The Global Internet Economy
This Page Intentionally Left Blank
The Global Internet Economy
Edited by Bruce Kogut
The MIT Press
Cambridge, Massachusetts
London, England
( 2003 Massachusetts Institute of Technology
All rights reserved. No part of this book may be reproduced in any form by any electronic or
mechanical means (including photocopying, recording, or information storage and retrieval)
without permission in writing from the publisher.
This book was set in Baskerville on 3B2 by Asco Typesetters, Hong Kong, and was printed
and bound in the United States of America.
Library of Congress Cataloging-in-Publication Data
The global internet economy / Bruce Kogut, editor.
p. cm.
Includes bibliographical references and index.
ISBN 0-262-11272-8 (hc. : alk. paper)
1. Internet—Economic aspects—Cross-cultural studies. 2. Internet—Social
aspects—Cross-cultural studies. 3. Information technology—Cross-cultural studies.
4. Electronic commerce—Cross-cultural studies. I. Kogut, Bruce Mitchel.
HC79.I55 G5783 2003
338.4
0
7004678—dc21 2002075120
To Edward Bowman, the first director of the Reginald H. Jones Center
and a friend to my colleagues at Wharton and myself, who believed that
the world of ideas can reflect and yet guide the action we observe.
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Forms of Business Governance in the Japanese
Internet Economy 291
Mari Sako
II Cross-cutting Themes 327
10 Is There Global Convergence in Regulation and
Electronic Markets? 329
Bruce Kogut
11 Suppliers and Intermediaries 331
Susan Helper and John Paul MacDu‰e
12 Regulation in Europe 381
Alain Jeunemaı
ˆ
tre and Herve
´
Dumez
13 Non-Market Strategies and Regulation in the
United States 407
Dennis Yao
14 Conclusions 437
Bruce Kogut
References 473
Index 509
viii
Contents
Acknowledgments
This book was conceived by curiosity, a plague that wiser minds avoid. It
began by observing a global euphoria over the potential of a new body of
technologies lumped under the label of the Internet. Many colleagues
and friends were fascinated by the Internet’s e¤ects on productivity, and
surely almost all were infected by the lure of astronomical valuations

played at a faster tempo. But more poignantly, this new economy was
also marked by the transport of an economic model, often called the
Silicon Valley model, to countries that had long been shown by re-
searchers to be inhospitable to these institutions. How important is the
concept of the nation if cultural ideas can coerce national systems to
converge toward new global understandings of how technology should be
developed and people rewarded?
These are intriguing questions that could not be ignored. A project was
born after discussion with colleagues who came to join the endeavor.
Most of them responded first with the reply, ‘‘It is still too early to study
these questions, and I don’t know enough in any event.’’ And then came
the second response, ‘‘But still, I would like to know the answer . . .’’ The
dangers and wonders of curious minds. I would like to thank above all
these participants who had to give so much of their time to learn about
the Internet, to gather the facts, and then to write their interpretations of
what they observed.
We thank as well the participation of many people who helped us
along the way. These include above all Patrick Fridenson and his students
at the E
´
cole Hautes des Etudes en Sciences Sociales and Dan Ra¤ of the
Wharton School, who contributed a sense of historical sobriety to our
deliberations. Olivier Bomsel at the E
´
cole des Mines, Susan Lucas-
Cornwall of VEO, Michel Fleuret of CCF in Paris, and Fre
´
de
´
rique

