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Communications networks and virtual economic integration: the case of three countries.

Article Excerpt
Abstract

This paper proposes a three-country model of trade that captures the role of communications networks which enhance trade in business set-vices. The interconnectivity of country-specific networks is found to determine the structure of comparative advantage in the good that requires business services provided via networks. In connected countries, producers of that good benefit from the growing connectivity of business services providers. It is also shown that the third country which is unconnected to the interconnected networks may be worse off from trade. (JEL D43, F12)

Introduction

A tremendous change has been taking place in the world economy: globalization, caused both by the communications revolution and by fall in barriers in international trade. To put it plainly, globalization is closely related to the increased connectivity of individuals and organizations, achieved through improved communications networks such as the Internet and a consequent increase in the services transactions across borders. (1) Software engineers from India, for example, can deliver their services to the United States and Europe via the Internet.

In the existing literature on trade theory, however, relatively few attempts have been made at the theme of communications networks and their impact on trade in business services. In a series of articles, Harris [1995; 1998] explored an important aspect of communications networks--their ability to remove the barriers to mobility of business services such as banking, engineering, retailing, software development, and so forth. Related to this aspect, Harris [1998] used the term virtual economic integration to refer to the situation where communications networks make trade possible in business services.

This study, in contrast, focuses on another important aspect of networks: interconnectivity which allows network users in one country to communicate with users in another country. (2) The Internet is the ultimate example of the boon of having the interconnectivity: it allows lots of different computers in the world to talk to one another. Language is another essential factor which affects the interconnectivity of country-specific communications networks. Interconnectivity of networks plays a crucial role in economic activities in the world economy. If network users in one country operate on its own standard (that is, languages and industrial standards), they may be excluded from the internationally interconnected networks...

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