Locating the Centrality of Networks

One of the remarkable trends of the era of "irrational exuberance" was the almost exclusive emphasis of much business academic and professional commentary on the dot.com phenomenon and, in retrospect, the unrealistic valuations of high technology and Internet-based firms. Indeed, the proliferation of the "e" portions attached to economic activity, coupled with the rapid introduction of the Internet in established business processes, gave the impression that what was "new" in the new economy was the "transfer" of business processes online. In the wake of the collapse of the high-tech stock bubble, academic and business opinion are marked not only by uncertainty but also by skepticism as to whether the economic transformation associated with ICT and the Internet were the harbinger of a new phase in the development of the global economy or simply a temporary phenomenon that was brought about by speculation. What is in question today is whether the technological, economic, and organizational changes associated with ICT amount to the formation of a new economic system, a new economy. In this context, it is imperative that research in the domain of the knowledge-driven economy be underpinned by explicitly articulated operating assumptions and conceptual categories.

The eclipse of the techno-enthusiasm that accompanied the dot.com phenomenon has highlighted that the "e" components of economic activity are manifestations of a wider process of change that involves more than the implementation of ICT. The ICT-enabled portion of economic activity is a central element of an emerging economic system that is powered by ICT, is dependent on highly knowledgeable labor, and is organized around electronic and organizational networks. The historical specificity of this emerging economic system is that it is knowledge-driven, it is global, and it is networked in terms of technology and organization. It is knowledge-driven because the productivity and competitiveness of economic organizations depend upon their ability to create, process, and convert information into knowledge geared to innovation and value creation. It is global because the core processes of production, circulation, and consumption are increasingly organized on a global scale through functional linkages among economic agents. It is networked because productivity and competition are organized through networks of interaction between and across business networks on a global basis (Castells, 2000).

One of the key drivers of change in the emerging economic environment is closely linked to two key industries that not only introduced process and product/service innovations, but also applied such innovations to their own structures and processes, which resulted in higher growth and productivity, and through competition, to the diffusion of new business models throughout the economy. These industries are ICT and finance. At the core of the new ICT industries are the Internet-centered firms and Internet-related components of "old economy" types of organizations. However, the centrality of Internet-related economic activity is not related to the until-recently exponential revenue growth and market capitalization value of Internet-related firms. Instead, their economic and business significance lies with the potentially dramatic impact of Internet-related technologies on the way business, especially "old economy" business, is conducted (Castells, 2000; Cairncross, 2002).

The financial dynamic of the new economy is related to the successive rounds of innovation that have resulted in a profound transformation of financial markets in terms of the technology, organization, and regulatory structures (Strange, 1986; Moran, 1991; Cerny, 1993; Helleiner, 1994). Financial markets are increasingly globalized and interdependent, while they are one of the leading domains of application of new ICT. The global financial market is a central axis of the new economy. It constitutes the central instrumentality that enables capital to flow in and out of securities and currencies across markets and invested on a planetary basis. At the same time, ICT-enabled innovation is transforming the nature of financial transactions. The widespread use of ICT and the Internet have fundamentally changed financial trade between companies, between companies and the investment community, between sellers and buyers, and not least, the stock exchange markets. This change has important implications not only for financial markets, but also for the entire economy. ICT-enabled transaction mechanisms reduce transaction costs, thus significantly increasing market volume because the globally interconnected financial markets are able to mobilize savings for investment on a planetary basis, while considerably accelerating the turnover of investment. On the other hand, they open up investment opportunities to an increasingly larger basis of individual and institutional investors, who are able to assess value and identify investment opportunities on the basis of information that is increasingly available online. ICT-enabled financial transaction mechanisms also present the possibility of financial disintermediation, as individual investors and brokers are—theoretically—in a position to directly identify demand for capital and, in the process, bypass traditional brokers and investment firms (Canals, 1997; Orl an, 1999; Castells, 2000).

The dialectical interplay between technology and finance is in many ways the central axis, the flywheel, that powers the dynamism and innovation potential of the new economy. On the one hand, the technological infrastructure of financial markets allows for processes of financial innovation and the development of new financial products that create value out of trade in securities. On the other, ICT-enabled financial innovation encompasses an increasingly larger sphere of social life, where almost any potential source of value can be converted into a security and traded in financial markets through ICT-enabled transaction systems. Indeed, this process of conversion of potential sources of value into financial securities, i.e., securitization, is the driving force of the financial industry. Financial markets, in this respect, constitute a strategic network of the new economy. For it is there that value is assigned to economic activity, as this is represented by its stocks, bonds, derivatives, or any kind of security. The valuation of economic organizations, and thus their capacity to attract capital, depends in a fundamental sense on the judgment of the financial market (Castells, 2000).

The question of how this judgment is and should be formed is one of the most complex questions in contemporary economic analysis and is the subject of considerable debate. Nevertheless, recent experience and research suggest that expectations (on the part of financial markets) about the future growth projections of enterprises in terms of actual profitability and future financial value, and trust in the institutional environment within which financial markets and enterprises operate, are central determinants of investment (Castells, 2000, 2001). However, to reach the financial market, and to compete for higher value in it, firms have to go through innovation in technology, processes, product/service lines, management quality, and branding. Indeed, the ability to innovate in these domains becomes the cornerstone of competitiveness in the emerging economic environment (Tuomi, 1994).

