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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.
This Page Intentionally Left Blank

Contents
Acknowledgments ix
List of Contributors xiii
1 Introduction: The Internet Has Borders 1
Bruce Kogut
I Country Chapters 41
2 From Pockets of Experimentation to Institutional
Change 43
Bruce Kogut
3 The Growth and Development of the Internet in
the United States 69
Martin Kenney
4 Sweden’s Wireless Wonders: The Diverse Roots
and Selective Adaptations of the Swedish Internet
Economy 109
Henrik Glimstedt and Udo Zander
5 Technological National Learning in France: From
Minitel to Internet 153
Pierre-Jean Benghozi and Christian Licoppe
6 Creativity under Constraint: Technological
Imprinting and the Migration of Indian Business to
the New Economy 191
Srilata Zaheer and Radhika Rajan
7 The German Internet Economy and the ‘‘Silicon
Valley Model’’: Convergence, Divergence, or
Something Else? 223
Steven Casper
8 The Internet Economy of Korea 263
Sea-Jin Chang
9 Between Bit Valley and Silicon Valley: Hybrid

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

placed on companies run (dare one say managed?) by talented and en-
thusiastic entrepreneurs, often with very little experience.
I had the fortune to be on sabbatical in Paris at the Centre de Recher-
che en Gestion, attached to the Ecole Polytechnique and constituted as
a national scientific research center, for the years 1999–2001. The Inter-
net economy was in full swing in France in the fall of 1999. There was
already an active research program, coordinated loosely among several
French centers. Having long been a‰liated with the Institute of Inter-
national Business at the Stockholm School of Economics and periodi-
cally with the Science Center in Berlin, I learned that these institutes
were also engaged in research on the Internet. In all of these countries,
the reports indicated the emergence of hundreds of new firms, venture
capitalists, and graduates defecting from the traditional employment
markets to enter new firms that promised options and equity sharing.
How odd this reality seemed compared to the many stylized models of
national systems that had been studied for the past decade! Clearly, a
global cultural movement was in gear, the leading indicator being the
replacement of the business suit by the black T-shirt worn by the new
entrepreneurs in Palo Alto, New York, Paris, and Tokyo. Could a cul-
tural shift be powerful enough to overturn the institutions that guided the
educational systems, the funnelling of engineers and managers to large
industry, and the traditional bank finance?
These observations drive a theoretical stake into the undeveloped side
of the national systems approach, for economic history has always shown
the fundamental role played by the di¤usion of ideas, methods, and
technologies across borders. Indeed, the Reginald H. Jones Center had
financed a volume a decade ago, entitled Country Competition, that exam-
ined this historical tension among national context, technological capa-
bility, and the global di¤usion of organizing principles. The Internet
economy reflected these familiar patterns of international di¤usion, only

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

Sachwald of the Institut Francais des Relations Internationals provided
comments on several of the draft chapters presented in March 2001 at
an event sponsored by the Centre de Recherche en Gestion, the Reginald
H. Jones Center, and the Wharton Alumni Club of France. We would
x
Acknowledgments
also like to thank the Institute of International Business, and especially
Malin Ekberg, for organizing the first of our meetings, held on an island
near Stockholm, to discuss early drafts in June 2000.
This project was financed by the Reginald H. Jones Center of the
Wharton School at the University of Pennsylvania. The center receives
funding from the private sector and government agencies to conduct re-
search on the concerns of the chief executive o‰cer. We would like to
thank DuPont, General Electric, General Motors, the IBM Institute for
Knowledge-Based Organizations, and Pitney Bowes, and their managers
who give us their time and support. These include Paul Costello, James
Parke, Reginald Jones, Julie Beamer and Mark Hogan, Doug Sweeny,
and Johnna Torsone. I would like to express my thanks especially to
Larry Prusak and to John Seely Brown, with whom we organized a series
of conferences on ‘‘The Internet and Virtual Communities.’’ Our coop-
eration with Larry’s Institute for Knowledge-Based Organizations has
been intellectually vital to this research program. We would also like to
mention the help of Mukul Pandya and Robbie Shell, who disseminated
the results of our work and conferences through Knowledge
@Wharton,a
great example of the educational power of the Internet.
John Covell, Deborah Cantor-Adams, and the MIT Press provided us
with excellent support and productive criticism. My co-directors at the
Reginald H. Jones Center, John Paul MacDu‰e and Sid Winter, gave
enthusiasm and, in the case of John Paul, their time to this project. Sue

