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Published online by Cambridge University Press: 17 February 2009
Only a couple years ago various analysts were hailing the arrival of a radically new economy fueled by the expansion of information technology and focused on the Internet. New Internet-based businesses were coming to life every day, attracting some of the best human capital available – both new MBA's fresh out of school and seasoned managers from management consulting firms and the so-called “old-economy” companies. Since in the very short run the supply of talent is fixed, salaries for these talented individuals skyrocketed under the influence of this explosion in demand. A few of the established companies and management consulting firms even set up so-called e-business incubators in an attempt to stop the exodus of talent. They also invested in the development of these e-businesses with the hope of getting a share of returns that were expected to be phenomenal. Furthermore, financial capital flowed to e-business not only directly through these incubators but also from many venture capital firms and private investors.
1 “Europe's Internet Drought”, The Economist, 3 August 2000.Google Scholar
2 Morgan Stanley, Dean Witter, “The Technology and Internet IPO Yearbook”, 7th ed. (May 2001).Google Scholar
3 See lists of layoffs and closures at Internet firms at <http://interactive.wsj.com/public/resources/documents/dotcomlayoffs.htm> and <http://www.hoovers.com/news/detail/0,2417,20_2694,00.html>. See also Sinara Stull, O'Donnell, “In or Out? Dot-Com Refugees Ponder Their Career Options”, Career Journal from The Wall Street Journal, 28 August 2001Google Scholar, available at <http://www.careerjournaleurope.com/jobhunting/jobloss/20010828-theladder.html>; Jennifer, DiSabatino, “Dot-Com Layoffs on the Decline”, PC World.com, 3 January 2002Google Scholar, available at <http://www.pcworld.com/news/article/0,aid,77903,00.asp> (reporting that 101,000 jobs were eliminated at Internet based firms in 2001 and 42,000 were eliminated in 2000).
4 We use the “Internet” to refer to both the physical network connecting computers globally (the strict definition of the Internet) and the “World Wide Web”, which refers to specific types of content that are available through the Internet.
5 The terminology in the literature and popular press is not always consistently defined. The U.S. Census Bureau uses the following definitions: e-business processes (how business is conducted), e-commerce transactions (buying and selling), and e-infrastructure (which supports electronic activities). In this paper, we mainly discuss e-commerce and will use that terminology unless otherwise noted. See U.S. Census, Bureau, “Government Statistics: E-Commerce and the Electronic Economy”, 15 June 2000Google Scholar, available at <http://www.census.gov/econ/www/ecomm2.htm>.
6 See “Define and sell”, The Economist, 24 February 2000.Google Scholar
7 The typology is suggested in “Define and sell”, The Economist, 24 February 2000.Google Scholar
8 Nua Internet Surveys, Ltd., available at <http://www.nua.ie/surveys/how_many_online/index.html>. For the earlier estimates, see “Growth of the Internet: Statistics”, available at <http://www.netvalley.com/intvalstat.html>.
9 See European Commission, “The impact of the e-Economy on European enterprises: economic analysis and policy implications”, 29 November 2001, available at http://europa.eu.int/comm/enterprise/ict/policy/doc/com_2001_71l_en.pdf>. There is gre difficulty estimating the true value of e-commerce both because of the new nature of the mediu and because of the inherent difficulty in tracking spending online. Thus estimates vary considerably, but all data that we have surveyed show an increasing amount of online commerce. Both Eurostat and the U.S. Census Bureau have initiated programs to attempt to measure e-commerc but the results are still preliminary. Eurostat initiated a pilot survey on e-commerce (B2B and B2C) in 2001. See European Commission, available at http://www.europa.eu.int/comm/enteprise/ict/statistics/e-commerce.htm>. The U.S. Census Bureau is developing a number of similar programs. U.S. Census Bureau, “Measuring the Electronic Economy”, available at http://www.census.gov/eos/www/ebusiness614.htm>.
10 The Boston Consulting Group, “Incumbents Take the Initiative: Harnessing the Power of Business to Business E-Commerce in Europe”, May 2001, Exhibit 1, available at <http://www.bcg.com/publications/files/Final_Euro_B2B_5_01_summary.pdf>.
11 European Commission, “The impact of the e-Economy on European enterprises: econom analysis and policy implications”, 29 November 2001, available at <http://www.bcg.com/publications/files/Final_Euro_B2B_5_01_summary.pdf>.
