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Knowledge in the Network: Economic and Social Effects

Carlos Alberto Primo Braga Senior Adviser, International Trade Department The World Bank Turin, 17-18 November 2003

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Outline

• Knowledge and Development • The Expansion of Networks • The Economics of “Information Goods” • IPRs Protection and Networks • Implications for Developing Countries

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Knowledge Makes the Difference Between Poverty and Wealth

14 12 Thousands of constant 1995 US dollars

Rep. of Korea

10 8 Difference attributed to knowledge 6

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4 2

Ghana

0 1960 1965 1970 1975 1980 1985 1990 1995 2000 Source: World Development Report, 98/99 Difference due to physical and human capital

Average Years of Schooling of the Total Population Aged 15 and Over Countries Low Income Middle Income High Income World 1980 3.9

5.5

9.3

5.9

1990 4.7

6.8

9.6

6.7

2000

(Projection)

5.4

7.3

10.2

7.2

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Global Distribution of R&D Expenditures (1997) Upper middle income 4.1 % Lower middle income 2.4 % Low income 0.8 % High income 92.7 % 5

Source: Calculated based on data from the World Bank SIMA Database, 2002

Distribution of Patents Registered in the U.S. (2001) Upper middle income 0.4 % Lower middle income 0.4 % Low income 0.1 % High income 99.2 % 6

Source: Calculated based on data from the US Patent & Trademark Office (USPTO), 2001

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The Expansion of Networks Income Divide High Income Upper-mid Income Lower-mid Income Low Income 8 User distribution, by income group, 2001 6.1

billion 986 million 741 million 361 million 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Population Telephone lines Mobile users

Source: ITU World Telecommunication Indicators Database

Internet users

Worldwide Growth of Internet Hosts 1995-2002 9

1995 1996 1997 1998 1999 2000 2001 2002 Source: Network Wisard, 2002 Number of hosts 8,200,000 16,729,000 26,053,000 36,739,000 56,218,000 93,047,000 125,888,000 162,128,000 Yearly growth 107% 104% 56% 41% 53% 66% 35% 29%

10 How Many People Online?

Online population – January 2000 vs. September 2002

Africa Asia/Pacific Europe Middle East Canada & USA Central and South America

World Total

Source: Nua Internet Surveys

January-00

2.1 Million 40 Million 70 Million 1.9 Million 120 Million 8 Million

242 Million September-02

6.31 Million 187.24 Million 190.91 Million 5.12 Million 182.67 Million 33.35 Million

605.6 Million

Telecoms and Internet: the cost of being connected

300% Nepal 250% 200% Bangladesh Monthly internet access charge as a percent of monthly average income 150%

278%

100% 50%

191%

Bhutan

80% Sri Lanka

Sri Lanka

60%

United States

1.20%

Denmark

0.135%

0%

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Source: Human Development Report Office calculations based on data ITU 2000 and World Bank 2001

The “Knowledge” Society 12

• Communication networks and digital devices are becoming ever more pervasive in day-to-day activities, as their costs continue to decline and their quality improves.

• In a networked environment, the incentives for specialization and outsourcing are multiplied. This puts a premium on flexibility and responsiveness as business cycles shorten and interactions with clients multiply.

• Electronic commerce – that is, the use of electronic networks to support business transactions – expands rapidly. This process, in turn, further contributes to the internationalization of service activities as the feasibility and competitiveness of cross-border provision increases.

Knowledge and Networks

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IT (and related communication networks) is changing the terms under which knowledge can be created and disseminated:

- IT facilitates the process of codification and transmission of knowledge about technology; - IT enhances the positive learning externalities of knowledge generation by magnifying the possibilities for recombination of ideas and information; IT dilutes the “tyranny” of geography by providing new ways for researchers to escape national boundaries. The rate of international co-authorship of scientific and technical papers, for example, has increased significantly over the last decade; IT increases the “distribution power” of innovation systems, diminishing the time to market of new products and services, while enhancing the dissemination, application, and use of “mature” technologies.