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

enterprises. His research interests include diversification, corporate restructuring,
organizational learning, corporate growth through joint ventures and acquisi-
tions, and comparative management studies of Japan and Korea.
Herve
´
Dumez is Director of Research at the CNRS (Centre de Recherche en
Gestion de l’E
´
cole Polytechnique). He has been a visiting professor at MIT. His
main stream of research focuses on regulatory policy, the globalization of mar-
kets, and EU integration.
Henrik Glimstedt is an associate professor at the Institute of International
Business, Stockholm School of Economics. He has been a visitor to the Wharton
School of the University of Pennsylvania; the Wissenschaftszentrum in Berlin,
Germany; the Norwegian School of Management; and University of Wisconsin–
Madison. He has mainly published on globalization and national and interna-
tional industry governance in historical and comparative perspective. His recent
writing includes articles on global standardization and governance of technologi-
cal development in the information and communications industry.
Susan Helper is Professor of Economics at the Weatherhead School of Man-
agement of Case Western Reserve University in Cleveland. Her research focuses
on how innovation is a¤ected by the structure incentive systems and channels of
information flow within supply chains. Current research projects include inves-
tigating the impact of industry clusters on productivity and innovation in Midwest
and Mexican component manufacturing, the determinants of worker satisfaction
in low-wage manufacturing, and the impact of e-business on small automotive
suppliers. She is a research associate of the National Bureau of Economic Re-
search, the MIT International Motor Vehicle Program, and Gerpisa (European
automotive research group).
Alain Jeunemaı

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

an alternative to mass production; the consequences for economic performance
and the organization of work; the di¤usion of this approach across company and
country boundaries; and patterns of collaborative problem-solving and knowl-
edge transfer within and across firms. For many years, he has been a core re-
searcher for MIT’s International Motor Vehicle Program (IMVP), and he was
recently named as IMVP’s co-director.
Radhika Rajan works with the TCG Group, an investment house in New York
City focused on technology investments. She has first-hand knowledge of the
issues discussed in this book, from her experience as executive vice president of a
global IT company, headquartered in the United States with substantial Indian
operations and customers on every continent. She has worked in the financial
markets at JP-Morgan Chase, Union Bank of Switzerland, Bank of America, and
other prime financial institutions. She is a graduate of the Indian Institute of
Technology in Bombay, and the Indian Institute of Management in Ahmedabad.
She combines a career in investments with strong academic interests in interna-
tional business strategies, especially cross-border issues in Asia.
Mari Sako is P&O Professor of Management Studies at the Said Business
School and a professorial fellow of Templeton College, University of Oxford.
She had previously taught at London School of Economics, and has been a
visitor at Kyoto University’s Economics Department and the Institute of Social
Science at Tokyo University. Her research is on comparative business systems
with a specific focus on inter-firm relations, human resources, and the automobile
sector.
Dennis A. Yao is Professor of Business and Public Policy and associate professor
of Management at the Wharton School, University of Pennsylvania. From 1991–
1994 he served as commissioner of the U.S. Federal Trade Commission, where
he and his colleagues had responsibility for antitrust and consumer protection
matters. Professor Yao has published a number of papers concerned with eco-
nomics and policy in the areas of antitrust, consumer protection, regulation,
procurement contracting, and innovation and intellectual property.