11 European Commission, “The impact of the e-Economy on European enterprises: econom analysis and policy implications”, 29 November 2001, available at <http://europa.eu. int/comm/enterprise/ict/policy/doc/com_2001_711_en.pdf>.
12 U.S. Census Bureau, 1998 Annual Retail Trade Survey; U.S. Census Bureau, 1999 Annu Retail Trade Survey; U.S. Census Bureau, Retail 3Q, 2001 E-Commerce Report. These data are based on the Monthly Retail Trade Survey, but they exclude online travel services, financial brokers and dealers, and ticket sales agencies, three of the largest e-commerce sectors. Therefore, the figures understate to some degree the true level of online retail spending in the United States. For example, another study by BCG suggested that online revenues generated by North American retailers accounted for 1.7 percent of overall retail revenue in 2000. The BCG study also exclude online brokerages but did include travel. The Boston Consulting Group, “The State of Retailing”, May 2001.Google Scholar
13 See “Europe's Holiday Net Sales Top 4 Billion Euros”, Forrester Brief, 27 Novemb 2001Google Scholar; “The Economic Slump Hardly Hits Net Sales”, Forrester Brief, 4 January 2002.Google Scholar
14 The Technology and Internet IPO Yearbook, supra n. 2.
15 “Yearend Shutdowns Report: Shutdowns More Than Doubled in 2001”, Webmergers. com, available at <http://www.webmergers.com/editorial/article.php?id=49>.
16 Ibid.
17 The Technology and Internet IPO Yearbook, supra n. 2.
18 FactSet Research Systems, Inc., IPO Database. Data as of 24 January 2002. In addition, about 900 IPOs have no current price data. These firms could have failed, been delisted, or been acquired by another company. The FactSet database is meant to be comprehensive, which means that the Morgan Stanley IPOs are a subset of the FactSet IPOs. It is impossible to identify the Internet IPOs tracked by Morgan Stanley in FactSet's IPO database.
19 The total value of the Internet basket of stocks tracked by Morgan Stanley Dean Witter peaked in 1999 and by February 2001 fell to 43 percent of its peak value: The Technology and Internet IPO Yearbook, supra n. 2.
20 Amazon, for example, recently posted its first quarterly net profit despite that fact that its shares are trading nearly 90 percent off their highs. Allison, Lynn, “Amazon.com Posts First-Ever Profit”, Associated Press, 22 January 2002.Google Scholar
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22 Dun, & Bradstreet, , “European Business Failures Fall by Two Percent in 1999”, 8 March 2000, available at http://www.dbireland.com/informationnews/european_business_failures.htm>..>Google Scholar
23 Raff, Daniel M.G. and Manuel, Trajtenberg, “Quality-Adjusted Prices for the American Automobile Industry: 1906-1940”, NBER Working Paper No. 5035 (February 1995) Table 3.1.Google Scholar
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25 See Geroski, ibid.
26 Gross entry refers only to the total number of firms entering a given line of business in a given time period (a year, for example). Net entry refers to the number of firms gained by that line of business after taking into account not only the companies that entered but also those that exited over the same time period.
27 See Cable, J. and Schwalbach, J., “International Comparisons of Entry and Exit”, in: Geroski, P. and Schwalbach, J. (eds.), Entry and Market Contestability (Oxford: Blackwell 1991)Google Scholar. See also Caves, R., “Industrial Organization and New Findings on the Turnover and Mobility of Firms”, 36 Journal of Economic Literature (1998) 1947, at p. 1954.Google Scholar
28 See R. Caves, ibid., at pp. 1954-1955.
29 Geroski, supra n. 24, at p. 424.
30 See Caves, supra n. 27, at p. 1954.
31 See Dunne, T. et al. , “The growth and failure of US manufacturing plants”, 104 Quarterly Journal of Economics (1989) 671CrossRefGoogle Scholar. See also Geroski, supra n. 24, at p. 424.
32 See Baldwin, J., The Dynamics of Industrial Competition (Cambridge: Cambridge University Press 1995) especially chapter 2CrossRefGoogle Scholar. See also Caves, supra n. 27, at pp. 1954-1955.
