UC Berkeley Recent Work Title The Growth and Development of the Internet in the Unites States Permalink https://escholarship.org/uc/item/05z7r9mt Author Kenney, Martin Publication Date 2001-06-01 eScholarship.org Powered by the California Digital Library University of California The Growth and Development of the Internet in the United States* BRIE Working Paper 145 June 21, 2001 Martin Kenney Professor Department of Human and Community Development University of California, Davis Davis, CA 95616 (530) 752-5660 [email protected] and Senior Project Director, Berkeley Roundtable on the International Economy, University of California, Berkeley. ©Copyright 2001 by the author Prepared for the forthcoming book edited by Bruce Kogut tentative title National Systems of Innovation and the Internet. Generous support for production of the BRIE Working Papers Series was provided by the Alfred P. Sloan Foundation. OUTLINE Setting the Stage Telecommunications Regulatory Preconditions Venture Capital – A Critical Component of the U.S. Innovation System The University as an Initial Repository of Capabilities From the Internet to E-commerce Existing Firms and the Internet The Startups Portals, Communities, Auctions, and More Business-to-Consumer E-commerce Business-to-Business E-commerce Software Tools and Internet Services Conclusions 2 Rarely does a new technology emerge that galvanizes a dramatic rethinking of the nature of commerce. The Internet is such a technology. At this early stage, it is difficult to appreciate fully the importance of the Internet, but some speculate it might be as momentous as the arrival of the telegraph (Cohen et al. 2000; Standage 1999). Radically new communication technologies such as the Internet have multiple applications and often become ubiquitous. As such, the adoption, diffusion, and development of this new technology provide an especially penetrating view of how different national innovation systems have responded to and shaped the commercial possibilities inherent in the Internet. Of course, such an assessment for an economy as large as that of the U.S. is difficult. It is further complicated by the peculiar way in which communications technologies permeate and facilitate connections and relationships. Often the action of such technologies is imperceptible to most of the actors involved and even to aggregate statistics; e.g., better information transfer between customers and suppliers is not manifested in the finished good, though it is embodied in the good in terms of lower cost and/or higher quality. Given the diffuse nature and the speed of the Internet’s evolution, any analysis can only be tentative. Descriptions of the U.S. national innovation system (NIS) have concentrated upon government funding and research conducted by the established Chandlerian corporations and universities (Lundvall 1992; Nelson 1993). The government and universities played vital roles in the gestation of the Internet in the pre-commercial and early commercialization phases. Many established firms were laggards in the early commercialization process, though ultimately they could become the greatest beneficiaries. The apparent ease of entry encouraged many startups.1 National exceptionalism is a difficult argument to advance and validate. Nevertheless, in the case of the commercialization of the Internet, certain unique characteristics of the U.S. political economy contributed to the head start that U.S. firms enjoyed, their ability to grow rapidly, and, after the 2000 NASDAQ decline, the large number of firm failures. With respect to commercialization, the U.S. 3 institution of venture capital played a central role in the rapid formation of new dedicated Internet firms that were established to define and occupy new economic spaces. With respect to the Internet, there were three advantageous features of the U.S. national system of innovation: a unique telecommunications infrastructure, an active government in funding university research, and a capable set of private sector institutions dedicated to funding new high-technology enterprises. The enormity of the U.S. market and the variety of impacts and uses of the Internet dictate that this discussion must necessarily be a limited examination of the role of the NIS and the development of the Internet. For example, the significant impacts of intranets upon firm organization, internal information flow, and human resources practices, etc. are simply ignored, though they will surely be profound. Chapter XX examines the business-to-business (B-to-B) area in more detail, but this chapter only reflects upon B-to-B issues with respect to the role of the NIS in funding B-to-B startups. One of the most intriguing impacts or initiatives that has emerged from the Internet is not examined, namely the effort in a wide variety of industries to standardize descriptors of all parts of the value chain, so that commerce can be transacted entirely electronically.2 Despite these and numerous other omissions, the pervasive nature of the Internet as a communications medium, and the wide variety of experiments underway that are aimed at exploiting the Internet, mean that the scope of this paper remains immense. Setting the Stage The commercialization of the Internet and the speed with which it became a medium for commerce depended upon the already extensive diffusion of the Internet’s infrastructure and its noncommercial use. This section describes some of the organizational features that provided the preconditions for the U.S. commercialization process. Despite the formation of the European Union, the 1 In certain respects, the commercialization of the Internet parallels the commercialization of university-based biology research in the late 1970s and early 1980s, which led to the formation of a biotechnology industry (Kenney 1986). 2 For developments in the personal computer industry value chain, see Kenney and Curry (2001). 4 U.S. was (and remains) the largest single market united by common laws,3 a common language, a common currency, and various features of a modern nation-state. A more prosaic, but nonetheless important, feature for the diffusion of the Internet was a well-developed telephone system with uniform rates and usage rules. Widespread credit card usage, and the large number of U.S. consumers who were comfortable using their credit cards for telephone and catalog sales, also helped ensure the rapid growth of Internet commerce. In an entirely different vein, the U.S. had an enormous research university system with a number of global-class engineering and science departments that were among the largest and most lavishly funded in the world. This was complemented by a large number of global-class corporate research laboratories, led by AT&T/Lucent’s Bell Laboratories, IBM’s Yorktown Heights and San Jose Laboratories, and Xerox’s Palo Alto Research Center, to name the most prominent. No other nation or, perhaps, even group of nations possessed institutions that could rival these as sources of technology and well-trained personnel. In terms of computers, computer firms, and resources dedicated to computing, the U.S. was the acknowledged global leader. The U.S. not only trained many engineers, but also had a liberal immigration policy that permitted qualified immigrants to enter, particularly for postgraduate education. These institutions and policies created an enormous pool of engineers and scientists. The U.S. was the leader in developing and using computers in government, university, and industry. The importance of military spending in this process is well known (Flamm 1988), though often exaggerated. In the adoption of computers for commercial or general use, the U.S. was the world's leader.4 The rapid adoption and large installed base created positive feedback loops, reinforcing the U.S. advantage. Though IBM was a global colossus, U.S. antitrust enforcement ensured a semblance of competition and fettered IBM’s ability to throttle new entrants: witness Microsoft, DEC, or Sun 3 It is worth noting that in the U.S., many different entities including state, county, and city governments can affect e-commerce. These jurisdictions have different taxation schemes and laws pertaining to retail sales, particularly with respect to tobacco, firearms, alcohol, and pornography. Despite these differences, it is accurate to call the U.S. a unified market. 4 The U.S. lead was not always at the invention stage. Frequently, there was simultaneous invention in several nations, but nearly always the U.S. triumphed in the commercialization of the idea. 5 Microsystems. In most other nations, one national champion for computing and another for telecommunications equipment were chosen and subsidized by the national government; other entrants were discouraged. The evolution of the computer sector in the U.S. was characterized by repeated waves of new computing and data communications industry entrants, whose innovations were more capable and/or less expensive than those of the dominant vendors. Thus, there was continuing turbulence – a feature not as prevalent in Europe or Japan. In technical terms, the Internet is the result of an evolutionary path that has been affected by two fundamental reconceptualizations of the architecture of computing. The first reconceptualization was distributed networked personal computers. The second reconceptualization was the connection of a wide variety of data processing devices via the Internet. At each step of this evolution, U.S.-based startups were the delivery mechanism