Economist magazine senior editor Francis Caincross predicted in 1997 that information and communications technologies would mean the “death of distance.” That hasn’t quite happened.
For example, one Canadian study found that people are willing to pay four times more for service providers within 100 kilometres than for service providers that are approximately 10,000 kilometres away. A University of Toronto study found that even for digital products (such as music, games, and pornography)—where in theory distance should not matter since products can be downloaded instantly—it still does. A one per cent increase in distance from the U.S. reduced by 3.25% the number of visits an American would make to a particular website. And there is a limit to what goods and services can truly be purchased on global markets. Humorist AJ Jacobs runs up against it when he tries to outsource to an assistant in India not only administrative and research tasks, but also resolving disagreements with his wife and making phone calls to his relatives.1
It seems that, even when digital technologies offer options around the world, most people still prefer to trade locally. This is likely because of existing networks, relationships, and habits formed early in life (what the Economist magazine calls “The Marmite Effect”).
While preferences to buy locally may still dominate, there is no question that the ability to digitize information and send it anywhere in the world has changed global trade profoundly. Distance may still matter, but it matters much less than it once did, as this study confirms.
For one, digitization has opened up all kinds of new trading possibilities for Canadian businesses and their global counterparts. This includes:
- Trade in virtual markets. Individuals and businesses can now buy and sell in virtual markets, spending real money on “virtual goods.” One example is buying clothing for an avatar doll at Cartoondollemporium. According to In-stat, over US$7 billion was spent globally on such virtual goods last year.
- Trade in services. It is now possible to trade globally for services such as research or medical diagnostic services that were not previously considered “tradables.”
- Trade in smaller tasks or inputs. The ability to send information so rapidly across international borders has meant it is much easier to coordinate global value chains—breaking down trade into smaller components and tasks than in the past, with each task performed or component bought from where it is most efficient. Such trade appears to be growing rapidly: trade in intermediate goods grew by a whopping 15% annually over the past two decades, according to Conference Board calculations.
- Trade in digital form. Digitization has also created opportunities for Canadians and others to sell products that were previously only traded physically—such as books and music—via digital form. This means businesses both can reach a broader audience and must compete with a broader audience. It also means that companies can create content once, and then duplicate it at zero marginal cost, selling it many times.
For another, digitization has meant global trade possibilities are opened up to a whole new array of actors. This includes smaller businesses and individuals, as well as those in the developing world where mobile phone use is widespread. With widespread Internet and mobile access, barriers to selling goods and services in global markets have fallen dramatically. Anyone can go global instantly without having to sell in local markets first. This is particularly important given the relative importance of smaller businesses in the Canadian economy. (A forthcoming Conference Board paper will look specifically at best practices for SMEs using digital technologies to go global.) And it means that Canadian businesses have potentially easier access to opportunities in new, rapidly growing markets.
Companies also can reap large efficiency gains from using digital technologies, better equipping them to sell in global markets. An OECD survey of the evidence finds that overall such technologies give a strong boost to productivity.2 For example, cheap communications technologies not only cut costs and increase efficiency for companies selling services or digital video games, but digital technologies can help make companies more efficient at tracking and transporting physical goods. (And trade in such digital products and technologies leads to cost reductions, making such tools more available throughout the Canadian and global economies.)
Of course, such technologies also mean competition for trade in both goods and services can now be fierce, as customers and businesses have access to comparative information cheaply, and are no longer confined to local options. They can compare prices, and new technologies, products, or content can go viral, all instantly. Businesses need to be nimble in response.
Canadian companies that intend to compete globally—or even locally—now need to think about a host of new or intensified issues. These could include establishing and protecting their digital identities and intellectual property, as well as becoming more efficient via electronic payments and other methods. They also need to think about whether traditional forms of organizations are agile enough to be able to compete effectively in a more digitized world.
The bottom line is that digital technologies mean that, while distance still matters, it matters less than it once did. Over time, distance will matter less and less, as governments establish greater confidence in the digital marketplace and reduce barriers to digital trade (as an upcoming blog will discuss), and as more and more consumers and businesses open their eyes to new possibilities. The result will be many more possibilities for Canadian businesses and individuals in the global marketplace.
This series on “Trading Digitally” comes from the Conference Board’s International Trade and Investment Centre. The comment period on this series is now closed. The series will be revised based on comments received and published by the Conference Board in spring 2011.
1See Jacobs, AJ. My Outsourced Life in “The Guinea Pig Diaries”.
2Organization for Economic Co-operation and Development. 2008. Broadband and the Economy.
Blogs in this series