e-commerce in the u.s. and europe—is europe ready to complete?

E-Commerce in the U.S. and Europe-Is Europe Ready to Compete?

Tanuja Singh, Jay V. Jayashankac and Jasvinder Singh

Many factors, from technology diffusion to risk- taking, must be considered if Europe is to make headway in the “race fl for Internet business superiority,

E lectronic commerce, or e-commerce-the latest

buzzword in business-is the online exchange of value, without geographi- cal or time restrictions, between companies and their partners, employees, or customers. Nua (ZOOO), an Internet survey firm, estimates that as of June 2000 almost 333 million people around the world were online, and almost half of them were in North America. In 1999, the Net

economy in the U.S. was reported to be $500 billion, with online retail sales alone accounting for perhaps $16 billion. Survey after survey touts the power of e-commerce from the U.S. to China.

While estimates of usage, diffusion, and potential in the world’s many and varied markets differ considerably, there is general agreement among theoreticians and practitioners about the influence of this new medium on consumers and businesses. Academic and business publications now routinely devote substantial space to information on the Net. Its role in business, from collecting valuable data to disseminating information to various stakeholders, seems to be an integral part of corporate business strategies. The fact that Time magazine voted Jeff Bezos, CEO of Ama- zoncom, as its Person of the Year for 1999 also attests to the significance of the Web economy in today’s environment.

Of particular interest to U.S. firms is the potential of e-commerce in Europe, traditionally one

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of the most favored destinations for American businesses. Not surprisingly, electronic retailers, or “e-tailers,” in the U.S. have already expanded to Europe and currently dominate the industry there. Despite recent growth and continuing optimistic predictions for European e-commerce, however, reports suggest that Europe is one to four years behind the United States in conducting e-business. Although “one to four years” is a rather large bandwidth, it is not debatable that even the most advanced European markets have not reached their optimum potential in e-commerce, and lag way behind the U.S. in terms of capabilities and growth. Estimates of online population for the U.S. range from about 49 percent to 53 percent; in Europe, only Sweden and Norway have comparable figures. The United Kingdom, Germany, and France are still behind the U.S. in sheer Web access levels, although industry watchers predict that the U.K. and Ger- many might close the gap soon.

Forrester Research (2000a) notes that e-commerce in Europe is suffering from a lack of consumer trust and a “dearth of Web sites in different languages.” Internet diffusion and access remain very low in such European nations as Greece, Portugal, and Spain. In fact, when it comes to Net penetration, there is a clear division between northern and southern Europe. What is intriguing is the fact that Europeans lead the U.S. in digital cell phone ownership and are expected to be the first ones to use digital phones to access the Net. Thus, their reluctance to embrace the e-commerce revolution seems somewhat contradictory.

This dichotomy appears to be a function of many interdependent variables, which must be evaluated systematically if we are to understand the evolution of e-commerce in Europe versus

Business Horizons / March-April 2001

the United States. What factors have aided or inhibited e-commerce in the U.S. and Europe? And will the recent initiatives taken by the Euro- pean Commission contribute to the growth of e- commerce there?

THE E-COMMERCE UNIVERSE

W hen examined closely, e-commerce has existed in some form or other since the advent of telephones and

telegraphs for communication. The development of communication networks for linking comput- ers to enable electronic communication was the first step toward establishing the e-commerce models of today. The initial networks were pro- prietary and expensive, so only large corporations could afford them. Now, of course, the technologies have become vastly more affordable and universal. The Internet, which has been in existence since the 1960~, became a well-known commercial medium for conducting commerce only after the invention of the World Wide Web in the early 1990s. In reality, while e-commerce has seen unprecedented growth in the past three to five years, the conceptual models and basic technologies can still be traced back to the 1960~.

The multimedia look and feel of the Web made it a favorite of businesses, and now many claim that the Net has fundamentally and irrevers- ibly changed the business world. Wigand (1997) called the use of Net-based technologies “the essential dial tone for conducting business in the year 2000.” Others suggest that mere automation, universalization, and delivery of information should not be confused with innovativeness in the business models. Nevertheless, few dispute the power of the Net, and most believe it has profound consequences for the marketplace, transforming the competitive landscape as it evolves ever further. Vying for the top position in the e-commerce arena has become a strategic decision for most well-established bricks-and- mortar companies as well.

