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Singaporean economy and points to a potentially greater role of the private sector in the
New Economy. The export market accounted for 53% of total revenues and the domestic
market accounted for 47%.
Hardware accounts for the lion™s share of the IT industry™s output in Japan, Korea and
Taiwan while in the case of Hong Kong, the IT industry, along with the rest of the
manufacturing sector, has largely shifted production to China. Japan, Korea and Taiwan
are all big-time players in the global IT industry. Japanese consumer electronics firms
have been and continue to be among the most efficient and most innovative firms in the
world, with internationally strong brand name recognition and consumer loyalty. Sony
in particular has become a world-class firm synonymous with superior quality and


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Opportunities and Challenges of the New Economy for East Asia 333


constantly at the technological frontier in terms of introducing new and better products
for the consumer to enjoy at home. While Sony has been a global technological leader
for a long time in audio-visual hardware based on technologies such as magnetic
recording, optical devices, semiconductors and digital signal processing, the company
has been strategically and gradually shifting its focus toward establishing a presence
in the production of software that plays on its hardware. The acquisition of CBS Records
“ now Sony Music Entertainment (SME) “ and Columbia Pictures “ now Sony Pictures
Entertainment (SPE) “ in the late 1980s marked a giant step in that direction. The success
of Sony™s PlayStation videogames and digital cameras further illustrates the effective-
ness of Sony™s strategy of merging hardware and software in the New Economy.
Samsung Electronics of Korea is another company from the high-income part of East Asia
that is making waves in the global IT industry. In fact, with its electronics products
recognized around the world for their high quality and innovativeness, the company is
the flagship of Korea™s manufacturing sector and perhaps the country™s only truly world-
class brand. Samsung Electronics has become a global leader in semiconductor, telecom-
munication and digital convergence technologies, and the world™s largest manufacturer
of memory chips, TFT-LCDs, CDMA mobile phones, monitors and VCRs. The company™s
total sales reached a US$34.5 billion in 2002, and perhaps more tellingly in terms of
efficiency, its net income reached US$6 billion for the same year. Samsung has become
the world™s third largest maker of mobile phones, a product that accounts for a large share
of its profits. The company has been able to stay one step ahead of its competitors by
spending relentlessly on research and development, investing heavily in new facilities,
and keeping a blue-chip client base. For example, in the memory chip business, while its
three biggest competitors all recorded losses in 2002, Samsung was able to achieve US$2
billion in profits. The company was able to do this by focusing on specialty products
commanding higher profit prices and fatter margins such as graphic chips for game
consoles.
Among countries outside Japan and the NIEs, China is best positioned to become a
manufacturing hub for IT hardware products and indeed this process is already well
under way. The country™s computer hardware industry grew dramatically from non-
existence in the 1980s to the fourth largest in the world with sales of US$23 billion in 2000.
Exports have surged from a mere US$230 million in 1990 to more than US$10 billion in 1998.
Local PC makers such as Legend, Great Wall and Founder are dominating the fast-
growing Chinese market for PCs through a combination of stronger distribution net-
works, lower prices and better after-sales service, even though they were expected to be
no match for well-established, foreign brands. In fact, the market share of foreign brands
has fallen steadily over recent years and is forecast to fall further. The government has
actively promoted the development of the computer industry by high tariffs on imports
as well as requirements on foreign companies to transfer their technology in exchange
for market access. All major Chinese PC makers are involved in technologically beneficial
joint ventures with foreign partner firms.
A danger related to greater inter-country inequality inherent in the IT revolution for East
Asian economies is that it could exacerbate income inequality within a country. This is
especially a concern in countries outside Japan and the NIEs since there is a much closer
link between inequality and poverty in those countries. A digital divide, or inequality in
terms of access to and use of IT, can only put the less fortunate segments of the society