McMullen, a valued colleague and associate at the center, watched with
care the financial management.
And above all, my thanks to Rachel Barrett, who more patiently than
we deserve, managed the various parts to a completed manuscript.
xi
Acknowledgments
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Contributors
Pierre-Jean Benghozi is presently the research director at the National Center
for Scientific Research (CNRS) and teaches regularly at University of Paris
(Panthe
´
on-Sorbonne, Dauphine, Nanterre). He created and leads a research
group on Information Technology, Telecomunications, Media, and Culture at
the Centre de Recherche en Gestion (CRG) at the E
´
cole Polytechnique. His
current projects draw attention to adoption and uses of ITC in large organi-
zations, structuring of e-commerce, and ITC-supported markets and supply
chains. Pierre-Jean Benghozi publishes on these topics in French and English.
Steven Casper is a university lecturer at the Judge Institute of Management
Studies and a senior research fellow at the Center for Business Research, both at
the University of Cambridge. His research focuses on cross-national comparisons
of the organization of science-based industry and the relationship between law
and technical change. He is currently writing a book examining the di¤usion of
institutions to support entepreneurial technology firms across Europe.
Sea-Jin Chang is currently Professor of Business Administration at Korea Uni-
versity. Previously, he was a faculty member at the Stern School of Business of
New York University and a visiting professor at Stanford and INSEAD. Professor
Chang is primarily interested in the management of diversified multinational

ˆ
tre, Director of Research at CNRS–Maison Franc¸aise
d’Oxford,isa‰liatedwithNu‰eldCollegeandtheRegulatoryPolicyInstitute
(Hertford College) at the University of Oxford. His main stream of research
focuses on regulatory policy, the globalization of markets, and the EU integration.
Martin Kenney is a professor in the Department of Human and Community
Development at the University of California at Davis, as well as a senior project
director at the Berkeley Roundtable on the International Economy. He has been
a visitor at the Copenhagen Business School, Hitotsubashi University, the Uni-
versity of Tokyo, and Kobe University. He works on regional innovation com-
plexes, venture capital, and industry globalization issues.
Bruce Kogut is the Dr. Felix Zandman Professor of International Management
at the Wharton School of the University of Pennsylvania, and co-director of the
Reginald H. Jones Center. He has been a visitor at the Stockholm School of
Economics, the Wissenschaftszentrum in Berlin, the Centre de Recherche en
Gestion at the E
´
cole Polytechnique, and INSEAD. He works on the di¤usion of
ideas across borders and the economic potential of information technologies for
developing countries.
Christian Licoppe has been trained in the history and sociology of science and
technology. He has published a book on the history of experimental practices and
is currently working on the analysis of mediated interaction practices in the field
of electronic exchanges and e-commerce. He is director of the social and cogni-
tive science laboratory at the France Telecom R&D research facility in Paris.
xiv
List of Contributors
John Paul MacDu‰e is an associate professor in the Management Depart-
ment at the Wharton School, University of Pennsylvania and co-director of the
Reginald H. Jones Center. His research focuses on the rise of lean production as

Srilata Zaheer (Ph.D., MIT) is the Carlson School Term Professor of Interna-
tional Management at the University of Minnesota’s Carlson School of Manage-
ment, and chair of the International Management Division of the Academy of
Management (2001–2002). Her research interests revolve around international
strategy and organization, and focus on the legitimacy of multinational enter-
prises, the value of international location in a digital economy, knowledge
creation, and di¤usion across borders and time-based strategies.
xv
List of Contributors
Udo Zander is Professor of International Business at the Stockholm School of
Economics, where he is the acting director of the Institute of International Busi-
ness. Dr. Zander has been a visitor at the Wharton School, University of Penn-
sylvania, and Stanford University. He is the author of several articles that cover
the internationalization of R&D, the theory of the firm as a social community,
and a comparative study of the Zeiss firms in East and West Germany. His most
recent area of research is the impact and power of ideas on international firms
and society, addressing the myth of unidirectional and smooth globalization.
xvi
List of Contributors
The Global Internet Economy
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1
Introduction: The Internet Has Borders
Bruce Kogut
Technologies di¤use rapidly in the modern global economy. Certainly,
the di¤usion of the technologies that make up the Internet occurred with
great rapidity over the past two decades. This is hardly surprising given
the global web of ties among people, firms, and institutions. Many of
the Internet’s key components were created in universities and public
research institutions that viewed their research mission as public dis-

