Measuring the Electronic Economy: Current Status and Next Steps

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Measuring the Electronic Economy:
Current Status and Next Steps





B.K. Atrostic, John Gates, and Ron Jarmin
U.S. Census Bureau


June 2000












batrostic@ces.census.gov
John.H.Gates@ccmail.census.gov
rjarmin@ces.census.gov





Disclaimer: This paper reports the results of research and analysis undertaken by the authors. It has
undergone a more limited review than official publications. The authors received valuable comments
from Frederick Knickerbocker, Thomas Mesenbourg, Lee Price, Jack Triplett, and members of the
Census Bureau’s Electronic Commerce Steering Committee. However, opinions expressed are those of
the authors and do not necessarily represent the official position of the Census Bureau. This report is
distributed to inform interested parties of research and to encourage discussion.

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Abstract


The recent growth of consumer retailing over the Internet draws attention to the
electronic economy. However, businesses also conduct other business processes over computer
networks, and many have been doing so for some time. Uses of computer networks attract
attention because of assertions that they lead to new products and services, new delivery
methods, streamlined or re-engineered business processes, new business structures, and
enhanced business performance. These changes, in turn, potentially affect the performance of
the entire economy, including economic growth, productivity, prices, employment, trade, and the
structures of businesses, regions, and markets.

Evaluating these assertions, and their effects on economic performance, requires solid
statistical information about the electronic economy. This paper develops principles for
identifying information critical to measuring the size and evaluating the potential effects of the
electronic economy, relates that information to current data collection programs, and notes
relevant measurement issues. Some of the required information about the electronic economy
can be collected by adding questions to existing surveys, making the scope of existing surveys
consistent, or developing new surveys. However, many key pieces of information pose
significant challenges to economic measurement. While some of those challenges are specific to
the electronic economy, others are long-standing ones. Interest in the electronic economy
highlights the importance of continuing attempts to address these challenges. Improving and
enhancing the statistical system to provide information about the electronic economy, therefore,
would also substantially improve the baseline information available for evaluating the
performance of the entire economy.

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Measuring the Electronic Economy:
Current Status and Next Steps

Table of Contents
I. INTRODUCTION
1
II.
DEFINITIONS
2
III.
QUESTIONS ABOUT THE ELECTRONIC ECONOMY
3
A. DIMENSIONS ........................................................................................................................... 3
B. IMPACTS.................................................................................................................................. 4
IV.
FROM QUESTIONS TO DATA
7
A. TWO APPROACHES ................................................................................................................. 8
B. EXAMPLE: SIZE..................................................................................................................... 8
C. EXAMPLE: PRODUCTIVITY .................................................................................................. 12
D. OTHER QUESTIONS .............................................................................................................. 16
V.
THE ELECTRONIC ECONOMY IN STATISTICS
17
A. OVERVIEW ........................................................................................................................... 17
B. IMPROVING DATA ON ELECTRONIC COMMERCE TRANSACTIONS ......................................... 23
C. IMPROVING DATA ON ELECTRONIC BUSINESS PROCESSES THAT ARE NOT TRANSACTIONS.. 25
D. IMPROVING DATA ON THE ELECTRONIC BUSINESS INFRASTRUCTURE.................................. 26
E. IMPROVING DATA TO ASSESS THE IMPACTS OF THE ELECTRONIC ECONOMY....................... 27
VI.
CONCLUSIONS
30
APPENDIX
32
REFERENCES
33

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Measuring the Electronic Economy: Current Status and Next Steps

I.
Introduction

The recent growth of consumer retailing over the Internet draws attention to the
electronic economy. However, businesses also conduct other processes over computer networks,
and many have been doing so for some time. Uses of computer networks attract attention
because of assertions that they lead to new products and services, new delivery methods,
streamlined or re-engineered business processes, new business structures, and enhanced business
performance. These changes, in turn, potentially affect the performance of the economy as a
whole, including economic growth, productivity, prices, employment, trade, and the structures of
businesses, regions, and markets.

Evaluating these assertions requires solid statistical information. The first requirement is
for basic information about the dimensions of the electronic economy, such as the number and
kinds of businesses participating in it, and the value of the products and services those
businesses produce. The federal statistical system is just beginning to collect this kind of
information. Assessing the effects of the electronic economy requires information about both the
electronic economy and baseline information about the entire economy. The federal statistical
system currently collects detailed information from businesses and households. Current baseline
statistics, however, are not uniform: the amount of information and level of detail collected, and
the presence of important measurement problems, vary across economic sectors. Understanding
the ways the electronic economy affects the performance of businesses and the economy requires
expanding and improving the current set of baseline information.

