I. Introduction

In the past few years, the information revolution has ceased to be an issue of concern only to a few groups of specialists and has become a part of millions of people’s daily lives. Information and communications technologies (ICTs)^[1] have been gaining in visibility, primarily as a result of the growing use of the Internet and the proliferation of e-commerce businesses. These technologies are playing a leading role in the globalization of the world economy and in the rapid growth of what is known as the “New Economy."

The "New Economy" refers to a knowledge-driven economy where e-commerce and the Internet permeate all industrial, service and retail sectors, leading to new sources of competitive advantage based on the ability to create new products and exploit new markets. It is based not only on innovative business methods and highly skilled labor, but the support and participation of a forward-looking government and the presence of a knowledgeable population buying ever-evolving products and services. Creating the "New Economy" requires nothing less than a revolution in thinking for government, business and the public.

Because e-commerce is emerging as an important element in the New Economy, an understanding of the present state and the future outlook for the e-commerce environment will contribute significantly to an overall understanding of a particular country's economic potential. To systematically evaluate the e-commerce environment, a Model Framework has been developed to identify and analyze the important factors driving growth in this area.

This paper is divided into eight sections. Following this introduction, the second section will describe the main traits of the new information and knowledge-based economy and explain the Model Framework and the regulatory, technical and operational factors comprising the building blocks of an efficient and effective environment for e-commerce. In the third section, a brief overview will be given of the current global economy and the state of the elements of the New Economy – the telecommunications sector, Internet infrastructure and usage, and current e-commerce development. The next four sections address with particularity the e-commerce readiness of three countries (China, India and Japan) and one multilateral entity (the European Union) with reference to the factors outlined in the Model Framework. For each case, attention will be given to current economic conditions, government structures and political atmosphere and the characteristics of ICTs in that country or region as they apply to an analysis of e-commerce readiness.^[2] The final section will draw conclusions from the country studies regarding future prospects for e-commerce development.

II. E-commerce Model Framework for Legal
and Regulatory Landscape

The pace at which a country or multinational organization achieves network connectivity and moves toward becoming an information and knowledge-based society depends on its own particular situation and special characteristics. To predict the potential for success of e-commerce, these conditions must be assessed relative to other national entities using an objective measuring system.

The following e-commerce Model Framework provides an overview of the conditions necessary to promote the growth and development of e-commerce. The Model Framework, illustrated in Appendix 1, is derived from a "building blocks" concept. The "building blocks" concept describes the foundations upon which a country's e-commerce capabilities are built and fully illuminates the strengths and weaknesses of the e-commerce environment in that country. Each building block builds upon the results of the previous one. Thus, the strength of the e-commerce Model Framework depends upon the sum of all its parts.^[3]

The Model Framework is divided into three tiers to reflect the interconnectedness of the telecommunications, Internet and e-commerce sectors. The success of a country's e-commerce environment is largely dependent on its Internet capacity, cost and access which, in turn, depend on low-cost and widely available telecommunications infrastructure and services in that country. Within each tier, certain regulatory, technical and operational factors influence e-commerce readiness.

A. Telecommunications Regulatory Factors

Regulatory Authority
The price of telecommunications services and the extent to which universal service coverage has been attained, both of which must be considered when assessing a country's progress toward becoming a knowledge-based society, depend on how the regulatory framework is designed and what role is assigned to the regulatory authorities.

The independence of the regulatory body in overseeing the telecommunications industry is vital to the success of the infrastructure. An independent regulatory body not susceptible to political pressures will be able to perform its functions consistent with the interests of the industry and the public. In some countries, the key regulatory functions may be shared with or under the control of the ministry for that sector, thus limiting the independence and negotiating power of the regulator. Often, the independence of a regulatory body is more apparent than real.

Government regulators in the telecommunications industry must strike a balance that will allow for the proper development of the market in the new economy. In many instances, where privatization has taken place, state-run monopolies have been replaced by private monopolies or dominant, government-supported "national champions." In these cases, the regulators must take appropriate steps to open the market to new, possibly smaller providers and supervise the dominant firms to ensure healthy competition. The regulator should prevent anti-competitive and price-fixing practices of the monopolies and operate as a counterweight to large conglomerates of domestic and transnational corporations.

At the same time, minimizing regulatory intervention in the telecommunications industry also promotes the public interest. Minimization of regulations allows for competition and is considered necessary for innovation and development. In order for the telecommunications infrastructure to adapt to the increasing demands and needs of its customers, the regulatory environment must be flexible enough to promote convergence of telecommunications technologies. Burdensome regulatory restrictions that strongly favor a nation's incumbent telephony provider or restrict product development stifle innovation and entrepreneurship. Barriers to entry and high access costs must also be limited in order to spur growth of e-commerce.

