Journal of Computing and Information Technology - CIT 9, 2001, 3, 177–183 177 Building the Knowledge Economy Vlatko Ceriˇ c´ Graduate School of Economics & Business, University of Zagreb, Croatia Generation and exploitation of knowledge became one Capital, energy, labour and land are no more of the most significant components in the new economy. the only factors in production, and creation of This paper first investigates influence of information and communications technology on economy, with specific wealth is transformed from exclusively physical- emphasis on Internet economy and electronic commerce. based work to increasingly knowledge-based The paper then describes characteristics of the knowledge work. Growing influence of information and economy, discusses knowledge, presents main issues rel- evant for building of knowledge economy and gives an knowledge on economy led to “knowledge eco- overview of the situation and perspectives of knowledge nomy”, i.e. economy that is directly based on economy in Europe. the production, distribution and use of know- ledge and information OECD, 1996 . Several Keywords: knowledge economy, information and com- munications technology, Europe other names coined for the same phenomenon are information economy, new economy, digital economy, and network economy. Second section of this paper deals with influ- 1. Introduction ence of information and communications tech- nology on economy. Third section discusses In the last two decades information and com- knowledge economy in some detail, while the munications technology ICT made a major fourth section describes the main types of know- influence on all areas of business, as well as on ledge. Section five presents main issues in personal and social life. Prices of ICT equip- building the knowledge economy, while section ment were falling drastically through this period six discusses some social issues related with of time, which led to fast increase of installed knowledge economy. Section seven presents computing and communication equipment in some facts related with development of know- enterprises, government institutions and homes. ledge economy in Europe, while the last section New ICT systems for scanning, imaging, stor- includes some conclusions. age, computing and communications are devel- oped continuously. Huge quantity of digitized material appeared, and a substantial number of applications were developed. 2. Influence of Information and Communications Technology Introduction of Internet was a major step that on Economy reshaped economy by enabling global commu- nication, as well as global transport of infor- mation and knowledge. Internet had an enor- Rapid development of information and commu- mous influence in changing business models of nications technology and dramatic fall of ICT enterprises, enabling cheap global publication equipment prices in the last decade e.g., annual and marketing, as well as cheap and fast busi- fall of computer prices was about 12 percent ness transactions between businesses, business between 1987 to 1994, and about 26 percent and customer, government and customers, gov- between 1995 and 1999 is having a fundamen- ernment and business, etc. Victoria University, tal influence on the economy as a whole. Ac- 2000. cording to the U.S. Department of Commerce, 178 Building the Knowledge Economy 2000 real business investment in ICT equip- revenue, but growing three times as fast as cor- ment and software in U.S. increased from $243 porate revenue in whole. billion in 1995 to $501 billion in 1999. ICT Total employment in Internet Economy grew industries account for 8.3 percent of U.S. eco- 22.6% between the second quarter of 1999 and nomy output in 1999 and contributed for nearly the second quarter of 2000. Internet Economy a third of real U.S. economic growth between supported 3.088 million workers in mid-2000, 1995 and 1999. In 1998 ICT industries invested including 600.000 new workers employed in the almost one third of all company-funded research first half of 2000. Internet-related jobs in Inter- and development investment. In the second half net Economy companies grew four times faster of the 1990s the production and use of ICT con- than the growth of the non-Internet related jobs tributed to more than a half of the acceleration in these same Internet Economy companies. of U.S. productivity growth. Total number of employed people in Internet Exceptionally strong influence of ICT on eco- Economy was somewhat bigger than the num- nomy came from explosive growth of computer ber employed in insurance industry and double networks, and particularly Internet. Internet the number employed in real estate industry. and World Wide Web enable companies of all Internet Economy growth is unprecedented, sur- sizes to radically improve interaction with cus- passing even the extremely fast growth in per- tomers and other businesses, build new products sonal computer industry. While personal com- and services, and carry out business efficiently puter industry grew from zero to $100 billion in and globally. Private computer networks in- ten years, the Internet Economy grew from zero tranets enable exchange of important informa- to $800 billion in five years. Both business and tion within the enterprises, as well as coopera- customers are now using Internet routinely, as tion between employees dispersed on very long can be seen from the growth of Internet-related distances. Outsourcing became much simpler, Christmas holidays spendings. These spend- ings grew from $4.2 billion in 1999 to $8.7 bil- faster and cheaper, new ways of working such lion in 2000, according to a study by Goldman as telework emerge, while direct sales via Web and distribution of digital products via Internet Sachs and PC Data. led to dramatic fall of operation and distribu- Electronic commerce refers to all aspects of tion costs. Customers became able to compare business that take place over computer networks product and service prices, and request person- Adam et al, 1999; Ceriˇ c,´ 2001 . These busi- alization of products and services. ness activities may involve consumers, manu- ICT industries also intensively influenced the facturers, service providers and intermediaries. creation of additional jobs in local economies – Electronic commerce includes goods and ser- vices that are delivered over the networks, as e.g. in the Washington state in 1995 each job in well as goods ordered over the networks and the ICT giant Microsoft created 6.7 new jobs, delivered by traditional delivery channels. It while a job in Boeing created 3.8 new jobs. includes various business functions required to Internet Economy, i.e. economy based on In- support these activities, such as marketing, pro- ternet, includes companies directly generating duction and delivery. Electronic commerce size all or some part of their revenues from Inter- is growing at an impressive speed – its annual net or Internet-related products and services. revenue growth from second quarter of 1999 to Internet Economy can be classified into Inter- second quarter of 2000 was 57.8% University net infrastructure layer, Internet applications in- of Texas, 2001. frastructure, Internet intermediaries and Inter- Electronic commerce radically changes the way net commerce layer. Recent study of the Center organizations carry out business and enables for Research in Electronic Commerce Univer- substantial increase of speed and efficiency of sity of Texas, 2001, that included worldwide business transactions. Communication and co- Internet-based revenues of U.S.-based compa- operation both inside the company and between nies, showed that their overall annual revenue companies and customers or other companies growth was 58.8% between the second quarter becomes much simpler and faster. Production of 1999 and the second quarter of 2000. Inter- and delivery costs are cut and delivery cost net revenue is one-fifth the size of non-Internet for digital products became negligible, while Building the Knowledge Economy 179 products are delivered almost instantaneously. and lead to creation of wealth through exploita- Electronic marketplaces Bakos, 1999 is a key tion of information. economic infrastructure built around electronic Some industries have knowledge as their main commerce with rapidly growing influence and product, while many other industries manage use. or transport information. Industries that pro- duce knowledge include software, hardware and biotechnology industries, and some important 3. Knowledge Economy occupations in these industries are scientists, en- gineers or programmers. These industries make While the traditional economy perceived labour up less than 7 percent of economy output, but and capital as the only factors that influence the are key drivers of knowledge economy. production and determine the standard of liv- Knowledge-based products appear in the form ing, this approach has difficulties with dealing of knowledge goods, digitized processes, digi- with the causes of long-term economic growth. tized physical goods, and knowledge-enhanced New economic growth theories see e.g. Romer, physical goods and services Choi and Whin- 1986 are therefore not viewing knowledge as ston, 2000. Knowledge goods include goods an exogenous variable but rather as an intrin- that can be digitized and transferred over com- sic part of the economic system. Knowledge is puter network, like magazines, books, pho- regarded as the basic form of capital, and eco- tographs, or music. Digitized processes are