However, paths toward innovation are conditioned by three structural transformations associated with the new economy that have significant implications for the organizational structure of the firms operating in it. First, ICT centered on the Internet, in combination with globally integrated financial markets, tend to overcome one of the historic impediments to market transparency: geographical distance (Harvey, 1990). Transparency is a highly transforming condition that affects two dimensions of the business process. ICTs increase transparency in the operation of financial markets. Openness of corporations to financial markets is primarily a function of the financial disclosure regulations that govern securities trading, i.e., access to capital markets. ICTs increase transparency in that they enhance the ability of shareholders and other stakeholding constituencies of organizations to track more intensely the performance of managers and align it more closely toward maximizing the value-creating capabilities of organizations (Goldman Sachs, 1999).

On the other hand, ICTs increase price and process transparency. Pricing becomes more transparent as more transactions can be put to the test of auction. Customers can track the progress of their orders, while suppliers can access information electronically at their customers' databases. This kind of transparency has implications for every aspect of business operations. For instance, small changes in things such as price, product quality, service, responsiveness, and even partnerships could, in theory, be rapidly registered in market share shifts. Putting a business process online has effects throughout a company, since it introduces more information and volatility into strategy. As a result, partnerships and customer relationships that underpin existing business models are being reconfigured. In reality, excepting financial markets where they are negligible, switching costs for most industries still represent a significant element of friction. Nonetheless, the Internet contains the potential to move most industries closer to textbook transparency. As a recent authoritative report notes, the Internet is "the mother of all looking glasses" (Morgan Stanley Dean Witter, 2000).

The second implication of the new economy acts on the spatial organization of firms. As information technology and the Internet become entrenched into corporate life, the economic foundation of the firm changes. Business theory on the spatial configuration of the firm has argued that the boundaries of firms are determined by the cost of transactions, and especially the cost of communication (Coase, 1937). One of the central canons that guided business practice for much of the 20^th century was that an enterprise should aim for maximum integration as a key to competitiveness and efficiency. In the new economy, by contrast, disintegration and decentralization are becoming the new canon for competitiveness. There are primarily two reasons for this. The first is that the knowledge needed for any economic activity has become highly specialized, which means that it is becoming increasingly costly and complex to maintain the necessary competencies for every major task within any given organization. And since knowledge is a quality that can be rapidly depleted unless it is used constantly, maintaining within an organization an activity that is used only intermittently leads to incompetence. The second reason why disintegration and decentralization are becoming important is that the physical cost of communication is being reduced to negligible levels, which means that in order to organize efficiently, firms must search for the most economically optimum form of organization (Drucker, 2001).

The reduction of the information costs attached to transactions thus unleashes a process of reconfiguration of the internal and external boundaries of firms. The reduction of information costs enhances organizational capacity to link different operations within and between firms, and outsource critical business process components. An important implication of this is the acceleration of the cycle from conception to rollout. At the same time, the Internet is a fertile ground for the development of new ideas and hence competition, which reinforces the need for companies to develop mechanisms for "reading" and adjusting to the shifting conditions of competition. Within companies, the implication is a greater need for collaboration in order to maximize synergies and increase efficiencies across all lines of the business process.

The third implication of the new economy is that it introduces a dialectic of centralization/decentralization in companies. This is largely a function of software standards required in order to enable the transfer of information within and between organizations with different software systems, naming conventions, procedural methodologies, etc. At the same time, standardization increases the capacity of all parties involved (management, employees, external partners) to "see through" the entire process. Transparency, in other words, though it significantly enhances the influence of shareholders, also increases the potential of other corporate stakeholders or partners to better track a company's activities. More specifically, it enables management to contribute to the activities at the frontlines of the company's operations. On the other hand, in the context of the pattern of economic change and heightened competition, companies need information at the frontlines of their operations. Hence the need for decentralized organizational forms that enhance the autonomy of employees not only in the generation of knowledge but also in terms of decision making and action, in order to acquire knowledge of developments at the frontlines of their operations (i.e., the market touch-points with customers, suppliers, etc.) and to constantly adjust to shifts in the competitive environment within which a company operates (Cairncross, 2002).

The structural impact of this set of transformations is that the process of innovation is increasingly becoming a function of open-source networks of cooperation. In other words, innovation is no longer happening within the formal boundaries of firms, but rather at the network and inter-organizational interfaces of firms with the market, regulatory, and institutional environments within which they operate. Open-source networks are composed of teams of company employees and entrepreneurs within as well as across the formal boundaries of organizations. Innovation itself is driven by three main factors. The first is the generation of new knowledge in the form of scientific and technological know-why, know-how, know-what, and know-when, and the practice of management. This presupposes the existence of well-developed public and private R&D systems, able to provide the key ingredients of innovation. The second is the availability of highly educated, motivated, and autonomous labor, capable of applying new knowledge in innovative ways to increase productivity and improve business performance. The third factor is the existence of entrepreneurs. Entrepreneurial drive is a key element of innovation, since it functions as a catalyst in the transformation of new business ideas and projects into innovation in process, products and service lines, and improved business performance (Castells, 2000).