which underlie the structural transformation of the United States economy are quite apparent. Computer hardware plays an important role as a source of economic growth. Take the United States as an example, although computer inputs contributed less than one-tenth of 1% to the U.S. economic growth from 1959 to 1973, investment in computers has exploded, and the growth contribution of computers increased by more than five-fold to 0.46 percentage points per year in the late 1990s as the price decline for computers reached nearly 28% per year from 1995 to 1998.
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In response to this, software and communications equipment contributed an additional 0.3 percentage points per year from 1995 to 1998 (Jorgenson and Stiroh, 2000). A decade later, E-commerce has become a norm nowadays and is a major engine in economic growth. Czernich et al. (2011) review that every 10 percentage point increase in the broadband penetration rate resulted in a 0.91.5 percentage point increase each year in per capita growth. Today, hundreds of new companies are adding Web pages every day around the globe. 15 years ago, more than $83 million was spent world-wide on Web site development, however, the total Web expenditure was expected to increase to nearly $2.6 billion by 1998. Many companies use their websites to publish information about their companies, products, or services. It is also used to provide price information, on-line shopping, and e-mail orders. The first aim of these is similar to having a Web presence, they also encourage their potential customers to purchase by including price information with products or services details (Ng et al., 1998). One study prepared by a web site consultancy company concluded that the major reason for companies setting up a web site lies in the concern that; 1) There is a strong feeling of falling behind the curve, and 2) Their companies cannot be perceived as market leaders if they do not have a Webpage etc (Ng et al., 1998). There is no doubt that cheap access to the Internet greatly reduces transaction costs, leading to a timely transfer of information which is vital for commercial transactions, and thus ultimately increases economic activity (Yoo, 2007). New information and communication technologies (ICT) have reduced the cost of transmitting significantly. It also lowers the difficulty of communicating information over distance and leads to the death of distance. Location no longer matters, and it is anticipated that economic activity will be evenly distributed across the board in the near future. ICT also increases the spatial scope of knowledge spillovers, making it easier for people to acquire information. Fewer person-to-person interactions are required to obtain a thorough understanding of what other companies are up to. With regards the knowledge spillovers via ICT, it is productive regardless of whether it is deliberate, such as among employees of the same firm, or fortuitous. Local increasing returns are less localized when more people interact with each other via new technologies (Ioannides et al., 2008). Codified knowledge spillovers across regions and firms may provide a vital channel by which information technology in general stimulates economic growth (Czernich et al.,
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2011). 4. Knowledge in the World Wide Web Knowledge is indispensable to any modern world organization (Choi et al., 2010). It is defined as a fluid mix of framed experience, values, contextual information, and expert insights (Gagne, 2009). One of the most popular notions in strategic management is to perceive a firm as a bundle of knowledge (Gagne, 2009). An organizations ability to identify, create, share, and apply knowledge directy affects its competitive advantage (Choi et al., 2010, Gagne, 2009). Information technology plays an important role in leveraging knowledge resources (Choi et al., 2010), and it is now used to share knowledge in construction safety (Li and Poon, 2009, Li and Poon, 2011), sustainable development (Li and Ah Pak, 2010) and hospital design (Li and Zhang, 2010). Organizations nowadays often implement information systems which are designed specifically to support knowledge sharing and management activities. These systems include features such as collaboration tools, document repositories, search engines, and intranets, all of which allow virtual communities of practices to be organized. Information technology tools which support knowledge management activities provide some features that encourage collaboration and communication among internet users (Choi et al., 2010). Recent research results show that proper knowledge management leads to an increasing profit as well as sales performance. Thus, it is crucial that different parts of the organization share knowledge (Gagne, 2009) with each other in order to achieve the best performance for the organization (Fey and Furu, 2008). 5. Websites discussion on internet and economic growth In mainland China, online advertising, online games, and e-commerce increased by around 50% in 2008 (Doug.herman, 2009). It is estimated that ICT accounts for up to one-fifth of the GDP growth (Heshmati and Yang, 2006), and every 10% increase in broadband penetration contributes an additional 2.5% to GDP growth in mainland China. To know more about the general publics views on the internet and economic growth, views from the internet are collected via a search engine. Some of them concede that there is a positive causation relationship between the internet and economic growth because of a reduction in transaction costs. Others suggest that such a positive relationship is mainly due to the birth of electronic commerce. More business opportunities are created via the World Wide Web. Some of them suggested

that the internet brings forth economic restructuring. The following Table shows the knowledge regarding the relevant topic in mainland China.

Author

Content

Transaction costs/costs

Create electronic business / new industry

Economic

Evidence on

restructuring growth

(Wei, 2007)

Analysts pointed out that many aspects of Internet applications, including, entertainment, content, communication, application, ande-commerce are inside a link, but only e-commerce can directly create value for the enterprise. IResearch survey shows that SMEs in China in 2005 increased at an alarming rate, and more than 10 million SMEs have been registered in the industrial and commercial administrative departments. These SMEs are an integral part of the Chinese economy. The e-commerce, compared to tens of millions of Chinese enterprises in trade activities, is "a new convenience. (Translated from Chinese)

(Wang, 2009)

Technology innovation promotes a major adjustment to the economic structure and provides a new growth engine for the country. As the forefront of technological innovation, the information network industry has become one of the emerging industries which are significant to Chinas development. (Translated from Chinese)

(Haofumu, 2009) This can increase the pace of economic restructuring, improve the products, and also services market competitiveness. (Translated from Chinese) (Doug.herman, 2009) Online advertising, e-commerce and online games, grew by around 50% in 2008. The wireless Internet is seen as a major engine of growth for most Internet companies in China.