Despite the universal nature of Net-based technologies, the U.S. remains the center of the Web universe. More than 134 million American adults are now connected to the Net, although regular users may be fewer. The Industry Standard, an Internet information firm, predicts that even though by 2003 the U.S. will no longer have the majority of the world’s Inter- net users, it will nevertheless generate most global e-commerce transactions, further attesting to its significance in that arena. By most accounts, the U.S. and Western Europe should dominate the e-commerce field-which makes

all the more puzzling the considerable gaps that currently exist between the two. Table 1 provides an overview of the estimates on e-commerce in the U.S. and Europe.

It is important to mention that estimates of global e-commerce are considerably varied. Some may be based on very optimistic predictions of growth. And European estimates do not take into account individual differences in European markets. Nor do they account for differing business attitudes.

The State of E-commerce in the U.S. and Europe

The Net is often viewed as the great equalizer. It has opened the doors to almost anyone with the means to conduct business in cyberspace. And it has made companies, big and small, into multina- tional corporations (MNCS). American firms were the first to take advantage of this revolution, using the Net to create, buy, distribute, sell, and offer services deemed impossible only a few years ago. Predictions for global e-commerce range from optimistic to startling. Some believe that by 2004 it will exceed $7 trillion, much of that coming from the business-to-business (BTB) sector. Currently, the U.S. leads every other country in both BTB and BTC (business-to-consumer) sectors, but questions remain about whether that leadership is sustainable into the future.

A U.S. Department of Commerce study reports that the “digital economy”Aefined as the value of the hardware and software produced by the telecommunications industry-accounts for 8 percent of GDP in the United States. While the digital economy as defined by the DOC is not synonymous with the Internet economy, the two are highly correlated. Other reports offer a more conservative estimate of the Net’s share of the digital economy (5 percent of GDP), but few doubt its significance. What is particularly important is that the share of the digital economy is

Table 1 E-Commerce Expectations Worldwide (All moneta y values in US$j

BUSINESS-TO-BUSImS (B7Bj BUSINESS-TO-CONSUMER @TCj

Global $145-200 billion $7.29 trillion - - as of 1999 as of 2004

U.S. $251 billion $1.4-1.8 trillion $16-$29 billion $133 billion as of 2000 as of 2003 as of 2000 as of 2004

Europe $76 billion $1.27 trillion $2.77 billion $64-$167 billion (overal as of 2000 as of 2004 as of 2000 as of 2005

Sources: BizRate 2OOQ Durlacher Research 2000; “B2B.. ” 1999; For-rester Research 2ooOCb); Gartner Group 2000; Jupiter Communications 2000.

E-Commerce in the U.S. and Europe-Is Europe Ready to Compete? 7

now higher than that of housing construction or motor vehicle manufacturing sectors, which have been in existence much longer. Moreover, the share of the information technology (IT) industry in the nominal GDP growth has been double its share of the economy+lose to 15 percent- since the start of the e-commerce revolution.

Equally important is the fact that technology companies are performing the highest level of research and development in the United States. Capital spending by businesses is more likely to be for technology than for real estate or machin- ery. Estimates are that as much as 60 percent of current capital spending may be going to high- tech projects. In fact, industry watchers believe that current e-commerce revenues in the U.S. are merely a fraction of their potential.

Whether forecasts for U.S. and global e-commerce indeed hold true remains to be seen. A multitude of factors will affect whether e-commerce realizes its global potential. Factors ranging from ease of access and use to consumer confi- dence in the integrity of information transmitted via the Net will be critical. And factors affecting BTB commerce might be different from those affecting BTC commerce. However, factors such as the regulatory environment and computer lit- eracy among the general populace will be similar irrespective of whether the transactions involved are BTB, BTC, or consumer-to-consumer (CTC).

Forrester Research (2000b) reports that Eu- rope should experience e-business growth of more than 100 percent over the next two to three years. Interestingly, a survey conducted by Ander- sen Consulting (1998) found that although most European executives believed e-commerce to be strategically important to their business in the future, far fewer said their companies were taking concrete steps to create competitive advantage in the area. Similarly, a PriceWaterhouseCoopers study (1999) found that although many European CEOs expected e-commerce to affect competition in their industry, only 20 percent considered themselves “regular Internet users.” Not surprisingly, expectations about the role of the Net varied from country to country-a significantly higher number of CEOs from the U.K. expected e-commerce to shape their industry than CEOs from other countries. Yet another survey (“How to Get Ahead.. .” 1998) found that while 80 percent of the French companies studied had implemented EDIs-the highest in any European coun- -they were less enthusiastic about e-commerce technologies. Scandinavian countries, on the other hand, viewed e-commerce as being critical to their global competitiveness.