This paper develops principles for identifying the key additional pieces of information
needed to measure the size and evaluate the potential effects of the electronic economy, relates
that information to current data collection programs, and notes relevant measurement issues.
Some of the required information about the electronic economy can be collected by adding
questions to existing surveys, making the scope of existing surveys consistent, and developing
new surveys. However, other key pieces of information pose significant measurement
challenges. While some of those challenges are specific to the electronic economy, many are
difficult and long-standing ones. Interest in the electronic economy highlights the importance of
addressing these challenges. Many of the improvements needed to provide information about the
electronic economy would also substantially improve the information available to evaluate the
performance of the economy as a whole. The discussion highlights these enhancements and
expansions of the Census Bureau’s existing measurement program.

The paper is a companion to a recent Census Bureau paper that proposes definitions of
electronic business (Mesenbourg 1999). As with the definitions in that paper, this framework is
presented for discussion purposes, is based on reviews of available information and consultations
with interested professionals, and is intended to provide a framework for developing official
statistical measures and data products. Comments and suggestions are requested.

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II.
Definitions

Measuring the electronic economy requires defining it. The Census Bureau has developed
preliminary definitions of three key components of the electronic economy: electronic business,
electronic commerce, and the infrastructure for electronic business. These definitions are
presented in greater detail in Census Bureau papers (Mesenbourg 1999 and 2000; see also
Fraumeni, Ehmann, and Lawson 1999). Similar elements are being presented by other national
and international agencies, such as Statistics Canada (1999) and the OECD (1999).



• Electronic business (e-business) is any process that a business organization conducts over
computer-mediated network channels. Business organizations include any for-profit,
governmental, or nonprofit entity. Examples of these processes are on-line purchasing; on-
line sales; vendor-managed inventory; production design and control; on-line logistics;
customer support; employee training; and recruiting.

• Electronic commerce (e-commerce) is any transaction completed over a computer-mediated
network that transfers ownership of, or rights to use, goods or services. Transactions occur
within selected electronic business processes. Transactions are Acompleted@ when the
agreement between buyer and seller to transfer the ownership or rights to use goods or
services occurs over computer-mediated networks. Only priced transactions will be
measured.

• E-business infrastructure is the economic infrastructure used to support electronic business
processes and conduct electronic commerce transactions. It includes the capital (hardware,
application software, human capital, and telecommunication networks) used in electronic
business and commerce.

A key feature of the Census Bureau definitions of electronic business and electronic
commerce is that both require not just computers alone, but the use of computer-mediated
networks.

• Computer-mediated networks are electronically linked devices that communicate
interactively over network channels. A variety of devices may be linked, including
computers, Internet-enabled cellular telephones, and telephones linked with interactive
telephone systems. Such links generally involve minimal human intervention, although some
businesses are providing customers with capabilities for on-line or Internet telephony
conversations with customer support representatives. Networks include Internet, Intranets,
Extranets, Electronic Data Interchange (EDI) networks, and telecommunication networks.
These networks may be open or closed.

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This flexible definition of computer-mediated networks includes both the kinds of
networks that companies have been developing and using for a number of years, and the more
recent Internet-based networks. Within this definition, data collection and processing are able to
focus on specific technologies, such as retail transactions over the Internet, when such focus is
appropriate. The definition is flexible, including new and emerging electronic communications
devices, such as computers, personal digital assistants, Web-TV, internet-enabled cellular
telephones, and interactive telephone systems, as well as devices yet to be developed.

Differences in definition matter. For example, a narrower definition that singles out a
specific technology may apply to relatively few users in any industry or sector, making it more
difficult to collect reliable estimates from a given sample. It would also preclude collecting the
information needed to track the use of evolving technologies. Broad definitions that permit a
range of technologies and applications make it possible to collect the information needed to track
whether businesses typically transition to Internet-based processes from closed or proprietary
systems (such as EDI), or move there directly from traditional (e.g., non-networked, or non -
computer mediated) processes.