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334 Park


at an even further disadvantage in an age when information and knowledge are becoming
ever more important determinants of success and advancement.20 The essence of the New
Economy is more information at lower cost, as we pointed out earlier. So, in principle, IT
can serve as a force for greater economic equality. However, in practice, this depends
on the extent to which access to IT is available to all. Therefore, once again we come back
to our point of departure for the IT revolution “ telecom liberalization supported by a
sound regulatory framework. The private sector tends to be more flexible and adaptable
than the government, yet another big reason why it makes sense to involve the private
sector to a greater degree in the telecom sector.
Affordable and reliable telecom services are a start, but only a start in the IT revolution.
Human resource development that equips the entire workforce with basic IT usage skills
is another indispensable ingredient for an IT revolution. 21 A PC and a telephone line will
not do an illiterate person a whole lot of good. Therefore, primary and secondary
education that creates a literate and numerate workforce will remain just as important in
the New Economy as ever. In addition, primary and secondary schools should introduce
computer education as part of their core curriculum. On the supply side, equipping IT
workers with the necessary technical skills as well as investing in tertiary education to
produce a steady stream of engineers is essential to develop a strong IT sector. Although
governments continue to play the leading role in education in East Asia, bringing the
private sector into IT human resource development is desirable. In fact, as the prolifera-
tion of private IT training institutes across the region shows, this is already happening
to some extent. Government regulation of such private sector education should focus on
quality control issues.
There is certainly a lot of merit to the widely heard argument that East Asian education
systems, with their emphasis on memorization and rote learning, will not serve the region
well in the New Economy. Thus the region-wide calls for revamping education systems
to allow for more creativity and independent thinking.22 However, there is also a lot that
the region™s schools, especially those in Japan and the NIEs, do right, such as emphasis
on and their students™ excellent performance in science and math. Encouraging greater
creativity is fine, but this must not mean wholesale imitation of the curricula of Western
countries. Furthermore, we must recognize that the region™s education systems, along
with the mindset and mentality they have engendered, have been in place for a long time
so that the emergence of a mindset and mentality more appropriate for the New Economy
will not take place overnight. Also, many talented East Asians still move to Silicon Valley
rather than contribute their skills to the region. In this case, the problem is not the
education system, but points instead to the lack of a favorable overall environment for
IT entrepreneurship.
In particular, Taiwanese have a highly visible presence among the technopreneurs “ i.e.,
technologically proficient entrepreneurs “ of Silicon Valley. Thousands of Taiwanese go
to U.S. universities each year to study and settle down in the Silicon Valley. In fact, the
Taiwanese, along with Indians, have probably been the most influential expatriate
community in terms of contributions to the emergence of the Silicon Valley as the
epicenter of the global IT industry. Many Taiwanese technopreneurs in Silicon Valley
have returned to their home country to play a catalyst role in its transformation into
Silicon Valley East or Silicon Island. While there have been several factors behind this
transformation, it is difficult to exaggerate Taiwan™s close links to America, in particular


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Opportunities and Challenges of the New Economy for East Asia 335


the role of Taiwanese returnees from Silicon Valley. Just as important as their innovative
technical skills have been the spirit of entrepreneurship and risk-taking that they have
brought back to their motherland.
Taiwan has a number of globally recognized IT companies, most notably Acer, which
ranks among the world™s top ten branded PC vendors with sales of US$13 billion in 2002.
Taiwan Semiconductor Manufacturing (TSMC) is the world™s largest contract chip
maker, commonly called a foundry, and its closest rival is another Taiwanese company
“ United Microelectronics (UMC). The two together accounted for over 60% of the global
foundry market in 2002. The prominence of TSM and UMC points to a more general
characteristic of the Taiwanese IT hardware industry. Most of the industry consists of
component suppliers that supply generic parts, even completely assembled machines,
at competitive prices to big foreign brand-name companies that concentrate on marketing
and sales. For example, Quanta Computer is the world™s biggest designer and manufac-
turer of notebook PCs, but sells its output to top brands such as Dell and Hewlett-
Packard. It was the Taiwanese in the Silicon Valley who first spotted the trend of a division
into two tiers “ manufacturing and marketing/sales “ within the global IT industry and
went home to set up many of the component suppliers that form an essential extension
of America™s IT industry. Again, the role of the returnees from the U.S. has been
indispensable to Taiwan™s efforts to successfully find a major IT niche for itself.
Central to a favorable overall environment for IT entrepreneurship is the availability of
capital for would-be IT entrepreneurs. One of Silicon Valley™s biggest advantages over
aspiring IT hubs is its large corps of venture capitalists who evaluate the viability of New
Economy start-ups and help them grow. Unfortunately for East Asia, the region lacks
venture capitalists, and for a good reason.23 Venture capitalists reflect the depth, width
and sophistication of U.S. financial markets. When East Asia™s banks and capital markets
did a poor job of evaluating risk and monitoring investments even in the Old Economy,
and this was one cause of the crisis, it is unrealistic to expect them to do a good job in
the much more complex and unstable New Economy. Venture capitalists, just like more
independent thinking, cannot be created overnight. However, East Asian countries can
make a start by opening up and liberalizing their financial systems so that scarce
resources will finally begin flowing to their most productive uses.