33 See Mata, J. et al. , “The survival of new plants: Start-up conditions and post-entry evolution”, 13 International Journal of Industrial Organization (1995) 459.CrossRefGoogle Scholar
34 See Boeri, T. and Bellmann, L., “Post-entry behavior and the cycle: Evidence from Germany”, 13 International Journal of Industrial Organization (1995) 483.CrossRefGoogle Scholar
35 See Geroski, supra n. 24, at pp. 423-424.
36 See Baldwin, J. and Gorecki, P., “Firm entry and exit in the Canadian manufacturing sector”, 24 Canadian Journal of Economics (1991) 300.CrossRefGoogle Scholar
37 See Gort, M. and Klepper, S., “Time Paths in the Diffusion of Product Innovations”, 92 Economic Journal (1982) 630.CrossRefGoogle Scholar
38 See Audretsch, D., Innovation and Industry Evolution (Cambridge, Mass.: The MIT Press 1995) especially chapter 3.Google Scholar
39 See Audretsch, ibid., chapter 3. See also Gort and Klepper, supra n. 37. The original source of these ideas is Nelson, R. and Winter, S., An Evolutionary Theory of Economic Change (Cambridge, Mass.: Harvard University Press 1982).Google Scholar
40 See Audretsch, ibid., at pp. 56-57
41 See Audretsch, ibid., at pp. 61-64. Audretsch identifies those industries or sectors where the rate of innovative activity by small firms is relatively high as belonging to the “entrepreneurial technological regime”. He finds that entry is more intense in these sectors even after controlling for a measure of scale economies, a measure of capital intensity, and various measures of the economic cycle.
42 See Jovanovic, B., “Selection and Evolution of Industry”, 50 Econometrica (1982) 649CrossRefGoogle Scholar; Evans, David S., “Tests of Alternative Theories of Firm Growth”, 95 Journal of Political Economy (1987) 657.CrossRefGoogle Scholar
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44 See D. Audretsch, supra n. 38, chapter 4.
45 See Arrow, K., “Economic Welfare and the Allocation of Resources for Invention”, in: Nelson, R. (ed.), The Rate and Direction of Inventive Activity (Princeton, NJ: Princeton University Press 1962)Google Scholar. See also Dosi, G., “Sources, Procedures, and Microeconomic Effects of Innovation”, 26 Journal of Economic Literature (1988) 1120.Google Scholar
46 See Nelson and Winter, supra n. 39, at p. 97.
47 Many other high-profile entrepreneurs developed outside the confines of the corporate world entirely. Michael Dell, for example, began by selling computers from his dorm room at the University of Texas.
48 “Yearend Shutdowns Report: Shutdowns More Than Doubled in 2001”, Webmergers.com, supra n. 15.
49 The evolution of the electricity industry in the United States provides an interesting analogy to the evolution of the Internet and e-commerce. Commercial electricity was first introduced in the United States in 1882, but by 1899 it still accounted for only five percent of total mechanical horsepower in American manufacturing establishments. Mowery, David C. and Nathan, Rosenberg, Paths of Innovation: Technological Change in 20th-Century America (Cambridge: Cambridge University Press 1998) p. 103CrossRefGoogle Scholar. It was not until the period between 1910 and 1930 that rapid adoption began to take place. Electricity accounted for 25 percent of mechanical horsepower in 1909 and 82 percent by 1929. Mowery and Rosenberg, ibid., Table 9, p. 116. Just as the Internet has made possible new e-commerce business models, electricity facilitated widespread use of all sorts of new products, including electric irons, radios, refrigerators, washing machines and vacuum cleaners. However, it took decades for entrepreneurs to discover all of the ways that electricity could be put to use. See Mowery and Rosenberg, ibid., Table 7, p. 108 for some examples. Indeed, Mowery and Rosenberg observe, “[t]he lengthy period of time required for the development of complementary technologies and for the other adjustments that were necessary to realize the full potential of electric power has characterized most major technological innovation in this century.” Mowery and Rosenberg, ibid., p. 117. It may well take entrepreneurs a similar length of time to discover all of the potential for e-commerce. In that time thousands of firms will be created and destroyed. Paul, David and Gavin, Wright, “General Purpose Technologies and Surges in Productivity: Historical Reflections on the Future of the ICT Revolution”, Oxford University Discussion Papers in Economic and Social History (September 1999)Google Scholar, draw an analogy between the evolution of electricity and the evolution of the personal computer. Each experienced an extended transition period during which a general-purpose technology (GPT) became dispersed widely. In the case of electricity, the transition period was followed by a prolonged period of higher growth in total factor productivity. Although they caution against drawing too many conclusions from historical analogy, the authors suggest that the evolution of the two technologies is, in many ways, similar.
50 It is debatable whether “mixed” firms should really be considered e-commerce firms since they really operate as traditional firms while exploiting the benefits of the Internet. Still they do participate in e-commerce and thus deserve mention.