It is pertinent to mention that a variation of e-commerce has been in existence in France for nearly two decades. The French Minitel, a net- work of videotext terminals connected by tele-

phone lines, has been widely used by businesses and households alike. A recent OECD report (2000) suggests that French Prime Minister Lionel Jospin felt that Minitel might have been partly responsible for hindering the growth of the Net in France. Minitel’s popularity is now waning despite France Telecom’s efforts to provide an integrated MiniteVInternet service. However, the reluctance of the French to embrace the Net wholeheartedly could be due partly to the fact that the Net is a relatively insecure medium for protecting personal information compared to the Minitel, a trusted device with minimal security concerns.

Nevertheless, it is evident that individual markets in Europe are showing signs of growth. The NOP Research Group (2000) estimates that Net users in the U.K. are expected to have spent close to $16 billion in 2000, almost a threefold increase since 1999. Reports also suggest that the U.K. is following the U.S. closely in terms of BTC e-commerce and is likely to experience considerable growth in this area. The number of people shopping online is also expected to triple in the next two years. Currently, Germany and the U.K. are considered e-commerce leaders in Europe, and five countries--Germany, the U.K., France, Italy, and Spain-may account for 75 percent of Europe’s online consumers in many years to come. However, current statistics on Internet usage and growth in Italy and Spain are far less impressive.

U.S. LEADERSHIP IN E-COMMERCE: REAL OR IMAGINED?

W hat factors influence e-commerce growth? Do significant differences still exist between the U.S. and Eu-

rope in terms of the enabling factors? And if differences do exist, what might European companies and governments do to help bridge the gap?

Technology Penetration and Use

Technology penetration is a prerequisite for e- commerce, and technology capabilities remain much higher in the U.S. compared to Europe. From PC ownership to online access fees, enabling factors are more conducive to e-commerce in the U.S. than in any other country. Some reports suggest that more than half the U.S. population is now online, increasing to two-thirds by 2003. Further, more than I6 million U.S. homes are expected to have high-speed Net access by 2004. There are concerns about a digital divide in the United States because technology penetration has not been uniform among all socioeconomic groups. Nevertheless, the country is still farther ahead of most countries in this area. Table 2

8 Business Horizons / March-April 2001

provides a comparative look at the European and North American Internet penetration statistics.

As shown, Internet penetration varies widely among European countries, and concerns remain about the ability of some countries to catch up with their more connected neighbors. Despite claims that more than half of Western Europeans will have access by 2003 (a number close to the 66 percent expected for the U.S.), these numbers appear to be somewhat misleading once individual countries are examined. Sweden, Norway, Finland, and Denmark are considerably more advanced than Greece, Spain, Portugal, and Italy. Sweden and Norway perhaps have the entire infrastructure for developing e-commerce to the same potential as the U.S., but from an economic perspective they are less significant than the three major economies-the U.K., France, and Ger- many. Moreover, although Net use is growing impressively in those three economies, e-commerce transactions are still a fraction of what they are in the United States. Experts believe the U.K. and Germany show more promise than France, where businesses and consumers remain suspi- cious of the Net. A socialistic government, regulatory hurdles, and a perceived lack of local control over transmitted information could explain the French attitude toward the Net, as well as concerns about the lack of security.

Despite the fact that technology penetration is neither as uniform nor as widespread in Eu- rope, and despite America’s acknowledged leadership in the diffusion of Internet technologies and BTB and BTC commerce, the U.S. cannot afford to rest on its laurels. One major change that will affect European presence and power on the Net is its merging with cellular telephones. The widespread adoption of Wireless Access Protocol (WAP) among European suppliers along with a much higher cellular phone ownership among Europeans should help Internet growth in the region. Recent events such as Vodafone Air- Touch PLC’s buyout of its German rival Mannes- mann AG will make the European telecommunications industry much stronger, at least technologically. Europeans’ lead in cell phone technology and use may also signal a change in the Internet arena. Some speculate that if telecommunications companies can also make the transition to Net companies, the competitive picture may change quickly and dramatically

The Economic Environment

The American economy continues to experience impressive growth despite warnings from econo- mists that this level of noninflationary growth cannot be sustained in the long run. In 1998, per capita GDP in the U.S. was close to $30,000 compared to an average of $15,000 in Europe. More