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-

semination. Multinational companies recognized the global demand for
the infrastructure of the Internet: fiber optics, routers, data terminals,
computers, software. Any country with su‰cient financial and economic
resources could have rendered its communication and data transmission
infrastructure capable of supporting Internet connections. Though coun-
tries varied in the speed and the extent by which these investments were
made, all but a handful of countries were connected to the global Inter-
net by 2002.
This story of the global Internet gold rush hides another and a fasci-
nating tale. Here we have an intrinsically global technology—for once
a country is connected, it becomes virtually co-located with all other
countries—but its development occurs within the physical and institu-
tional geography of nations. The Internet relies, after all, on two tech-
nological components: a network among distributed computers, and the
digitalization of content (e.g., music, text, data). In Nicholas Negro-
ponte’s (1995) powerful phrasing, the movement of atoms that had been
the core of world trade since the dawn of human history gave way to the
transmission of electrons, or bits, that do not comply with the economic
geography we learn in school and through travel. By this view, this is not
the end of history, but the end of distance.
There are elements of truth to this vision. The Internet arrived at
a particularly critical junction in economic history, for its exploitation
is closely intertwined with the powerful force of the globalization of
finance, corporate governance, and trade. This coincidence of the Inter-
net and globalization poses deep challenges to the historical institutional
models that govern the development and exploitation of technologies
and innovations within nations. Historically, countries have been defined
by more than just political borders, but also by more or less coherent
institutions and conventions that shape the skill formation of a work force
and the entrepreneurial modes by which technologies are commercially

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

was an old and ‘‘new economy.’’ The literary gazette of the new Ameri-
can economy, Wired magazine, predicted in September 1999 that the
Dow Jones Index for Wall Street would hit 50,000 in the year 2010.
The euphoria ended in the implosion of April 2000, during which the
stock market values of new economy companies fell dramatically. Sud-
denly, there was wide recognition that the stock market looked like a
classic speculative bubble. Fundamentals mattered after all, and rules of
discounted cash flow returned to remind investors that even the most re-
markable growth opportunities could not explain the valuations of the
new economy companies. Sobriety returned.
History is not reversible. This simple learning means that the cycle by
which expectations started and ended close to their long-term steady state
did not leave companies, consumers, and national systems the same. In
the course of these six years, a wave of innovation carried on its crest
new firm creation and the transformation of existing companies that
permanently influenced the trajectories of national economies around the
world.
The Internet as a Cultural Event
The Internet o¤ered the possibility for the delivery of new services. Some
of these services were the provision of information. Some promised to
rationalize the supply chains of entire industries. Others o¤ered oppor-
tunities for people to communicate and to help each other through online
communities.
Workers abandoned traditional companies to work for start-ups.
Graduates of engineering schools turned down o¤ers from prestigious
companies to take up o¤ers to work for companies that had no revenues.
Clad in jeans, open shirts, and casual shoes, these workers labored long
hours to realize the dream that their stock options they would receive
from an Initial Public O¤ering (IPO) would be worth more than what
their parents had earned in the course of their entire working lives. They

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

of children ‘‘growing up digital’’ understood the broad possibilities of
converting the familiar image, text, and sound to data encoded digitally,
as 0s and 1s.
3
Their digital CDs could now be transmitted as a steady
stream of binary numbers, transporting the sounds of favorite artists
through a digital compressed format called MP3. Businesses such as
Napster, which began as a teenager’s hobby, supported these exchanges
between individuals. The Internet culture had its own rhythm, took little
heed of conventional ideas of property rights, and expanded by the par-
ticipation of millions of people who pursued their interests in new worlds
thatWilliamGibsoncalledinhisnovelNeuromancer ‘‘cyberspace.’’
4
Bruce Kogut
National Systems and Institutional Recoupling
If the Internet was a cultural and economic wave, it broke upon very
di¤erent national shores. The rapid expansion of Internet-related busi-
nesses challenged national systems consisting of firms, governments,
consumers, and workers. The Internet appeared deeply engrained in the
American model of entrepreneurship and new firms, and threatened the
ideological foundations of these national systems, already unbalanced by
global investors and the end of the Cold War. The economy of Germany
is organized by corporatist principles: business and labor are represented
by their associations, banks and firms are highly intertwined by cross-
holdings, and the government actively supports programs to maintain the
contract of a social economy. The Japanese and Korean economies—
though quite di¤erent in their economic logics—consist of competing
business groups; labor unions are often fragmented, and tax rates are
low, pushing many social programs onto individuals and companies.
Dominated by business groups in a historical context of socialist eco-

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