Global Opportunity and National Political Economy: The Development of Internet Ventures in Germany Niko Marcel Waesche Submitted for the Ph.D. Degree (80,113 words, without appendices) International Relations Department The London School of Economics and Political Science University of London May 2001 Corrected November 2oo1 UMI Number: U161968 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U161968 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 ~ fl4 £ S £ S F 7938 Vs * OF pOLVF'C^L, * ano M> ‘‘W # SZ+if Abstract In the late 1990s, the internet was heralded as a global opportunity for new ventures. One aspect of this opportunity was the innovation of including small firms and consumers in seamless ‘business webs.’ The second aspect was the distance insensitivity and intemationality of the internet. New ventures appeared in different countries responding to this seemingly global opportunity. In Germany, this response appeared especially strong against the background of years of slow development of the domestic information technology (IT) sector. This thesis examines the role of national government policy in a world being transformed by technology. ‘Network thinkers,’ following Schumpeter’s concept of ‘creative destruction,’ believed the internet represented a global innovation opportunity. They emphasised the independence and self-governance of globally networked market players, arguing that the territorial basis of national government policy has eroded. The problematique guiding this research effort has emerged from this thinking. Can the concepts associated with network thinking account for the apparently strong entrepreneurial response to the internet in Germany? A detailed study of the development of internet ventures in Germany was carried out to examine this guiding question. The study was supported by quantitative data supplied through a 123-firm survey conducted in the Spring of 1998. This research revealed that the entrepreneurial response in Germany was much weaker than it appeared to contemporary observers. New ventures had to adopt a ‘mixed-play’ approach which placed them on a less innovative and less international, slower growth trajectory. Two key policy arenas were identified which constrained the development of German internet ventures: (1) The course of telecommunications liberalisation and (2) the initial lack of venture capital. Practitioners have long been aware of the importance of these two determinants for internet development. The main contribution of this thesis has been to add to the understanding of how these two factors have operated in a national environment conditioned by distinctive institutions. 2 Table of Contents Abstract............................................................................................. 2 Table of Contents ............................................................................. 3 Figures .............................................................................................. 6 Acknowledgements ..........................................................................8 1. Continuity or Rupture - Interpreting the German Internet “Wunder”............................................................. 9 Global opportunity...........................................................................................14 Structures and agents: Institutionalist theory..............................................19 Institutionalism versus network thinking....................................................23 Refraction..........................................................................................................26 Three domestic agents and two policy arenas............................................29 The case for Germany.................................................................................... 33 Company focus and empirical research...................................................... 35 Chapter breakdown.........................................................................................37 Was it merely ‘irrational exuberance?’....................................................... 39 Part I - Global Opportunity 2. Explaining the Global Growth of the Internet...............42 An overview of internet "take-off'..............................................................44 Rise in transnational demand for internet services....................................54 Entrepreneurial activity and supply boom ..................................................65 The role o f the USA: Multilateral or bilateral flows?.............................. 73 3. Regulation and the Death of Distance.......................... 76 Differences in the regulation of international data and telecommunications networks.......................................................................79 The subsidised U.S. internet acts as a global hub..................................... 83 Intentional lack o f regulation in other areas............................................... 86 The issue o f technological standards............................................................94 The debate on small firm innovation and regulation.................................98 International policy convergence: The lesson from financial services............................................................................................................102 Conclusion......................................................................................................106 Part II - National Political Economy 4. Policy Shifts and Political Compromise in the Kohl Era ..........................................................................110 The German economy: Impact of unification and social programs.... 114 Policy-making in Germany..........................................................................119 Preamble one: The national videotex debacle.......................................... 124 Preamble two: The research network debacle.......................................... 126 Taking the long road to telecommunications liberalisation.................. 128 Multimedia legislation: The "Rechtsstaat" offers its services............... 139 Promoting the "garage entrepreneur".........................................................146 Conclusion: The access sacrifice................................................................152 5. Deutsche Telekom and Internet Access in Germany........................................................................ 156 The global cost challenge and the telecommunications industry 159 Deutsche Telekom in the cost trap............................................................. 164 Infrastructure challenges faced by Deutsche Telekom........................... 173 German cable TV: Left to stagnate?..........................................................177 The renaissance o f T-Online....................................................................... 180 Deutsche Telekom: "A bad loser?”............................................................ 187 Telecommunications infrastructure investment and capital markets............................................................................................................ 189 Conclusion......................................................................................................196 6. Survey of Internet Entrepreneurship in Germany 200 Introducing the typical German internet start-up....................................202 Start-up funding and the "balancing act"................................................. 204 Slow internationalisation............................................................................ 208 Unbalanced demand for internet services................................................ 210 Technology enthusiasts and management know-how............................212 Wrong country, wrong time........................................................................216 7. Internationalisation of Internet Start-ups from Four European Countries.............................................219 Europe in trouble...........................................................................................223 Domestic internet demand structures in Europe.....................................228 Telecommunications liberalisation across Europe and internet access prices..................................................................................................231 The European venture capital bottleneck................................................. 239 Further relevant policy areas.......................................................................248 The internet start-up experience in four European countries............... 250 Why Sweden?............................................................................................... 259 4 Conclusion: The Power of National Governments 264 Refraction revisited...................................................................................... 265 Summary of Part I- Global