The global Internet economy had its origins in the microelectronics industry and the innovation of the microchip in its various versions. In the stages of optoelectronics, the use of electrical energy to generate optical energy or vice versa such as light-emitting diodes (LEDs), the microelectronic chip, as developed by Intel Corporation, assumed enormous importance for the world of information and telecommunications.
Since 1970, Moore’s Law concerning the pace of technological innovation relative to cost gave significance to the power of the microchip and its contribution to all technological innovations, from the calculator to the computer, to voice and data over the Internet, and to the “magical” downloading of pictures from satellites onto the computer screen. Now known as digital convergence, most technological innovations in this sector originated from the microchip. The transformative innovation of the microchip led to the many innovations that emerged from Silicon Valley and other centers of technology in the United States, Europe, and Asia. Specifically, the microchip enabled computing and telecommunications to interlock in transforming data and information into digits that can be stored, processed, and transmitted over long distances instantaneously. The microchip has transformed manufacturing, health-care appliances, gadgets for domestic use, and tools and machines of every description. It has led to surges of wealth creation and employment, and it has transformed the ways in which people communicate, learn, and integrate across political borders.
Inevitably, the global Internet economy was the outcome of the transformative technology of the semiconductor. It enables the creation of new technologies in new sectors of the economy and in the daily activities of the population. In essence, the microchip is an extremely flexible technology capable of being customized to many different kinds of users and applications. As the United States witnessed the innovative dynamism generated by the microchip in the locality of Palo Alto, California, Sweden did as well near Stockholm, India in Bangalore, and Taiwan in Taipei.
The progress of the microchip industry led to the growth of multimedia services and operations. Due to this progress, the cost characteristics of the new technologies changed, and these technologies enhanced new economies of scope and reduced the economies of scale as miniaturization grew. Borrowing a term from William Gibson’s novel Neuromancer (1984), cyberspace has changed the entire world and rendered many of the previously basic tools of strategy, planning, and information systems obsolete.
The newest innovations originated not in corporate headquarters but in consumer markets in which proprietary communication networks were built; these in turn were overtaken by the power of the Internet and its global connectivity. New electronic markets were exploding overnight and technology had become “not the solution, but the problem” (Downes and Mui 2000). In a process described by J. A. Schumpeter (1942) as “creative destruction,” new technologies appearing in a capitalist society replaced old technologies, leading to the creation of new economies that added to the accumulation of wealth and prosperity. This change occurred under competition when the microchip became a “killer app” (application), and gave rise to the revolution in information technology and the transformation of the entire telecommunications industry.
As computing devices became smaller, less expensive, and more powerful, digital technology became the most disruptive force in modern society. Gordon Moore, who founded Intel, witnessed the decrease in the size of the product—the microchip—with each succeeding decade. He realized that as size decreases, power increases geometrically because more circuits can be placed on a single chip. Moore articulated the theory, which came to be known as Moore’s Law, that processing power doubles every eighteen months, while cost holds constant. Moore’s Law applies to many other aspects of digital technology, including memory and storage devices.
Many aspects of the telecommunications industry, such as bandwidth, the speed at which data can be transmitted, the use of high-speed fiber optic cable, and satellite and wireless communications, rely on the microchip in one way or another. As of 2006, one gigabyte of storage could fit on a credit card-sized device that cost no more than $200.
Moore’s Law is supported by Metcalf’s Law, according to which the more users a particular technology draws, the more valuable the technology becomes. Robert Metcalf was the founder in 1979 of 3Com Corporation, a Massachusetts-based manufacturer of computer networking products, and the designer of the Ethernet protocol for computers. Metcalf calculated that the usefulness of a network is equal to the square of the number of users, an insight that led to the explosion of the Internet in the digital age and the development of multimedia firms and services.