Table 2 A Comparative Look at Internet Access in North America and Europe

Date of Population % of Total Country Data On Line (Millions) Population

United States 06/00 134.2 48.7 Canada 12199 13.3 42.8

Austria 03/00 1.9 22.7 Belgium Ol/OO 2.0 19.6 Denmark 10199 1.9 35.5 Finland 02/00 2.2 41.6 France 03/00 9.0 15.3 Germany 03/00 15.9 19.4 Greece 10/99 1.3 12.4 Ireland 05/00 0.8 20.5 Italy 06/00 11.0 19.0 Netherlands 02/00 4.5 28.5 Norway 03/00 2.2 49.6 Portugal 10/99 0.6 5.7

Spain 12/99 3.6 Sweden 12/99 4.0 4::: United Kingdom 05/00 19.4 32.5

Source: Nua Internet Survey 2000

important, the number of jobs in the technology sector has been growing steadily in the United States. The high-tech sector, driven by e-commerce, is adding more jobs and bolstering wages without creating inflation. The introduction of the euro, once considered a major threat to the U.S. dollar, seems to have done little to challenge American economic prowess. In fact, the euro has declined significantly against the U.S. dollar since its introduction. The unemployment rate in the U.S. remains the lowest in three decades with no signs of inflation, whereas many countries in Europe are struggling with high unemployment. Countries such as Italy, where unemployment among youth is especially high, are bound to suffer technologically because young people tend to be the drivers of Internet growth.

Table 3 on the next page presents relevant statistics for the U.S. and Europe showing wide income disparities among many European countries, Greece, Portugal, and Spain remain at the bottom of the income hierarchy, whereas the economies of Germany, the U.K., and France are well established and affluent. However, the three latter economies are also very different. France’s socialist government has not done much to open up competition; 54 percent of GDP is still in the hands of the government, according to U.S. De- partment of Commerce reports. Moreover, economic growth in France is one of the slowest in Europe, with unemployment hovering around 11 percent. Germany’s economy is strong, but such factors as the monopoly of Deutsche Telekom, which result in very high access costs for the

E-Commerce in the U.S. and Europe-Is Europe Ready to Compete?

consumer, are slowing the growth of e-commerce. Several German regions suffer from double-digit unemployment. Not surprisingly, low-income economies also have lower Net penetration. While up-to-date information on technology indicators, including personal computer ownership, tends to be sketchy for many Euro- pean nations, data seem to indicate that Greece, Spain, and Portugal lag significantly behind the U.K., Germany, and France. IT, which has been responsible for the strong U.S. economy for nearly nine years in a row, is not providing the same growth in all of Europe. Only a few countries such as Ireland have been completely trans- formed as a result of the Information Revolution. Finally, European nations’ investment in IT infrastructure is relatively modest compared to that in the United States.

With Europe’s economies undergoing major changes since the launch of the euro, its nations and businesses have been much more concerned about that impact than the growth of e-commerce. Efforts to homogenize thk disparate economic structures of the 11 of 15 EU nations that have adopted the euro have consumed more resources, leaving less for investment in other parts of the economy. However, it is hoped that eliminating individual currencies in the year 2002 should help promote e-commerce simply because of the harmonization of the exchange medium. E-commerce should also help bring down the historic barriers of language and culture, although some

Table 3

Comparative Economic and Technological Statistics

As noted earlier, perceptions of e-commerce and its significance differ among European businesses. Those in the U.K. have a quite different view from those in Germany and France. Far more business leaders in the U.K. than in any other European country believe that e-commerce not only will shape competition in their industry but is also critical for maintaining a competitive edge. Not surprisingly, British businesses also expect e- commerce to account for a significantly higher percentage of their revenues in the future (20 percent) compared to other countries. French firms in particular do not feel strongly about the power of e-commerce. This is probably why, according to the Benchmark Group (1999), only 27 percent of the top 1,500 companies in France had their own Web sites in 1999, and only 3 percent of them had enabled the sites for e-com-

merce. More recent reports note that French consumers are beginning to use the Net, many to shop online, even though the numbers are much lower than in the U.S. or Great Britain.

European CEOs believe that e-commerce will assist them in building and retaining a customer base, improving supplier relations, and cutting costs. However, they remain reluctant to ex- ploit its potential fully. Although they understand the importance of e-commerce in today’s globally connected marketplace, their actions appear to contradict their understanding of the opportunities it can offer. They see the Net as a tool for improving existing business models but not necessarily as a revolutionary device that will redefine business and require a very different mindset. Taking a wait-and-see approach, their attitude toward e-commerce is more measured and cautious. Small and medium-sized firms, which constitute the backbone of many economies in Europe, are especially ill-pre- pared. Most of them have no e-business strategy at all. This is particularly sur-