Licensing
Throughout the world, the government licenses participants in the telecommunications industry. The ease or difficulty with which a license can be obtained, the transparency of the licensing system and the fees imposed on licensees are factors influencing who can and who will participate in the industry. In addition, the degree to which the licensing system is used by the government to control participation in and development of the infrastructure will impact the development of competition in the market.

Accounting System
In telecommunications, the existence of an accounting system for providers and the degree of transparency in that system provides stability and viability for telecommunications providers that is necessary to create a competitive environment. In an effort to extend telephony to a greater proportion of its population, a government may impose a universal service requirement on telecommunications providers. The terms of such a requirement and the scheme established to pay for it may help or hinder the development of e-commerce.

Local Competition
Growth in the telecommunications sector will come in the form of increased competition, by allowing large companies as well as those with minimal capital and resources, to offer a full package of services. The availability of interconnection, the ability of a new provider to use the resources of an established local telephone company, greatly enhances the growth and innovation of the telecommunications infrastructure. Innovation will be promoted by allowing specialized companies to remain focussed on their own research and development efforts. The tariff terms imposed on interconnection and the degree to which tariff terms favor the incumbent provider will also influence the growth of the telecommunications infrastructure.

Available Services
The development and availability of new technologies designed to provide access to communications and the Internet will greatly influence e-commerce growth. Fixed landlines provide a major means of access but are often limited by high costs for the consumer. Where alternatives including mobile wireless telephony and cable television exist, access costs are expected to decrease and Internet usage and e-commerce are expected to increase.

Foreign Competition and Ownership
In order to protect local or national providers or maintain government control over access and content, many governments restrict the level of foreign competition and ownership in their telecommunications sector. More and more, however, countries are recognizing that foreign competition and ownership provide funding through investment and access to new technologies that are vital to developing a strong telecommunications infrastructure and greater services.

B. Telecommunications Technical and Operational Factors

Spectrum Efficiency and Management^[4]
Spectrum efficiency and spectrum management are absolutely crucial to the burgeoning demands being placed upon the telecommunications infrastructure. Although fiber and wireless represent two viable alternatives to constructing a wireline infrastructure, a host of other obstacles remain. One of these, the failure to manage spectrum, will result in interference issues that will likely limit the usefulness and capability of telecommunications technologies.

Network Architecture
The existence of an open network architecture or a telecommunications architecture that promotes access for anyone on equal footing promotes competition and encourages new entrants. With the existence of competition and new entrants, prices will drop from artificially high levels. Additionally, an open network architecture will provide manufacturers with the information necessary to create variations and improvements upon existing technology.

Infrastructure and Rights-of-Way^[5]
The efficient and accelerated construction of an advanced telecommunications infrastructure capable of delivering Internet technologies relies upon the utilization of exiting infrastructure. The railroad and electric infrastructures provide a large number of necessary rights-of-way that the telecommunications infrastructure needs in order to provide Internet bandwidth.

C. Internet Regulatory Factors

Regulatory Authority
The chilling effect that a regulatory body can have upon the growth and development of the Internet can be significant. Due to the vaunted "borderless" nature of the Internet, if one country establishes regulations perceived as unnecessary or burdensome, Internet providers and businesses may simply relocate to a more hospitable environment. Therefore, a country should establish an Internet-friendly reputation if it wishes to achieve and maintain a significant degree of Internet market participation.

Cost of Access
Again and again, in the countries surveyed, a significant factor in the growth of Internet usage and e-commerce is the cost of access to the Internet. Cost of access includes the price of computer equipment; the cost of alternative means of access including mobile phones, wireless and cable television; and the cost of connecting to the Internet via an ISP which can include a connection fee and an hourly rate for access to the Internet.

Labor and Immigration Policies
Innovation of the Internet requires sufficiently knowledgeable individuals to create, support and repair products and services. Maintaining a talented pool of individuals within a country may necessitate relaxation of immigration policies, allowing the free flow of information. The easing of a country's immigration policies can come in a variety of forms including reducing visa restrictions, academic waivers and IT-specific exemptions.

Government Incentive Programs
Although regulations are often perceived as a governmental proscriptive tool, regulations may also provide a vehicle for promoting specific technologies. Under the "universal service" model used in the United States, the government subsidizes telecommunications providers, allowing them to provide services to customers who would not normally be serviced. The "universal service" model represents one of many models that could be used to extend access to the Internet and the benefits of being connected to everyone.

