Effects Of The Internet On The Global Economy

Effects of the Internet on the Global Economy

Introduction

It is all about being connected. Throughout the ages being connected has allowed for the economy to grow. The modes of transportation connected the ancient worlds and individual economies grew or dwindled depending on the effectiveness of transportation. Most economic strongholds were on the waterfronts. Shipping was the main mode of transportation. This shifted from the advent of the steam engine. The era of the rail transportation allowed for economic centers to shift and permitted countries to be connected nationally and internationally. Again the economy has entered a new era of being connected by the Internet. "According to the record books, not since the Industrial Revolution has the U.S. economy enjoyed such an extended and prosperous period of uninterrupted growth -- mostly due to rapid advances in technology that have completely altered the business landscape." (Goldman, 2000)

The Internet has created some unique challenges to both local and global economies. Although the Internet has experienced some setbacks, the business opportunities contained therein as well as the volume of daily transactions are too significant for economists and businesses to ignore. In today's global economy, the Internet is an effective way to market goods and services for many companies. As the commercial landscape continues to change, the Internet provides a direct connection between international and U.S. businesses. This connection shortens the communication gap between companies and provides a forum for daily negotiations. This dynamic effect on commerce has had a direct impact on the marketing strategies used to promote growth and business development into existing and new markets as well.

Effects of the Internet on the Economy

An article by Steven Schifferes from the BBC News website http://news.bbc.co.uk/1/hi/business/5235332.stm, gives a brief history on the activity of the Internet over the past 10 years, from 1995 to present. The economy of the Internet expanded quickly. There was much hype as Internet companies sprung up overnight, which were over inflated and over speculated, leading to a crash of stock value in the virtual companies. The rise of the Internet has led to a decrease of production cost in lowering transaction cost and reducing manufacturing cost by outsourcing. The emergence of other factors like price elasticity and product availability were able to take shape because of the Internet. The economics of the Internet is shaping our society today with similar affects of commerce and business from the Railroad in the 19th century.

Internet Marketing Hype - Boom Time and Crash

The rapid expansion of the Internet caused a boom in the products needed to drive the Internet. The company that made the switchgear for the Internet, Cisco systems, became one of the world's largest companies. New retail companies also came to life with vigor. The use of the Internet market appeared to be endless and was able to produce enormous amount of wealth in a short amount of time. (Schifferes, 2006)

The Internet grew so fast and the hype of the companies caused their market shares to be over inflated. The market needed to correct itself and bring the share prices back in line with the value of the company. In the spring of 2000 the market made the correction. The stock prices of many companies plunged over night. This plunge led to many of the internet- based companies to seek mergers with like companies to maintain and consolidate their position within the marketplace. The Internet market became a "survival of the fittest" business forum and companies such as; Amazon, Yahoo and eBay became the dominant market figures.

Effect of Production Cost due to the Internet

Many positive effects related to cost control were realized as companies made use of the Internet for overall growth due to increased net revenues and sales. These cost savings were not as self evident to the consumer. The companies were restructuring the processes by which services were delivered and outsourcing became a viable option to reduce overhead and labor costs. Companies were taking advantage of the reduction in labor costs by shifting operations to many foreign countries including India and the Far East. This outsourcing also reduced the need for space, equipment/materials and labor as mentioned above. This article reveals some of the economic benefits from the Internet and the dramatic reduction of the overall cost of transactions.

Price Elasticity due to the Internet

Reduction of production cost allows the retailer to provide products and services at a lower price. The lower price allows more consumers to purchase more products and services. The Internet has also opened up many "niche" products to a wider consumer group of buyers, which was not available before this internet-based consumerism existed. Consequently, many consumers save both time and money by having this access as well as companies providing a more efficient delivery of services. The opportunity cost is ultimately realized by the consumer and drives future transactions before purchasing a given product or service.

Expanding the availability of products - Long Tail theory

The "long tail" theory is that products with low volumes or low sales can make up the market shares that may be equal to or exceed the sales of other items, if the store or distribution conduit is large enough. Some products that were scarce and only found in regional locations were now made available to the local market. For example, rare and hard to find books were made available to local consumers online through web sites like Amazon.com. The yellow area in the graph below would represent the "long tail" of low volume products that would now be available for distribution to many consumers.

This has been beneficial to both the consumer and distributor of hard to find products and services. This theory can also be applied to the availability of information. Vast amounts of information are now available to those who are connected to the Internet when previously the availability of information was limited to the newspaper or local library resources.

The Internet has revolutionized the business and sales industry and has created an environment that enables consumers to purchase goods or services that are competitively