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reinforces community values, establishes community identity, and supports community
development. Telecommuting or virtual mobility of labor permitted by global networks
can have significant effects on policies, institutions, and social patterns”regional social
infrastructure (e.g., housing, health care, and transportation), immigration law, dress
standards, eating habits, and others. In the United States, with its many local tax
authorities and its heavy dependence on sales tax to run local government, a significant
shift from local to Internet commerce would have serious ramifications. On the face of
it, this would put local businesses (which are taxed) at a competitive disadvantage, and
it would certainly reduce the funds available for local social services. One interesting
possibility is that the United States may respond to these pressures by moving toward
a European-style, value-added tax.

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Socio-Economic Impacts and Influences of E-Commerce in a Digital Economy 11

Economic Impacts and Influences on
The promise of significant economic growth places electronic commerce high on many
public and private sector agendas. Starting from basically zero in 1995, it is predicted to
reach $1 trillion in 2003-05 (IDC, 1999). On the other hand, it could have significant effects
on the structure and functioning of economies at the firm, sector and aggregate level. The
impacts of these changes are diverse and likely to impinge on prices, the composition of
trade, labor markets and taxation revenues. Adapting policy frameworks and institutions
to these changes and ensuring that the full potential benefits of e-commerce are reaped
will pose a number of challenges for structural policy. This section provides an overview
of these issues.

Organizational Changes of Enterprises

E-commerce can influence the process of governance in various ways and in varying
degrees, from improving the current mechanisms of delivery of services to transforming
the entire mechanism and the nature of services themselves. The role played could be:
1. Purely technical in terms of automation of tedious tasks earlier done by humans,
2. To a facilitating/supportive role leading to more participatory and all-encompass-
ing decision-making and implementation processes,
3. To a completely innovative role that involves new services and new mechanisms
to deliver these services.

E-commerce can lead to increased participation, inclusion and integration on one hand
and increased marginalization, loneliness and exclusion from information and communi-
cation on the other.
All enterprises face internal as well as external changes due to the emerging e-commerce
technologies. They influence the way in which enterprises position themselves in the
market and the way they collaborate with others. These new technologies have conse-
quences for intra-organizational changes of production and working issues. The imple-
mentation of modern ICTs creates impacts on business relationships with partners and
concurrently, the internal and external enterprise organizations with regard to its
competitiveness. For any organization, the adoption of an e-commerce strategy generally
entails redefining its value chain and re-engineering internal functions and processes to
adapt to and benefit from the new information systems implemented. The dramatic
changes in the way information flows throughout the organization deeply affect its entire
value chain. A shift of importance of single functions of an enterprise is to observe. Value
is shifting from production to product development, procurement, sales and marketing,
and the provision of after-sales services. These are also the areas where e-commerce
solutions are going to play a vital role in increasing companies™ collaborative capabilities
with partners along value chains. Co-operation motives can be cost and risk reduction,

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12 Sharma

knowledge transfer or just the reduction of time to market. Unfortunately, costs are still
the main incentive for business activities or even the reason to shut down business
activities. Reduced expenditures due to lower charges can be directly used in marketing,
research and development, etc. In cooperation, enterprises can exploit the better cost
position of the partner or use economies of scale.
Through the new possibilities of electronic collaboration and IT-supported production,
it is expected that productivity will comparatively grow with the introduction of new ICT
technologies. ICT technologies are becoming an important part of business processes
and have become indispensable to stay competitive in new market constellations. They
are necessary to reduce time to market, to find the best offer with the best price and most
suitable partners for one™s business. Productivity is the relationship between output and
input. It should be viewed as value adding in addition to optimizing. It is a total concept
that addresses the key elements of competition, i.e., innovation, cost, quality and
delivery. Therefore, an increase in productivity can be achieved by enhancing the value-
added content of products/services, or by decreasing the unit cost of production, or a
combination of both (Uzzi, 1997).

E-Commerce and Local Businesses

Whitten and Steinfield show that as electronic commerce grows, it will create an important
socio-economic side effect which will be increased competition with the traditional
businesses in any given local community (Steinfield, Mahler and Bauer, 1999a; 1999b).
Their study indicates that although local businesses may gain from the efficiencies
afforded by electronic commerce, both in better serving their local constituencies and
by reaching out to distant markets. In general local merchants are ill-prepared to take full
advantage of electronic commerce due to various reasons, and thus are unlikely to see
gains from it (Steinfield, Mahler and Bauer, 1999a; 1999b).
Distant Web-based businesses have several advantages over their local physical
businesses. Based on Steinfield et al. (1999a; 1999b), such advantages include, but are
not limited to: access to a wider potential market; lower sunk costs because a building
or rented space in each market is not required, and they may operate with less or no
inventory; better economies of scale arising from a larger customer base, and consequent
volume discounts on inputs; lower costs due to the ability to bypass many of the
intermediaries in the retail distribution value chain (Wigand and Benjamin, 1995; Wigand,
1997); a higher degree of transaction automation, leading to improved service and lower
labor costs and the ability to rapidly respond to changes in the market through price
adjustments which can be almost in real-time (Bailey, 1998), as well as changes in product
mix and marketing approach. These economies can potentially enable Web-based
retailers to easily undercut the prices of local retailers who formerly faced little or no
competition. Using transaction cost theory, one can conclude that electronic commerce
implies new competition for local retailers, particularly those offering products that are
readily obtainable from other sources, and that are easily transported (Steinfield and
Whitten, 1999; Steinfield et al, 1999a; 1999b).