GNP Per Capita GNP % of Number of Measured at Measured Population

Internet PPP ($billionj at PPP ($j Unemployed Country Hosts 1998 1998 1999 Austria 176.79 183.9 22,740 4.4 Belgium 162.39 239.7 23,480 8.3 Canada 364.25 735.6 24,050 7.6 Denmark 526.77 126.4 23,830 6.2 Finland 1,058.13 104.5 20,270 9.3 France 82.91 1,312.0 22,320 11.3 Germany 160.23 1,708.5 20,810 10.6 Greece 48.81 137.2 13,010 9.9 Ireland 148.70 67.5 18,340 9.2+ Italy 58.80 1,163.4 20,200 12.3 Netherlands 358.51 339.3 21,620 4.8 Norway 717.53 107.6 24,290 4.3 Portugal 50.01 143.1 14,380 4.8 Spain 67.21 631.5 16,060 18.0 Sweden 487.13 172.5 19,480 5.6 United Kingdom 240.99 1,218.0 20,640 4.8+ United States lJ31.52 7,922.6 29,340 4.1’

Source: World Development Report 1999/2ooO. *Data forMarch 2000, Source: U.S. Department of Commerce +Data for 1998, Source: U.S. Department of Commerce, County Commercial Guide

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wonder whether merely removing political and economic barriers is enough to overcome histori- cal and psychological barriers. Interestingly, two of the countries that have excellent infrastructure for e-commerce, the U.K. and Sweden, have not adopted the euro. Thus, while e-commerce has the potential to unify the European marketplace, it is possible that a strong economy based on the development of e-commerce in the U.K. could encourage it to refrain from joining the other nations now using the euro.

Business Environment


prising given the fact that many small firms have connections to the Net and are employing other technologies to aid their businesses.

The picture is quite different in the U.S., the breeding ground for Net startups built solely around the e-commerce model. Most bricks-and- mortar companies have a Web presence, whether for marketing, customer service, and publicity or for conducting trade. And most U.S companies look at e-commerce strategically. In addition to using it as a tool to improve existing business processes, they also use it to identify new opportunities and create radically different and innovative solutions for customers and suppliers.

Recent numbers reported by the National Association of Business Economics (2000) suggest that more than 60 percent of U.S companies are already using e-commerce to some extent, and another 20 percent are planning to do so in the very near future. Businesses engaged in BTB commerce report that 17 percent of their overall sales can be attributed to their Web presence. According to a Duke University study, more than half of U.S. firms were to have been selling online by 2000, up from less than a quarter in 1998, and online business was to constitute about 8 percent of U.S. companies’ revenues in 2000, up from 5 percent in 1998.

American firms are also using the Net more and more to connect with their buyers and suppliers. High-tech firms in particular use it to make the majority of their purchases. According to IDC Research (2OOOb), U.S. corporate spending on the Net will top $203 billion by 2002. Even small businesses have entered the arena; a third of them were online in 1999. Those not yet connected expected to go online within an average of eight months, reports Prodigy (1999). Almost all of these companies believed they would benefit from the Net in some manner, even though not all expected business to increase as a result.

To illustrate the power of e-commerce in a firm’s overall business strategy, some specific examples would be useful. Intel’s online sales exceed $1 billion per month and its reports indicate that by 2001 more than 90 percent of its orders will be generated online. Dell generates more than $40 million a day through online sales. Online car sales in the U.S. may exceed $16 billion by 2004. From hotel bookings to online auc- tions, industries all across the board are using the Net. Even traditionally conservative institutions such as banks are going online in record numbers to remain competitive in the market.

Thus, the amount of business being conducted over the Net and the revenues generated through e-commerce are much higher for Ameri- can companies compared to those in Europe. The attitudes of the two business communities are also different. Even small firms in the U.S. are

either already online or eager to get there, believ- ing that the Net is critical to their survival and growth. In contrast, many European businesses are approaching investment into these technologies much more cautiously.

Cost of Getthg Online

The cost of accessing the Net can be a significant barrier to its growth. Except for Finland and Den- mark, all other countries in Europe pay much higher connection fees than the United States. The average monthly cost in the U.S. is approximately $25 for unlimited access. Conversely, access fees in Western Europe vary from about $20 in Finland to $45 in France and even higher in Germany, which has the highest price for Internet access-as much as $68 for just 20 hours of usage in a month.