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15 The Economics of “Information Goods”

• Data: anything that can be digitized… • Information: data with a purpose (data embedded in a context of relevance to the recipient…) • Knowledge: information acted upon by human beings (what we know…) Characteristics of “information goods”: costly to produce, but cheap to reproduce (high fixed costs/low marginal costs); non-rival; value can be significantly influenced by network effects.

16 Some Common Questions

• How to balance incentives for production (via intellectual property rights) and the social costs of non-competitive provision?

• How to minimize anti-competitive lock-in effects (associated, for example, with branding and interoperability issues)?

• How to explore network effects in a socially productive manner?

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18 The Case of Software

• Background: Networks and digital technology dramatically reduce the costs of reproduction and distribution of software. At the same time, they facilitate decentralized cooperation. • Polar views: – IPRs laws can be used to “organize” the economics of software production and consumption without any major adjustment. Problems currently faced by the industry can be dealt with by enforcement, technology (encryption…) and change in consumer culture.

– To apply conventional IPRs laws to “information goods” is doomed to fail, given the high costs of enforcement and the dynamics of network effects.

19 Software: The Orthodox View

• There is nothing new in the challenge posed by technology/networks. Copyright law, for example, can accommodate fair use without hampering the prospects for information dissemination. Transaction costs can be addressed via new technological “fixes.” • The basic issues are: – to promote a change in culture among consumers about the negative effects of piracy; – to allocate resources to enforcement; – to foster convergence toward minimum levels of protection at international level, relying on international treaties negotiated under the WIPO and the WTO.

20 Software: The “Heterodox” View

• IPRs are being extended well beyond their original scope, increasingly becoming instruments to protect/leverage market power rather than instruments to promote innovation; • There are alternative models to operate in a networked environment as illustrated by the Internet and the Open Source Software movement.

21 Variables Influencing Software Choice (proprietary, open source, illegal)

• Affordability (total cost of ownership); • Reliability, performance, scalability, security; • Support services; • Switching costs; • Availability of regular upgrades; • Consistency with local needs (language, metaphors, easy-of-use); • Social beliefs (respect for property rights).

The Expansion of Open Source Software 22

Background: OSS and Free Software • The expansion of the Internet and the Web (TCP/IP network protocol, GNU/Linux, Berkeley Internet Name Daemon, Apache web server, scripting languages (e.g., Perl, Tcl)).

• Growing opportunities for cooperation in a networked environment; • Growing competitiveness/technical maturity of OSS solutions

23 OSS Limitations

• OSS offerings concentrate on infrastructure/ back end software (reasons: origins of OSS, focusing on the needs of programmers rather than end-user applications; easy-of-use not a key concern; historical roots: networking code and operating system software); • Limited OSS offerings in the desktop application space; • Interoperability problems; • Concerns about accountability/commercial support.

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Opportunities

• OSS can promote competition in the software industry, contributing to lower costs and greater choice (reducing vendor lock-in); • OSS can help minimize security risks; • OSS can foster local ownership; • OSS can contribute to capacity building.

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Challenges

• Depth of programmer community: translating into problems with respect to skills and support availability; • Public sector procurement guidelines that create ambiguity concerning the choice of OSS solutions; • Low levels of “digital literacy”; • Misconceptions about the legal implications of OS/FS licenses.

27 Concluding Remarks

 Creation and effective use of knowledge is key to rapid economic growth; • The continued expansion of networks will further promote interest and use of OSS; • OSS communities can foster knowledge creation and dissemination; • Proprietary solutions can co-exist with OSS. “Maximalist” solutions in the protection of IPRs in networked environments can be counterproductive; • Governments should avoid blanket preferential policies in favor of OSS. The key is to pursue procurement policies that allow for fair competition between proprietary and OSS solutions; • Mythology (the “bazaar” metaphor) vs. reality (the hierarchical status-based structure of successful communities).

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More information

The World Bank www.worldbank.org

Development Gateway Portal www.developmentgateway.org