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Socio-Economic Impacts and Influences of E-Commerce in a Digital Economy 13

Community-Level Impacts of Electronic Commerce

E-commerce has many positive influences at the individual level whereby local buyers
gain more value and greater access to suppliers. However, the results at the aggregate
community level may be undesirable for local residents. Some of the community-level
social costs of electronic commerce are: job losses, particularly in relatively unskilled
areas already quickly disappearing in the digital economy; loss of local shopping options
that, even with higher prices, afforded some conveniences; decreased attractiveness of
the local community due to the loss of boutiques or other businesses that enhanced the
quality of community appearance and life and reduced tax income from business,
resulting in a reduction in the ability to fund government services that enhance
community life (Whitten, 1999; Steinfield et al., 1999a; 1999b).
Clearly not all communities will be affected equally. Some may even find that electronic
commerce leads to significant growth in jobs, tax revenues and service levels. Larger
communities may be less vulnerable for a number of reasons. They may have more
competitive local business, and their larger population may make the effects of any loss
in business less noticeable. Community culture may play a role, such as university towns
having more Web-savvy consumers. The nature of the local economy ” for example, a
prevalence of firms in high-tech vs. heavy industry vs. services, such as tourism ” may
also influence the relative attractiveness of Web commerce and the vulnerability of local
businesses. Even the extent to which a community is geographically isolated, influencing
the availability of nearby businesses within driving distance, and the resulting competi-
tiveness of local firms once they are exposed to Web competition, can be a factor
(Steinfield and Whitten, 1999; Steinfield et al., 1999a; 1999b; Choi et al., 1997).

Bundling or Tying Arrangements

E-commerce offers opportunity for building or bundling several products and services
together. Many companies now offer a complete package of trading, information,
logistics and supply chain management services. The bundling of such products and/
or services may provide a convenient solution for buyers, and a way in which competing
service providers can differentiate their offerings to attract more customers. In some
cases it may also be a more efficient and economical way to provide both products and/
or services, resulting in lower prices and promoting the development of a new competitive
product or service. On the other hand, this may arise between competing outlets “
particularly when some outlets are independently owned and operated but others have
vertical links with manufacturers. Some wholesale operations could be squeezed out or
replaced by Internet intermediaries. Potential issues may include:
• Suppliers refusing to deal with independent offline or online distributors because
they have developed their own online retail Web sites;
• Suppliers refusing to deal with independent online distributors; and suppliers
discriminating between price and quality or quantity of goods distributed via
online and offline distribution channels.

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14 Sharma

E-commerce may have an impact on existing franchising arrangements, particularly where
contractual terms provide for territorial limits. Many businesses may have entered into
franchising arrangements on the understanding that they would have exclusive territorial
rights, whereas for certain types of goods, e-commerce transcends global boundaries
and thus would create a problem for franchising arrangements if these are territory-based.
Also, in the new environment of e-commerce, franchise products will face competition
both locally and globally.

Impact on Tax, Trade and Regulatory Policies

E-commerce has a strong impact on taxation and tax policy. Concerns have been
expressed that e-commerce could result in the erosion of tax bases. Consumption taxes
are levied on the principle of taxation at the place of consumption and according to rates
set in individual countries, or in individual states in the case of federal nations. E-
commerce, however, has the potential to undermine the application of domestic and
national tax rules. Tax planning for an e-business differs from tax planning for a traditional
bricks-and-mortar company. Historically, the generation of income depended on the
physical presence of assets and activities. This physical presence, or permanent
establishment, generally determined which jurisdiction had the primary right to tax the
income generated. Because of the growth of electronic commerce, new e-business models
(including digital marketplaces, online catalogs, virtual communities, subscription-
based information services, online auctions, and portals) have emerged. Each allows
taxpayers to conduct business and generate income in a country with little or no physical
presence in that country. The separation of assets and activities from the source of the
income represents a significant departure from historic business models. This change
creates new tax planning challenges and opportunities (Penbera, 1999; Olin, 2001;
Anonymous, 2000; Sharma and Gupta, 2003b).