High access costs in Europe are due partly to telephone monopolies. When the Spanish pro- tested Telefonica’s price gouging by not logging on to the Net for a day, they prompted similar reactions from French and German consumers. After the telecommunications industry deregula- tion in 1998, Europe saw a spate of mergers and acquisitions. AT&T and British Telecom’s joint venture is expected to increase competition in the European markets. Vodafone’s hostile take- over of Mannesmann in a $183 billion deal may force other European monopolies such as France Telecom and Deutsche Telekom to follow suit.

While many believe consolidations of this magnitude will help companies cut costs and pass on the savings to customers, it remains to be seen whether these mergers and acquisitions will merely replace domestic monopolies or create international ones. In the latter case, it is hard to predict whether the new international monopolies will indeed benefit consumers. Erkii Liikanen, the European e-commissioner, believes low Inter- net access rates are critical for Europe’s e-commerce growth and lists the issue among the top ten e-priorities for Europe (Liikanen 2000). It is heartening to note that competition is already growing in Europe and that national long-distance phone rates have fallen since January 1998. How- ever, the investments needed for building the infrastructure for Net access in many countries means it may take a while for costs to fall further. Moreover, because the monopolistic positions of European companies have shielded them thus far, they have shown little urgency to become customer-friendly.

Online Security, Consumer Concerns, and Government Regulation

American consumers make most of their purchases using credit cards. Europeans much prefer


to pay cash. On average, there are 1,480 cards per 1,000 customers; in Europe, the number is only 390. Europeans are also more concerned about the security of electronic payments and are more risk-averse than Americans. The electronic payment system is at the heart of e-commerce. Although items can be purchased online and paid for later by mail, most merchants prefer guaranteeing their sale by a credit card, which secures both the merchant and the consumer. However, Europe leads the world in the use of “smart cards,” which are used for everything- from paying utility bills to making small purchases. Information in a smart card is stored on a microprocessor chip in the body of the card itself. The card contains a variety of information, including the individual’s health records, credit

records, and so on, and promotes electronic

“American consumers make most of their purchases using credit cards. Europeans much prefer to pay cash. On average, there are 7,480 cards per 7,000 customers; in Europe, the number is only 390. M

payment, which is required for the development of e-commerce. A smart card is also very secure because it uses a digital signature, which identifies the owner of the card and allows the encryption of messages. Another advantage is that it allows for information storage, which can be downloaded from a variety of sources such as telephones, TVS, and the Net. Thus, the

seeming reluctance of Europeans to embrace credit cards should not pose a major problem for the development of e-commerce in Europe.

Consumers in Europe do, however, view the privacy of personal information very differently, as well as the government’s role in regulating online transactions. Many Europeans attribute their reluctance to shop online to security and privacy concerns. To assuage those concerns, the EU has taken steps to enact strict privacy laws that would make it illegal for companies to trans- mit personal information about European customers to the United States. In general, EU directives require that before information on a consumer is transmitted outside Europe, the consumer must give consent. Moreover, companies collecting and transmitting the information are required to show that it is accurate and will not be used for purposes other than that for which it is collected.

Europeans have consistently supported their governments’ efforts to enact laws such as these, which protect consumers’ online privacy. The European Commission’s (EC’s) “Net Initiatives” announced in December 1999, which specifically

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address facilitating e-commerce and smart cards as well as getting more Europeans online, should help allay some fears and encourage e-commerce growth. The main purpose of these initiatives is to remove legal and other barriers to e-commerce, encourage Internet investments in the EU, and offer consumer protection. For example, according to Connellan (20001, member nations are pro- hibited from taking actions that restrict the move- ment of “information society services” (those in- volving e-commerce> in the EU. At the same time, the initiatives give individual member countries some control over service providers by requiring that the providers comply with the laws of the country in which they are located.

Another example of the EC’s initiative is its position on electronic contracts, which requires that member states must develop legislation that will allow for, encourage, and recognize these contracts, Other areas addressed by the EC in- clude consumer protection and privacy, liability of service providers, and the availability of capital for small and medium-sized high-tech enterprises. There is some concern, however, as to whether these directives can be implemented adequately because individual countries differ markedly in their legal makeup and interpretation of contract and other laws.