Inter-Regional Imbalances
Casual observation suggests there are significant inter-regional economic imbalances
within East Asian countries. Capitals and other major urban centers usually account for
a disproportionately large share of real output and income. This means that the residents
of those areas enjoy higher living standards in comparison with their fellow citizens in
other parts of the country.24 Even in relatively developed and industrialized countries
such as Korea, a noticeable economic gap exists among the various regions. Such
imbalances are not unique to East Asia and are quite common throughout the world, and
they tend to be more pronounced in developing countries.




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336 Park


Concentration of economic power often extends into other areas such as politics, culture,
education, medical care, and infrastructure. For example, an oft-cited reason for migration
into the major urban centers is the higher quality of education and hence greater
opportunities for children in the future. To cite another example, in poorer countries, the
lack of adequate basic infrastructure such as power, water supply, transportation and
communications practically forces companies to locate in main cities. Geographical
concentration of resources in virtually all aspects of national life inevitably interferes
with well-balanced economic growth and development.
Of course, we must also realistically acknowledge that the predominant role of Seoul in
Korea, Kuala Lumpur in Malaysia, Manila in the Philippines, and so forth are not
accidents but rather reflect the evolution and interaction of economical, political,
sociological, institutional, and historical forces. Be that as it may, it is equally clear that
the geographical concentration of resources entails serious negative consequences, not
only for the rest of the country but also for the main cities themselves as well.25
For example, the massive flow of labor into the capital and other major urban centers
creates congestion, pollution, and excessive strains on infrastructure and basic services.
Meanwhile, the rest of the country, especially the rural areas, suffers from brain drain,
graying of population, and general decay and loss of dynamism. Paradoxically, while the
main cities suffer from the negative consequences of over-population, at the same time
some parts of the country suffer from under-population. Narrowing of the inter-regional
economic gap is thus a win-win situation that benefits a Jakarta as much as a Kalimantan.
It is worth noting we are not just talking about the urban-rural divide here. The inter-urban
divide, in the sense of the contrast between fast-growing main cities versus slow-
growing or even declining regional cities, can be equally stark in some cases. The fact
that the so many migrants, especially the young and the ambitious, choose to migrate
to major cities, despite the unemployment, congestion, pollution, crime, and other
problems, attests to the enormous differences in opportunities between the main cities
and the rest of the country. Therefore, the key to achieving a well-balanced economic
development is to reduce such enormous differences in opportunities.




IT and Imbalances
It is precisely in this area, creating a more level playing field for the various cities and
regions of a country, that IT can make a solid contribution.26 As indicated earlier, the
essence of IT is that it reduces the cost of information and thus provides more equal
access to information. Physical presence is less important in the New Economy than in
the Old Economy due to the high and ever-improving quality of virtual presence. For
example, the Internet allows us to constantly stay in touch with other parties and enables
us to take care of many businesses that would have required traveling before. Therefore,
the physical concentration of institutions and facilities in the main city becomes less of
an advantage for the main city and equivalently, less of a disadvantage for the rest of
the country, in the New Economy.




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Opportunities and Challenges of the New Economy for East Asia 337