Impact on Employment and Labor Policy

The growth of e-commerce is likely to have both direct and indirect impacts on labor
markets as well as the composition of employment. Since e-commerce may create more
knowledge-based products, it is likely to drive widespread changes in the labor market,
shifting the composition of workers required to produce and deliver a product or service
(Anonymous, 2000). There will be shifts in the kind of skills needed. Faster rates of
innovation and diffusion may also be associated with a higher turnover of jobs. This may
create more turbulence as workers will need to enhance their skills from time to time . This
may result in reallocation of labor to the changing needs of the economy (Sharma and
Gupta, 2003b; Anonymous, 2000).
One important change due to ICT is occurring in employment within economic sectors.
Changes occur regarding the polarization of wages around skills, demand for specific
qualified work (e.g., replacement of traditional craft and production engineering skills
towards computer design skills), a need for ongoing training, other forms of work

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Socio-Economic Impacts and Influences of E-Commerce in a Digital Economy 15

contracts, and a shift to a smaller core workforce. Businesses will incur ICT costs
including cost of new applications, developer time, software licenses, any hardware or
software, support and maintenance costs, and business costs associated with making
the transition to the new system, etc. The challenge remains to predict support and
maintenance costs for the new technology, business costs associated with making the
transition to the new system and other hidden costs. Considering the fast development
of technological changes it is therefore getting much harder to ascertain the long-term
impact of any technology choice (Penbera, 1999).

Competitive Environment “ Influence on Monopolistic

Internet-driven e-commerce will have a significant impact on the competitive environ-
ment of commerce. Because in e-commerce the entry cost is low, and transaction costs
are lower, it allows small entrepreneurs to enter the marketplace easily. On the other hand,
e-commerce especially facilitates enterprises whose success depends on network
effects”“winner-takes-all” situations for companies with significant market share”
which further facilitate their growth and market dominance. This effect may create
problems for competition and antitrust policy. Certain players may become monopoly
holders, which will have greater (and dire) consequences for competition. The recent
evidence from Microsoft case has shown that there is considerable potential for
weakening the competitive process. The monopolists will have strong interests in
locking customers into network relationships. The concepts like trust, reputation,
loyalty, pricing and commitment take on new meaning for online business (Uzzi, 1997).
Since e-commerce would transcend geographical boundaries, many big firms of known
brands may not only expand their markets, but also may enter into new business activities
across the broad spectrum of business activities. This may help to reduce the costs and
prices, but it will create the danger of creating an e-commerce monopoly by a few
corporations or networks of corporations. Many firms may use a low-price strategy to
grab the market and eliminate the competition. Several mergers and alliances, in which
two or more firms combine to achieve a large market share and have large economies of
scale, can result in eliminating meaningful competition (Sharma and Gupta, 2003b).

Impact on Prices

Electronic commerce is widely expected to improve efficiency due to reduced transaction
and search costs, increased competition and more streamlined business processes.
Lower search costs may also lead to Internet consumers being more sensitive to price
changes. By reducing search costs and increasing the flow of information, e-commerce
might effectively shift power from producers to consumers and make it harder for firms
to maintain higher prices (Bakos, 1997). However, empirical evidence does not support
this claim in all cases. Brynjolfsson and Smith (1999) found that average prices on certain
items in a particular industry sold through the Internet were lower than their equivalent

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16 Sharma

purchased through traditional retailers. However, in certain cases prices of goods sold
through the Internet were higher than those charged by traditional retailers. Brynjolfsson
and Smith (1999) justified this phenomenon by arguing that certain reductions in cost are
offset by higher overhead costs elsewhere. They also indicate that increases or de-
creases in price depend on the size of the market (Sharma and Gupta, 2003b).

The Threat to SMEs

The adoption of e-commerce technologies is important for the ongoing survival of SMEs.
The Internet can remove many of the competitive advantages of larger companies and
provide opportunities for smaller enterprises. It can also include a cost-effective way for
SMEs to market their business, launch new products, improve communications and
information and identify potential partners (Sharma et al., 2003). However, SMEs also
have to be aware that the Internet and e-commerce will create more sophisticated and
demanding customers with higher expectations in terms of 24-hour access to company
and product information and quicker responses to information requests.
From a theoretical perspective, small business and rural enterprises can benefit greatly
with e-commerce as they gain access to more customers (even globally) and can even
compete with large businesses since e-commerce is a “level playing field.” Since SMEs
are known for greater internal efficiencies, they may have an advantage over large
businesses. However, recent studies indicate that the adoption of e-commerce by small
business (as either a buyer or supplier in B2B and/or B2C environments) has not been
as rapid as would be anticipated. Reasons cited for this include the cost, technology
hurdles, and lack of expertise. E-commerce demands fundamental shifts in business
strategies, operations and technologies. Many participating SMEs indicated that they
have limited access to information about the business models and technologies that are
the basis of e-commerce success. Lack of knowledgeable staff in SMEs is also respon-
sible for non-adoption of e-commerce. This will result in SMEs being non-competitive
in an e-commerce environment (Auger and Gallaugher, 1997).

As electronic commerce grows, there will be important socio-economic side effects.
Although IT has the potential to reduce disparities between nations, asymmetric access
to its benefits by different sections of society can have far reaching social and economic
implications. Our research suggests that e-commerce technologies are helping organi-
zations, societies and nations to accelerate their socio-economic growth and to provide
more opportunities for businesses to grow, but it has also created many challenges and
effects across numerous domains of society, and poses many challenges for policy
makers. In this chapter we have identified a comprehensive set of socio-economic
variables that are influenced by e-commerce. Further empirical validation could be done
for these variables in different countries.

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Socio-Economic Impacts and Influences of E-Commerce in a Digital Economy 17

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