developed and marketed. The Internet technologies crashed on the shores
of most countries about the same time, challenging existing institutions
and powerful interests, as their di¤usion was coupled with global ideas
about venture capital financing, start-ups, and radical business models.
The Internet technology was global, but its economic and business de-
velopment was molded in the context of prevailing national institutions.
The ambition of this book is not to give an assessment of the ‘‘average’’
impact of the Internet. By comparing seven di¤erent country experi-
ences, we analyze how the Internet was developed and what has been
the impact on changing national institutions. Three additional chapters
analyze specific Internet sectors and regulation across countries. By this
comparative analysis, we assess the extent that the Internet presented a
revolutionary opening for economic and cultural change and served as an
impetus for institutional readjustments to a global economy.
The Two Explosions of the Internet
The Internet technologies evolved far more steadily and incrementally
than their economic and commercial exploitation. One date by which to
mark the explosion of the Internet onto the business and cultural scene
is 1994, the year an easy-to-use Internet browser with secured trans-
actions called Netscape was launched. From this date to 2000, the num-
ber of web hosts grew from 2.2 million to over 94 million. The number of
‘‘internauts’’ worldwide grew by some estimates to over 400 million, 40
2
Bruce Kogut
percent of these in North America and half divided almost evenly be-
tween Europe and Asia/Pacific.
1
Thousands of new firms were created.
Stock markets boomed. Venerable firms trembled before the astronomic
rise in valuations of firms no more than a few years old. Suddenly, there

attended gatherings where investors and twenty-something entrepreneurs
3
Introduction
would meet in the midst of a cultural happening. Organizations such as
First Tuesday opened operations in a dozen European cities to o¤er busi-
ness happenings over cocktails, lavish food, and cultural fanfare.
The business icons of this new culture were Je¤ Bezos, founder of
Amazon, David Filo and Chih-Yuan ‘‘Jerry’’ Yang of Yahoo!, and Marc
Andreesen of Netscape. There were dozens more, many of them young,
fresh from meetings with venture capitalists and Wall Street investment
bankers. These founders and their companies were worth billions of
dollars and had yet to earn a profit. In Silicon Valley, it was reported that
250,000 people were millionaires (Kaplan 1999). Stories abounded of
secretaries gifted company shares, and who could now buy homes in the
hills of Los Altos.
The cultural significance of the Internet went far beyond business cul-
ture. The Internet brought new worlds to internauts. People entered chat
rooms, tried out new identities, and encountered dialogues outside their
local lives. The quip that on the Internet no one knows you are a dog
summarized the potential for anonymous exploration of new selves.
2
The Internet economy promised a new economy. It represented radical
changes in labor markets, a change in cultural expectations and explora-
tion, and the introduction of new products and services. The entry of
new firms into these new economic spaces shook the strategies and fates
of industrial and financial giants. In this regard, the Internet poses a cog-
nitive reframing of work and entrepreneurship that vies with traditional
job definitions and aspirations of labor market participants.
The Internet economy is also the digital economy. The content of cul-
tural and material life increasingly became encoded in bits. A generation

nomic and social policies, India is a classic dual economy, with a back-
ward and advanced agriculture (depending on the region) and with a
backward retail sector coupled with relatively advanced industries, with
pockets of global activity in software design.
The United States often appears as the exception in national system
comparisons. Highly decentralized, it has weak business and labor asso-
ciations. Its government pursues active policies in antitrust, but relatively
weak policies in providing guarantees for health insurance or equal access
to basic education. Labor markets are relatively flexible, which also
means workers have less job security than in many other countries. Ties
between universities and companies are unusually strong, and patent and
intellectual property law encourages universities to invest in commer-
cially relevant research. Yet the United States provides an inegalitarian
primary and secondary education, and its deficit of skilled technicians
andengineersiscompensatedforbyanimmigrationpolicy,partlyim-
plemented by university admission criteria. Venture capital is predomi-
nantly an American institution in its origins. Small firm creation is an
unusually powerful engine for innovation.
Because of the particular role played by Silicon Valley in driving the
American Internet economy, the American national system is often called
5
Introduction