51 Data from Eurostat indicate that in 1999, the products accounting for the highest percentage of retail sales online were financial products, computer products, books, music, and travel while clothes and home and garden were last on the list. Joachim Hubertus, “Online Retailing – A Challenge for the Retail Sector”, Eurostat, Theme 4 –43/2001. See also Y. Bakos, “The Emerging Landscape for Retail E-Commerce”, 15 Journal of Economic Perspectives (2001) 69.CrossRefGoogle Scholar
52 See Y. Bakos, ibid.
53 See “Define and sell”, The Economist, 24 February 2000Google Scholar. See also Borenstein, S. and Saloner, G., “Economics and Electronic Commerce”, 15 Journal of Economic Perspectives (2001) 3.CrossRefGoogle Scholar
54 In the year 2000, Lehman Brothers estimated that the cost of a financial transaction was $1.27 for a teller, $0.27 for an ATM, and $0.01 for an online transaction. See Lucking-Reily, D. and Spulber, D., “Business-to-Business Electronic Commerce”, 15 Journal of Economic Perspectives (2001) 55.CrossRefGoogle Scholar
55 See Rachel, Konrad, “Dot.com Stars Shine Brightest Before They Die”, CNET news.com, 27 February 2001Google Scholar, available at http://news.com.com/2100-1023-253255.html>.
56 In fact, one could think of “content” as a good that can be distributed over the Internet, but that has not precluded multiple content-oriented companies from going bust.
57 See “The rise of the infomediary”, The Economist, 24 June 1999Google Scholar. Alternatively, it has been suggested that online intermediaries can be classified as brokers, auctioneers, dealers, and exchanges. Brokers match buyers and sellers for a fee. Auctioneers take a more active role in transactions by setting up a mechanism for price determination. Dealers take ownership of goods provided by suppliers and resell them to buyers. Exchanges, finally, are double-sided markets, similar to existing markets for financial instruments and commodity futures. See Lucking-Reily and Spulber, supra n. 54.
58 Companies have been created to conduct trade in goods as diverse as advertising and almonds, lighting fixtures and laboratory equipment, cattle embryos and circuit boards. On-line markets have been announced, or established, for advertising, aircraft parts, agricultural products, apparel, automotive parts, chemicals, computers and electronics, energy, financial instruments, food and beverages, health care, intellectual property, freelance services, laboratory supplies, industrial machinery, metals, office supplies, plastics, paper, printing services, shipping, telecommunications, and travel services. See Lucking-Reily and Spulber, supra n. 54.
59 See <http://www.nte.net>.
60 See “The rise of the infomediary”, The Economist, 24 June 1999.Google Scholar
61 See <http://auctions.bcentral.com/>. bCentral also offers a variety of other non-auction e-commerce services for small businesses.
62 See http://www.ewinwin.com/corp/>.
63 See “You'll never walk alone”, The Economist, 24 June 1999.Google Scholar
64 “Yearend Shutdowns Report: Shutdowns More Than Doubled in 2001”, Webmergers.com, supra n. 15.
65 See “Thrills and spills”, The Economist, 5 October 2000.Google Scholar
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67 FCC, “Federal Communications Commission Releases Data of High-Speed Services for Internet Access”, 9 August 2001Google Scholar, available at <http://www.fcc.gov/Bureaus/Common_Carrier/News_Releases/2001/nrcc0133.html>. See also “There's nothing on”, The Economist, 5 October 2000Google Scholar. By the end of June of 2000, only a fifth of American households had access to the so-called digital subscriber lines (DSL) offering broadband connections. Furthermore, DSL transmission speeds range between 300 kilobits and 1.5 megabits per second, whereas it is generally thought that 3 megabits per second are required for TV-quality video. Cable has a theoretical limit of 10 megabits per second but in practice faces congestion problems that reduce its actual speed.
68 See “Siren songs”, The Economist, 5 October 2000.Google Scholar
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70 See supra n. 66 and n. 67.
71 See “Thrills and spills”, The Economist, 5 October 2000.Google Scholar
72 In the second quarter of 2000, about 90 percent of online households in North America used their online connection to send and receive e-mail, about 70 percent used it do perform a search through various search engines, about 45 percent used it to do research on a product before purchase, about 30 percent used it to look for medical and health information, and a similar proportion used it to visit reference sites, to download software, and to read the daily newspaper. See “Sex, news, and statistics”, The Economist, 5 October 2000.Google Scholar