Underlying the physical concentration of institutions and facilities is a concentration of
information and knowledge. Information and knowledge are immensely valuable re-
sources in any economy, whether Old or New. One of the fundamental sources of the
inter-regional inequality of opportunity that is at the root of inter-regional economic
inequality has to be the asymmetric inter-regional distribution of information. Fortu-
nately, IT will substantially reduce this information gap and hence promote a more
geographically balanced pattern of economic development. We noted earlier that the IT
revolution will help to democratize information by spreading information from a privi-
leged elite to masses of ordinary people. By the same token, the IT revolution will devolve
information from main cities to other areas.
As noted previously, physical location loses at least some of its relevance in the New
Economy. Among other things, the Internet allows for remote or virtual access to a whole
new range of employment opportunities.27 The noticeable increase in the number of stay-
at-home workers is changing lifestyles in developed countries, and we have already
touched upon how IT has enabled India to become a major leader in back-office services.
IT will also bring the central government and bureaucracy closer to those living outside
the capital by providing them with improved and more convenient access to administra-
tive services. At the same time, IT will strengthen the local governments in regional cities
by enabling them to better serve surrounding rural areas. 28 IT-enabled educational
services can reduce inter-regional gaps in the quality of education. One example is online
distance education for remote areas. In short, IT holds out a whole lot of potential as a
tool for well-balanced development.
Just as we must be realistic about the potential economic benefits of the IT revolution,
we must also be realistic about what IT can do and cannot do for regional development.
IT will certainly not by itself enable regions and regional cities to leapfrog their way into
parity with the main city. To begin with, interactions through the Internet can never
completely substitute for face-to-face interactions.29 A click of the mouse will never feel
like a handshake. In this sense, even in the New Economy main cities still enjoy the
positive network effects associated with having the vast majority of important people.
In many countries, including relatively advanced ones such as Korea, chances are that
anybody who is “somebody” will live in the main city. In other words, although IT
reduces distances, there is clearly a limit to its ability to do so. To cite just one example,
while IT-enabled educational services hold a lot of promise, they can never completely
substitute for actual schools and teachers.
We saw earlier that countries have to fulfill certain pre-conditions before they can begin
to enjoy the economic benefits of the IT revolution. So it is with regional development.
That is, although the benefits of IT for regional development are potentially large, they
are neither automatic nor guaranteed. Above all, the realization of those benefits requires
the availability of reliable and affordable telecom services throughout the country.30 In
fact, concentration of telecom, IT education and other IT infrastructure in the main city
will widen rather than narrow the inter-regional economic gap by creating an inter-
regional digital divide.31 Equally importantly, the basic ingredients of regional develop-
ment in the Old Economy, such as transportation, education and strong local govern-
ment, remain as relevant as ever in the New Economy. In other words, IT is a complement
rather than a substitute for the fundamental ingredients of regional development.32



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Concluding Remarks and Implications
for FDI
I have limited the discussion to what I believe are the most important issues for the sake
of clarity and focus. This means I have omitted some relevant considerations. For
example, in addition to telecommunications infrastructure and human resource develop-
ment, the New Economy requires a well-functioning legal and regulatory environment
that covers areas such as contract enforcement and consumer protection. Those issues
are especially relevant for Japan and the NIEs since these economies by and large already
have the physical and human infrastructure in place. A key issue in the integration of
these economies into the New Economy is to encourage consumers and companies to
use IT more actively for e-commerce, and a sound legal and regulatory environment will
be conducive for making this connection.
Let me briefly repeat the main points of my discussion, in the hope that they may stimulate
discussion among East Asia™s policymakers and general public on how to best proceed
with the New Economy. First, the IT revolution presents many opportunities for East
Asian economies in terms of improving efficiency and thus promoting economic growth.
Those opportunities are especially inviting in the manufacturing sector, the region™s
economic mainstay, since the bulk of global growth in e-commerce is expected to come
from B2B. Thus the focus of the region™s IT investments must be on local applications
of existing technology.
Second, while East Asia stands to benefit significantly from the IT revolution, we should
be realistic about its limitations as well. In particular, while IT may allow countries to
leapfrog some technological barriers, IT will not enable countries to leapfrog sound
economic policies. The New Economy may have changed the world, but not by so much
as to change the key ingredients of successful economic performance. IT will help East
Asian countries achieve sustainable economic growth and development only insofar as
they maintain a sound overall policy environment.
Third, sitting back and waiting for the New Economy to arrive is a foolproof recipe for
making sure it will never arrive. The New Economy requires basic pre-conditions. Above
all, the poorer East Asian countries must liberalize their telecommunications sectors in
order to improve the quantity and quality of telecom services. They must also make the
necessary investments in human resource development. As for the region™s richer
countries, where the physical infrastructure is well developed and the quality of human
capital is higher, the greater challenge lies in creating socio-economic conditions that are
conducive for greater use of IT in economic activities.
Fourth, just as IT holds out a lot of promise for economic growth, it is also a potential
catalyst of regional development in East Asian countries. In particular, IT promotes inter-
regional equality of opportunity by breaking down the concentration of information and
knowledge, and disseminating those valuable resources more evenly throughout the
country. However, there are limits to what IT can do in terms of bringing about a more
balanced development pattern and, just as importantly, the benefits of IT for regional
development will not be realized unless East Asian countries fulfill certain key pre-
conditions.