III.
Questions about the Electronic Economy

The federal statistical system currently collects detailed information from households and
businesses. However, it is just beginning to collect information on the electronic economy. The
additional statistical information that is needed depends on the sets of questions being asked (for
example, Haltiwanger and Jarmin 2000; U.S. Department of Commerce 1998 and 1999; Triplett
1999a; Atrostic, Colecchia, and Pattinson 2000). Many questions about the electronic economy
are related to questions about the overall economy that the present system of economic statistics
already is called on to answer. The first major group of questions focuses on describing the
dimensions of the electronic economy. The second major group of questions is about the impact
of the electronic economy on businesses, workers, sectors, regions, and the entire economy.


A. Dimensions

Primary dimensions of the electronic economy are its size and characteristics, and how it
is distributed over businesses, industries, regions, and time. Separate sets of questions about the
dimensions of each component of the electronic economy include:

Electronic Business Processes
• What electronic business processes are used?
• How pervasive is this use?
• How are the electronic business processes used, e.g. to integrate business operations?
• What are the characteristics of the economic actors engaged in electronic business processes?

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• What proportion of the entire economy is made up of people, firms and organizations using
electronic business processes?

Electronic Commerce Transactions
• What is the value of electronic commerce transactions in specific industries and sectors?
• What are the characteristics of the economic actors engaged in electronic commerce
transactions?
• Which products are purchased or sold?
• Do the electronic commerce transactions represent intermediate or final demand?

Electronic Business Infrastructure
• How large is the electronic business infrastructure (that is, the stock of electronic business
capital)?
• How large are its components (e.g., hardware, software, human capital, and
telecommunications networks)?
• How much is invested in electronic business capital each year?
• How is this investment distributed among the components of electronic business capital?
• What are the depreciation rates for the physical and human capital components of electronic
business?
• How do the stocks and investment flows vary by economic actor, industry, sector, and
region?

B. Impacts

Assertions about its anticipated impacts on businesses, government organizations, and
society drive interest in the electronic economy. They also lead to two related sets of questions
about it. First, data users, researchers, and policy-makers want to know how the electronic
economy affects individual businesses and other economic actors. Second, they want to know
how it affects the performance of industries and sectors, and of the economy. Both sets of
questions seek an understanding of the underlying economic mechanisms through which the
electronic economy makes its effects felt.

While these are important policy and research questions, they also are inherently difficult
to answer. Understanding the impact of the electronic economy on the performance of
individual businesses and on the overall economy is a fundamentally different task from
measuring the size of the electronic economy. Concepts such as size can generally be measured
directly. Statistical agencies can collect and process the necessary data, and release an estimate.
However, assessments of the electronic economy’s impact on such key performance measures as
productivity can not be measured directly. Instead, these assessments are based on inferences

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developed by data users applying analytical and econometric models to information on both
productivity and on the use of electronic business processes. Estimating these models is
especially difficult when it requires addressing long-standing challenges to economic
measurement, and filling existing, as well as new, information gaps.

For example, consider the questions of how adopting electronic business processes
affects costs for establishments operating in a particular industry. Economists would typically
estimate an econometric model of costs. The model would include as explanatory variables
available information on factors hypothesized to affect costs, including a measure of the use of
electronic business processes at each establishment. Estimating the relationship between
electronic business processes and costs requires statistical agencies to provide data on the costs
businesses incur in producing the goods or services they sell, and on their use of electronic
business processes.

For some sectors, particularly manufacturing, detailed information on costs are collected
from well-defined economic units (e.g., establishments) on an annual basis. However, less
information is available for other sectors. The same concept of economic unit may not apply
across all economic entities included in a particular industry survey, and the basic concept of
economic unit may differ across surveys in non-manufacturing industries. In addition, there is
less detailed information on the components of costs. This lack of detail makes it difficult to
assess how using electronic business processes affect a business’ costs.

Business processes also pose a challenge. Rarely, if at all, is information collected on
whether businesses conduct specific business processes (such as sales, inventory management,
procurement, or recruiting) themselves, or outsource them. Information on whether the
processes are conducted through traditional processes (such as whether procurements are made
through direct sales calls or ordered from catalogs) or electronic business processes, is even more
rare. But such information is required to identify, for example, how electronic business
processes are affecting costs.