Author

Content The Internet economy can create more jobs, lower the costs for running companies, and encourage entrepreneurship,The Internet economy can also change the conditions of peoples work and life and generate conveniences The Internet economy can create more jobs, lower the costs for running companies, and encourage entrepreneurship, said the co-chair of the conference. The Internet economy can also change the conditions of work and life and generate conveniences

Transaction costs/costs

Create electronic business / new industry

Economic

Evidence on

restructuring growth

(China.org.cn, 2010)

(Show China, 206)

(Heshmati and Yang, 2006)

In similarity with the evidence from developed countries on the ICT and economic growth relationship, the results here suggest that ICT contributes significantly to the Chinese economic growth, rejecting the productivity growth paradox hypothesis, suggesting no positive effects. The contribution is in particular more evident in the 1990s, but the contribution was lower in 1980s. Based on our calculations, ICT accounts for up to 20% of the GDP growth and about 38% for of the TFP Growth. The Internet has expanded to include every aspect of social life and pushed forward the upgrade of economic restructuring, and the internet also promotes government administration, public service, and social undertakings.
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(People's Daily Online, 2010)

Author

Content Cont The rapid development of the Internet in China has fueled the country's

Transaction costs/costs

Create electronic business / new industry

Economic

Evidence on

restructuring growth

(People's Daily Online, 2010)

social and economic growth, Xi GuohuaAccording to statistics, the Internet market in China last year totaled 183.5 billion yuan, a year-on-year increase of 32 percent, and it is one the industries that has recorded positive growth. The Internet has expanded to every aspect of social life and pushed forward the upgrade of economic restructuring. The development of the Internet also promotes the industrial transition of economic production and green manufacturing. Meanwhile, it boosts the growth of modern logistics, e-commerce, cyber-banking, long-distance medical treatment, and community service. In China, every 10% increase in broadband penetration is seen as contributing an additional 2.5% to GDP growth

(The Broadband Commission for Digital Development, 2010) (Paul

Budde Chinas telecom service industry has grown at a faster rate than the Countrys GDP. According to official statistics from the Ministry of Industry and Information Technology (MIIT), telecommunications business contributed approximately 4.3% of

Communication Pty. Ltd, 2011)

the countrys GDP in 2009.

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6. Conclusion While division of labour in the 18th century was one of the major factors responsible for economic growth, the World Wide Web has becomes an important engine for economic growth in mainland China. In China, every 10% increase in broadband penetration is seen as contributing an additional 2.5% to GDP growth The internet users view point reviews the major reasons behind this are; 1) The internet can lower transaction costs/costs of doing business, 2) It brings economic restructuring, 3) It provides an important platform for electronic commerce and many other related business activities. With the fast growing broadband network business in mainland China, it is expected that it will continue to provide fuel to economic growth.

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Paper 2 The global subprime crisis in 2007-2009 seriously affected the economy of many countries. Whilst the United States is not a close trading partner of New Zealand, it affects her trading partners and indirectly affects her economy and real estate prices. The Chow test shows that there was a structural break in the first quarter of 2008 in New Zealand housing prices. Changes in the price of self-occupied housing have multiple impacts on dwelling owners. These changes affect many households wealth, since home equity constitutes a relatively large percentage of household wealth. Variations in residential property prices also affect the risk level of a homeowners portfolio .The Financial Tsunami in 2007-2009 led to a loss of confidence in the financial market and a substantial fall in the worlds output level. The former Federal Reserve Chairman Alan Greenspan described it as a once in a half century, probably once in a century type of event. The United States President Barack Obama also held a pessimistic view that the economy entered into a lost decade, comparable to the Japanese recession in the 1990s. Moreover, this sub-prime financial crisis greatly affects the real estate market though-out the world. New Zealand, as one of the most open economies in the world, was also hit by it. In this paper, we will discuss the causes and consequences of the subprime lending in the US and how it affects the New Zealand real estate market. To test if there was any structural change in housing prices in New Zealand during the global financial crisis, various quarterly data from 1988 to 2010 is collected. The following diagrams show; 1) Housing Price Index and building permit, 2) Gross Domestic Product, 3) The unemployment rate, 4) Currency exchange rate [an exchange rate index or a bilateral exchange rate, 5) Building permits in New Zealand. In a comparison to the Gross Domestic Product between 1997 and 2007, house prices in New Zealand increased by double while the gross domestic product increased by almost the same amount. In 2007, the House Price Index reached a peak of 1519 and the Gross Domestic Product reached a peak of NZD 46004 million. In 2007, the sub-prime financial crisis occurred. The fall in house pricse in the US caused a loss of confidence to the financial system, which then made credit unavailable and led to a liquidity shortfall in the financial system. The lack of liquidity resulted in a contraction of the economy and slowed down international trade. US real output level was reduced by over 10%, while the unemployment rate increased to 10%

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