Online security is a major concern for businesses and consumers worldwide. As better encryption technologies, such as SET, allow for the encryption of signatures and other vital information concerning an individual’s privacy, these fears may eventually be alleviated. However, Europeans have always been sensitive to providing personal information and do not have a laissez-faire attitude toward the marketplace. This may prompt European governments to remain actively involved in Internet legislation.*

Contrary to their European counterparts, the majority (76 percent) of U.S. consumers believe that the Internet industry should police itself. Fewer than a quarter support government inter- vention, despite the fact that they are beginning to view online privacy as a major concern. Con- sequently, says Markoff (19981, the Clinton ad- ministration was also reluctant to police the Net and believed that the electronics industry should regulate itself. These attitudes may change if security breaches become more common and consumers begin to worry about their information being collected and disseminated by online merchants. After several prominent Web sites were

*Editor’s note: For a legal discussion of these pn'vacy issues and the global furor taking place over them, see William J. Scbeibal and Julia Alpert Gladstone, “Privacy on the Net: Europe Changes the Rules, ” in the May-June 2000 issue of BH.


attacked and brought down by hackers, polls from Gallup and @Plan (2000) indicated that more than half the online shoppers in the U.S. were worried about the protection of personal information. A third of them indicated they were less likely to buy online as a result of these security breaches. Thus it is likely that the increasing public awareness of security concerns will prompt changes in American attitudes as well.

Apart from security issues, opinions regard- ing the role of government in shaping e-commerce are vastly different between U.S. and Euro- pean businesses. While U.S. firms prefer little or no regulation, almost the opposite is true in Eu- rope. Historically, European firms have been shaped and guided through government regulations, but in matters of the Net they believe EU regulation has been ineffective. Taxation offers an example of the complexities of e-commerce legislation. Globally, there is no consensus on the mechanism or the location for taxing e-commerce transactions. Companies are often forced to pay multiple taxes on the same income. Issues such as how to price (net of tax in the U.S. or VAT in Europe), the value-added tax (VAT) rate, invoic- ing, and duties present an array of unresolved issues Europeans must confront. Other differences among European nations revolve around electronic contracts and electronically signed documents, although the new directives announced by the EC should ease some of these. The U.K. also recommends developing a licens- ing system for cryptographic service providers.

Regulations themselves are not necessarily bad for companies. When designed and implemented correctly, they protect consumers as well as businesses. U.S. companies, which have traditionally been reluctant to agree to Internet regulation, may agree to some policing of the Net in light of recent events, which in turn may help reassure consumers. However, it is unlikely that U.S. businesses will agree to regulations they believe may stifle innovation, particularly in the very young e-commerce area.

Venture Capital AvailabiJity for Start-Ups

Venture capital has been crucial to the development of high-tech businesses in the U.S., helping to promote growth and innovation. Microsoft, Compaq, Cisco Systems, Yahoo!, and Amazoncorn are examples of successful firms that have ben- efited from venture capital in the past. NASDAQ has provided much-needed equity for American entrepreneurs. In fact, the abundance and availability of venture capital in the U.S. has been a major driver of e-business success. Describing its role in the U.S., Brenner (1998) correctly notes that although venture capital alone does not guarantee success, it ensures that talented people

will not fail simply because they lack capital. In the first three months of 1999, venture capitalists in the U.S. had invested $30 billion, of which 32 percent went to Internet startups. Even in 1998, venture capital investment in the U.S. was more than $14 billion, an increase from only $3 billion in 1997. The amount invested in the technology sector had doubled to approximately $11 billion. Net-related venture capital posted a 66 percent increase in investments in 1998, says Iau (19991.

Traditionally, the situation in Europe has been much different. For the most part, European economies have been controlled by large banks and equally large corporations, making it difficult for newcomers to access funds. The inherently risky nature of technology startups has been anathema to European businesses. To illustrate, in the first ten months of 1999 European venture capitalists invested approximately $2 billion, of which only about 8 percent went toward Internet deals. However, despite the seemingly large gap in actual investment dollars between Europe and the U.S., the European venture capital market has been growing significantly. According to the In- ternational Financial Law Review (“European Overview.. .” 1999), the overall amount invested rose by almost 50 percent in 1998, with high-tech industries attracting the lion’s share. The U.K. was by far the most active venture capital market, posting a 61 percent investment growth. Italy, Germany, France, and the Netherlands have also posted impressive numbers. Reports suggest that the European Internet sector is now more valuable than the steel and packaging industries combined. Some ana- lysts even predict that in terms of sheer po-

“Whether US. -sty/e risk

tential, Europe could taking will be duplicated soon become a better in Europe as venture market than the United States. Europe has also

capital becomes more come forward with its availabie remains to be own markets such as EASDAQ (European Association of Securi-

seen, u

ties Dealers Automated Quotation), the Nouveau Marche, and EURO.NM. These have opened up secondary markets for high-growth IT businesses.