1.
Individual businesses

The primary economic impacts of the electronic economy are expected to manifest
themselves at the level of individual businesses and other economic actors. New ways of doing
business are emerging as businesses review and redesign their activities to take advantage of
electronic processes that reduce the costs of acquiring, managing, and sharing certain kinds of
information. These reductions in the costs of sharing information could also change the
boundaries of the firm. It may become possible to outsource parts of operations that were once
conducted internally or routed through highly specialized intermediaries. Electronic business
processes, therefore, have the potential to alter the supply chains for many goods and services.
For individual businesses, the use of electronic business processes potentially affects what they
purchase, what they produce, the way they produce it, their marketing and selling activities, and
their productivity and profitability.

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Questions about the impacts on specific businesses and other actors include:
• How does electronic business change a business’ profits?
• How does electronic business change a business’ productivity?
• How does electronic business change a business’ product mix?
• How does electronic business change what a business purchases?
• How does electronic business change a business’ capital stock?
• How does electronic business change a business’ demand for different types of labor?
• How does electronic business change the prices a business gets for its products?
• How does electronic business change the prices a business pays for its own purchases?
• How does electronic business change inventory, procurement, and other supply chain
practices?
• How does electronic business affect the existence and role of intermediaries?
• How does electronic business change the boundaries of the business, e.g. through
outsourcing and vertical integration?
• How does electronic business change the costs of getting products to market?
• How do these impacts vary over time and across businesses, regions, and industries?

2.
Aggregate effects


Whether electronic business has brought about “a new economy” remains an open
question. The importance attached to answering it can be seen in the steady stream of reporting
in the financial media and in major new research endeavors at research institutions and
government agencies. The improvements in information technology (IT) and software, and the
new electronic business practices that they permit, like other technological changes, are diffusing
throughout the economy. The previous section noted that characteristics of individual businesses
might change because they invest in electronic business infrastructure and adopt electronic
business processes. Changes in the characteristics of individual businesses, in turn, could lead to
changes in the characteristics of broader economic entities of which they are a part, such as
industries, sectors, and countries. These broader changes could affect a range of aggregate
measures of economic performance, such as economic growth; productivity; price, employment,
and wage levels; and international trade balances. Among these measures of economic
performance, policymakers, data users, and researchers all pay particular attention to
productivity growth because of its close relationship to rising living standards and sustainable
rates of economic growth (see, for example, Blinder 2000).


Key questions about how the electronic economy affects measures of aggregate economic
performance include:

• How does electronic business change productivity and economic growth?

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• To what extent do electronic commerce sales simply substitute for sales at traditional “bricks
and mortar” or mail order outlets, and how does this vary across industries and regions?
• How does the use of electronic business vary across regions and countries, and how does this
affect the competitiveness and relative economic performance of regions?
• How does electronic business change the boundaries of industries and sectors, e.g. retail and
wholesale?
• How does electronic business alter the flows of commodities through sectors of the economy,
from raw through finished materials (i.e., the input – output structure of the economy)?
• How do electronic commerce and electronic business change prices in industries, sectors, and
the economy as a whole?
• How does electronic business change the labor force – the nature of jobs, how jobs are
distributed across industries, the skills required to perform those jobs?
• How do electronic commerce and electronic business change the competitiveness of
markets?
• How do electronic commerce and electronic business affect international trade flows?
• What are the specific mechanisms and factors through which all these changes operate?


IV.
From Questions to Data

Questions about the electronic economy range broadly. This section links those
questions to the statistical information needed to begin addressing them, to ongoing economic
data collection programs of the Census Bureau and other statistical agencies, and to important
measurement issues. The linkages are illustrated for two key questions, the size of the electronic
economy, and its effects on productivity. While these are only two examples from a constantly
evolving list of questions about the electronic economy, they apply broadly because much of the
information needed to address them is the same information needed to address other important
questions, such as its effects on prices, employment, and economic growth. The examples
illustrate a conceptual template that can be expanded or deepened as new questions arise that
require new or modified statistical information. Although information provided by several
statistical agencies typically is needed to address many of these questions, this paper focuses on
the economic data collection programs of the Census Bureau.

The distance between these relatively abstract questions and the presence or absence of
specific items in current economic data collection programs is large. To bridge that distance, the
following sections first give a brief overview of two distinct, but complementary, analytical
approaches, the micro and macro approaches. The way each approach would use existing
economic information to address size and productivity questions is illustrated first for existing
data and then supplemented with specific examples from the electronic economy. The examples
are based on publicly available information about three computer manufacturers (Acer, Compaq,
and Dell) and their use of electronic business processes.

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