As a result of the cost characteristics of new technologies based on greater economies of scope and reduced economies of scale, it became possible to place greater reliance on competition, which benefits economic activities, rather than regulation. In the new information economy, the rules of market pricing have changed as transaction costs are reduced and the concept of what constitutes public goods has changed. The power of information as a public good has radically altered its impact on consumers; information is no longer a proprietary good due to its availability in cyberspace. In the multimedia age, “content” is now a public good, but its distribution costs have an impact on competition and business models.
Although the term multimedia has no single definition, it covers three trends in communication products. One is the delivery by a single medium of different types of content, including text, video, sound, graphics, and data. The second trend depends on the way in which content is delivered, because digitization allows more information to be stored on the same chip and pushed through the same channels, either wire line or wireless. The third trend is determined by telecommunications and media companies, which are motivated to offer consumers integrated packages from a single vendor. In such a case, transaction costs dominate both the supply-side and the demand-side identities. Multimedia firms have an advantage in market competition in which the basic feature of their products—the microchip—gains greater power for both transmission and storage.
As the microelectronics industry advances, companies have introduced multifunctional smart cards. Such cards are used for the payment for services, public transportation, access to health and government services, public telephones, and so on. Using smart cards, electronic payments are made at point of sale, and through the Internet and home-banking sessions (Berkvens 1997). The data on the chip would include general information to be used by application providers and card acceptors. Data is stored on the chip, as well as in the back office of the card-scheme participants. Biometrics makes identification of the user on the chip even easier and more reliable.
Microprocessor-related trade talks between the United States and Japan became critical in 1986 when Japan agreed to open up to 20 percent of its market to foreign supplies of microprocessors. It was initially difficult to make inroads into the Japanese market for computer chips, but by 1996, 80 percent of foreign chips sold in Japan were made in the United States (Cooper and Takahashi 1996). Renewal of the 1986 agreement was sought by the administration of President Bill Clinton ten years after the initial agreement was signed. By this time, however, Japanese companies had access to lower-cost capital and subsidies from the Japanese government, and they could produce better-quality chips. The American company Cray Research, then the largest producer of supercomputers, lost a bid against Japan’s Nippon Electronic Corporation to build a weather-forecasting computer for the U.S. National Science Foundation in 1996.
The spread of the production of microprocessors in Japan, China, and Taiwan, and to some extent India, has “transformed Asia into a global factory for diverse goods including microelectronics, which has led to Asia’s emergence as a location for innovation offshoring” (Ernst 2004, p. 3). According to William J. Baumol (2002), new actors from Asia are entering the global innovations race, and Taiwan has accumulated a competitive advantage in digital circuit designs. Intel remained the leading chipmaker in the world as of 2006; its chips direct the inner workings of most personal computers, and it is responsible for changing the function of the personal computer to an entertainment device. Intel began positioning its platform to provide online entertainment to the digital living room, and was prepared to expand its operations in India. Domestic firms in India can benefit from the rapid growth of the domestic information technology market.
Wireless technologies, including Wi-Fi (wireless Internet connectivity), Blue Tooth, and 3G, provide faster and longer-range transmissions. Competing with them is a communication technology called near-field system, which fuses tickets, key cards, and cash with mobile phones. This device requires different types of microprocessors and may displace existing wireless technologies. By 2006, it had become possible to install a “contactless” chip and its reader into a mobile phone, thereby making possible such operations as using a screen and connecting to the Internet with a phone. Devices are in use in Hong Kong (Octopus cards) and Japan (DoCoMo) that offer wallet phones with a FeliCa chip. A FeliCa chip is a contactless card for an electronic wallet developed by Sony. From the word felicity the card cannot be forged and helps send and receive data at high speed and security.
These innovations are a consequence of a global production system based on vertical specialization in which many of the functions can be relocated to low-cost and low-wage regions. Beyond manufacturing, most of the production innovation in the electronics industry has given rise to the development of mass-production facilities in developing Asian countries. The models for chip design and manufacturing, for example, are developed in Korea, Taiwan, and Singapore, and then transmitted to other countries, such as Malaysia and China, as well as such eastern European countries as Hungary, Poland, and Romania.