However, potential alone is insufficient to convert Europe into a mecca for venture capitalists. There is also the matter of whether European countries embrace the Web culture. Europe has yet to see the kind of Internet stock valuations seen in the United States. Priceline, for example, an online auction company less than four years old, has a market value of approximately $13 billion, considerably more than such well-established companies as American Airlines (market value less than $5 billion). To some this may be


further evidence of U.S. investors’ penchant for speculative behavior. Nevertheless, these events have helped fuel the technology startups. Clearly, the ventures have not been without risk, but risk- taking is an integral part of American business.

Conversely, the risk-averse European culture means that events such as business bankruptcies carry a significant stigma. Debtors can follow bankrupt European entrepreneurs for up to 20 years, and the entrepreneurs rarely get a second chance. In the U.S., however, bankruptcies are considered part of the learning process. Thus, whether U.S.-style risk-taking will be duplicated in Europe as venture capital becomes more avail- able remains to be seen.

CultufalInfluences

Language, risk aversion, lifestyles, and other cultural variables have much to do with the success of the Net. Barring the U.K. and Sweden, the rest of the European countries have a much higher degree of Hofstede’s (1983) uncertainty avoidance index compared to the United States. This index, which measures the need to avoid uncertainty among people of a country, is used to as- sess how risk-taking is viewed. Low uncertainty avoidance countries tend to take more risk and feel comfortable in unpredictable situations. The U.S. has a score of 46 on this dimension (less of a need to avoid uncertainty, higher tolerance for risk), whereas France has a score of 86 (strong need to avoid uncertainty, lower tolerance for risk). Because the Net, like many other technologies, is an inherently risky proposition, it is plau- sible that some European countries may be less enthusiastic in embracing it wholeheartedly.

Language can be another barrier in developing e-commerce in Europe. Needless to say, despite its monetary union, Europe does not have a uniform language or a homogenous cultural plat- form. With some of the large markets for e-commerce in Europe-France, Germany, Sweden, Spain, and Italy-speaking diverse languages, European BTC and BTB sellers must ensure that their Web sites match the language, culture, and tastes of each individual country. Research also suggests that successful firms must use not only the native language but also incorporate local flavor into their Web sites to attract the largest customer base. Other cultural nuances, such as the “high street retailer” approach of the British- stodgy and somewhat elitist-are unlikely to work with other European customers, who may look to the U.S. or other more customer-friendly sellers. Moreover, because Europeans value their personal privacy much more than their North Ameri- can counterparts, companies wishing to succeed in Europe must recognize and adapt to these differences. Though not insurmountable, such

challenges can be significant for companies wishing to benefit from e-commerce in Europe.

0 f all the factors discussed here that play a part in America’s lead over Eu- rope in e-commerce, the one that will

perhaps have the biggest impact is the attitude and culture of the business community and governments. Customers have only a limited idea of what to expect from Internet technologies. They depend mostly on companies to offer innovative solutions to their problems. The convenience of online shopping offered by Amazon.com or the value of buying online demonstrated by Dell were innovations created by these companies, not demanded by consumers. In other words, companies have to take the lead in introducing new ways of doing business with the public.

Companies also have to risk adapting to the new business models. Governments can help in this respect by not creating regulatory hurdles. In Europe, many countries support government- owned monopolies, and regulatory obstacles make it difficult for newcomers to compete. Eu- ropean management has also traditionally supported government regulations, often demanding them. Unfortunately, innovation and entrepre- neurship are fundamentally averse to regulatory hurdles.

Risk is an inherent component of any revolution-technological or otherwise. Just like the Industrial Revolution, e-commerce is part of an Information Revolution that is changing the focus from production and manufacturing to services. Europeans were the first movers in the Industrial Revolution, but the United States has been the first mover in the Information Revolution and, consequently, in e-commerce. The big business model with large corporations and huge government-owned monopolies in Europe must undergo significant change.

However, because it offers a sense of security for firms and their customers, suppliers, and employees, this model may be difficult to change quickly. If businesses are serious about e-commerce, governments can be lobbied to open up competition, making technology more pervasive through education and easy access and encourag- ing innovation through limited regulation. When people become more familiar and comfortable with technology, they will have greater confi- dence in migrating to this new way of doing business. Cyberspace will become as comfortable as real space. 0

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Tanuja Singh is an assistant professor of Marketing at Northern Illinois University, DeKalb, Illinois. Jay V. Jayashankar is a structural engineer with Sargent & Lundy in Chicago, Illinois. Jasvinder Singh is a senior consultant in e-business for New Media, Inc. in Cleveland, Ohio. Professor Singh wishes to acknowledge the support of the College of Business Summer Re- search Fund at Northern Illinois University.


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