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Opportunities and Challenges of the New Economy for East Asia 339


The dawn of the new millenium has thrust upon mankind a technological revolution that
is sharply reducing the cost of information. In combination with globalization, the IT
revolution is creating a world economy in which competitive pressures are as fierce and
relentless as never before. East Asian economies will survive and thrive in this highly
competitive New Economy only if they keep doing the things that they have done right,
such as saving and investing a lot, while improving the things that they need to improve,
such as the quality of corporate governance. If they do so, the New Economy will indeed
prove to be a boon for all East Asians.
With respect to FDI, our analysis entails some significant policy implications. Above all,
we have seen that affordable and reliable telecommunications services are probably the
single most critical enabling pre-condition for the IT revolution and the New Economy.
Again, this is especially relevant for the region™s poorer economies. What this means is
that governments throughout the region should seriously consider opening up their
telecom sectors to private sector investors, including big foreign telecom companies with
lots of capital and expertise. A big, practical obstacle for the governments of many
developing countries in this area is the loss of significant revenues associated with the
privatization of state-owned telecom monopolies. However, in light of the critical role of
telecommunications in the IT revolution, it would be myopic indeed for governments to
place too much weight on those revenue losses. In short, the IT revolution makes the case
for telecom liberalization, including opening up to foreign investors, stronger than ever
before. Governments of countries that are saddled with backward and under-developed
telecom sectors should even consider offering fiscal incentives to attract foreign
investors.
At the same time, the IT revolution significantly strengthens the incentive for FDI in the
telecom sector. We can expect the demand for telecom services to grow rapidly as the
IT revolution, including its commercial applications, takes root in an economy. Precisely
because affordable and reliable telecom services are the single most enabling pre-
condition for the IT revolution and the New Economy, the telecom industry is likely to
offer investors, including foreign ones, higher and more sustainable returns than in the
Old Economy. However, the extent to which FDI takes place will depend heavily on the
degree of telecom liberalization. Furthermore, telecom liberalization in and of itself will
not fully unleash the potential benefits of the IT revolution for economic growth, which,
in both the New and Old Economy, requires a sound overall policy environment and helps
to determine the returns to domestic and foreign investors, in telecom and beyond.
While FDI in the telecom sector can be a mutually rewarding experience for the host
country and well-established foreign telecom companies “ the former benefiting from the
capital, technology and skills of the latter in improving telecom services, and the latter
reaping attractive and sustainable returns on its investments ” the IT revolution offers
other mutually rewarding investment areas as well. For example, human resource
development, which represents another key enabling pre-condition for the IT revolution,
is one such area, as are complementary New Economy infrastructures such as logistics
and transportation. Computer hardware and software also represent investment areas
that can benefit both the host country and the foreign investor, although whether such
FDI improves the welfare of the host country depends on the competitiveness of the
resulting products vis-à-vis imports.



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340 Park


From the host country™s viewpoint, the benefits of FDI into telecom and other IT-relevant
sectors are not limited to fostering the New Economy and ultimately faster economic
growth. As we have already seen, IT can play a significant role in reducing inter-regional
inequality within a country, although there are limits on how much IT in and of itself can
do so. To the extent that promoting a more balanced national development is a high-
priority objective, governments may offer additional fiscal incentives for foreign inves-
tors in less developed regions. Furthermore, FDI into such regions may very well be
commercially viable for the investors themselves. For example, stylized facts suggest that
there is a strong pent-up demand for telecom services, including satellite-based services,
in many backward regions of poor developing countries.
Finally, although the focus of this paper is on East Asia, all of the main lessons are
applicable to other parts of the world as well. Our lessons are particularly relevant for
developing countries where economic growth and well-balanced development are more
urgently needed. In conjunction with sound policies, IT will enable countries to grow
faster as well as grow in a more balanced way.




References
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Amirahmadi, H. (1995). Information Technology, the Organization of Production, and
Regional Development. Environment and Planning A, 27(11), 1745-1775.
Bhatnagar, P. (1999). Telecom Reforms in Developing Countries and the Outlook for

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