The restructuring of global design chains has created wide-ranging links across countries, and these can vary between manufacturing-based innovation, product innovation, and infrastructure (Ernst 2004). Chip design has become strategically important for telecommunications and computer networking, mobile handsets and entertainment devices, and automobile electronics. In the past, chip design and manufacturing was considered the monopoly of the Japanese microelectronics industry, but Japan’s innovation prowess failed in the software and biotechnology arena during the 1990s. Japanese researchers had better luck with robotics, aerospace technology, and other burgeoning technologies (Competing Through Innovation 2005, p. 65).
In order to regain its competitive strength, Japan aimed to innovate in its microelectronics industry. Japanese companies also began conducting research in the robotics sector with robots designed to enter the healthcare industry and search-and-rescue operations. Japan’s position as a leading innovator in chip design is being challenged by other Asian countries, especially Taiwan, as well as countries in eastern Europe. In the early years of the twenty-first century, Japan continued to lead the world in its investment in research and development, with approximately 3.2 percent of its gross national product devoted to research and development, compared with 2.6 percent in the United States and 2 percent in the European Union. Japan also leads other countries in obtaining patents in the electronics industry, but it lags in management skills and university research.
At the same time, India and China were racing to obtain foreign investment for chips manufacturing. In 2005 the California-based company Advanced Micro Devices (AMD) joined a consortium to build India’s first semiconductor plant, as well as an assembly and testing plant in the Chinese city of Chengdu. In 2004 Lenovo, China’s leading personal computer manufacturer, agreed to use AMD chips in its desktops. In addition, AMD agreed to open a chip-testing facility in India, gaining contracts from India’s railways, schools, and government.
Intel also has a commanding market presence in both India and China. Intel aimed at developing a low-cost personal computer to be used in rural multimedia kiosks found across India. The product could also prove successful in China. Competition between AMD and Intel would keep down costs for rural applications. In addition, both India and China were making a push for the faster spread of broadband with affordable Internet applications and e-initiatives.
There has been continuing opposition to the use of computing in health care, a prospect that involves far greater use of computers by the medical profession. Some critics argue that a systematic use of software to diagnose and care for patients could be disruptive. However, in tele-health projects, computing plays a vital role because diagnoses can be transmitted via the Internet to distant places through the use of satellites or even microwaves. The goal of this process is to use software that matches a patient’s symptoms and health history against a catalogue of computerized medical knowledge. This idea has been supported and propagated by Dr. Larry Weed, who believes that doctors need technology to facilitate their absorption and retention of new medical information. As governments push for health-care automation, resistance to the use of information technology could finally crumble.
As chip design centers become geographically disbursed, the links between engineers and markets have to be established. Market demand for microelectronic chips is growing phenomenally because of the wide use of chips in consumer products and in the entertainment industry. New models of software development are leading to a new breed of knowledge workers, adding to the complications already inherent in chip design and innovation. As the number of knowledge workers grows in developing countries, there is a shift in production in the microelectronics industry, with product chains also growing in number and intensity. These developments have had a major impact on the telecommunications industry, as well as in mobile communications, automobile production, and the health sector.
The convergence of digital technologies has created a new environment—cyberspace—for transacting business, providing entertainment, forming links with customers, and creating and distributing wealth. The development of digital technology has been fueled by the conditions expressed in Moore’s Law and Metcalf’s Law, as well as the economic effects of the Schumpeterian process of creative destruction. As a consequence, the microelectronics industry has touched all lives, both real and virtual. A new generation of knowledge workers is entering cyberspace armed with the Internet and the ability to change the economic dynamics of the business world and markets worldwide. The ability to reach new frontiers in microelectronics research is no longer determined by geography, but by free computing power, free bandwidth, free software, and a society that values such an environment for its business interests and its livelihood.
SEE ALSO Bubbles; Industry; Internet; Technology, Adoption of
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