Content Control/Censorship
Censorship of pornography, anti-government topics and other controversial topics may have wide-ranging impact upon Internet usage. Traditional laws and regulations also have the potential of affecting a country's Internet development through content control. Filtering programs and government monitoring will likely result in decreased usage or attempts to subvert restraints.

D. Internet Technical and Operational Factors

Protocol Standards and Development
Although the Internet relies heavily on the technical and operational factors of the telecommunications infrastructure, a number of Internet-specific technical and operational factors are of some consequence. Technical issues surrounding protocols including open development allowing for adequate testing and analysis, flexible or mandatory implementation and government involvement in development are crucial for software manufacturers in maintaining compatible and current software.

Language Barriers
The reluctance of a particular country or government to accept multiple languages for Internet applications will not only limit the availability of content to the public, but will also stifle the growth and development of the country's own Internet industry. A country's web designers, ISPs and information technology (IT) manufacturers will be limited to producing products that are only beneficial to customers that are literate in that country's language.

Skilled Labor Force
When an economy undergoes a transition as complex and potentially far-reaching as the transition to the New Economy, businesses will change the way they operate so that some employment opportunities are created and some are lost. The shift to higher technologies will thus require retraining and migration of skilled labor so the work force can adapt to the demands of the new technology. Where a skilled labor force is already available, the development of the Internet capability will be greatly enhanced.

Government Incentive Programs
Many believe that the government has a role in adapting the workforce to the new economy. Retraining the present workforce and establishing programs aimed at providing whole populations with greater education and access to the Internet and e-commerce opportunities are ways the government can promote public awareness and encourage Internet use and e-commerce growth. Moreover, the extension of Internet access in some regions of the world, where the middle and lower segments of society have relatively low levels of income, will depend more on the involvement of the government in subsidizing the dissemination of information and communications technologies.

E. E-Commerce Regulatory Factors

Taxation
One of the most critical building blocks for e-commerce is the level of regulatory involvement and intervention in development of the new system. The most visible e-commerce regulatory issue is whether to tax goods and services sold over the Internet. Although the most successful e-commerce countries have placed a moratorium on e-commerce taxes, the effects upon the tax base have not gone unnoticed. In the United States, it has been reported that state and local governments are losing US$170 million in potential tax revenues each year due to e-commerce sales. However, an e-commerce tax moratorium provides a powerful financial incentive for certain businesses and individuals, otherwise reluctant to venture into the electronic marketplace, to go online.

Privacy
The ability to access a great wealth of information with a few keystrokes has, in some cases, suppressed the growth of e-commerce. Apocryphal stories of data mining and the selling of personal information cause consumers to envision an Orwellian society where personal data is sold to the highest bidder. A country must strike a delicate balance between preventing private and governmental abuse of personal information and giving industry the tools necessary to tailor its products and services to meet consumer demands.

Content
Content policy issues include the extent of government involvement in controlling content on the Internet and the liability of ISPs and companies for content posted and transmitted on their networks. Limiting both government involvement and provider liability will encourage participation in e-commerce.

Content - Intellectual Property Rights (IPRs)
The growth of the Internet heightens traditional intellectual property concerns (e.g., unlicensed copying of copyrighted material, trademark violations) because of the ease with which copyright and trademark laws can be circumvented online. There are also entirely new concerns as laws suited to the non-Internet world often have unforeseen technical ramifications. Distributors such as telecommunications and Internet service providers wish to transmit material without worrying about whether it is crossing national borders or infringing on laws other than those of their home country.

The application of trademark and copyright law to e-commerce must be resolved against the fact that these authorities are largely country-specific. For instance, while one country may allow for automatic copyright, another country may require copyright registration. Therefore, in order for a country to be successful, its laws should be consistent with the major e-commerce countries' copyright and trademark legal authorities or with provisions of the international agreements governing IPRs. The major international agreements are the World Intellectual Property Organization (WIPO) Copyright Treaty, the WIPO Performances and Phonograms Treaty and the WTO Trade-Related Intellectual Property Rights (TRIPS) Agreements.

Security - Encryption and Authentication
In any secure verifiable electronic transaction, some methods of encryption, authentication and repudiation are all necessary. The laws and regulations that govern these activities must bring the same level of assurance to consumers as if the transaction had occurred in the brick-and-mortar world. Digital signatures, a form of authentication and repudiation, must be considered the equivalent to a written signature in order for e-commerce to flourish. Additionally, laws and regulations must allow for encryption programs that are compatible (e.g., technology-neutral) with other countries' standards in order to be considered viable e-commerce technology.

Security - Payment Mechanisms
Governments can encourage participation in e-commerce by providing policies to recognize and develop secure electronic payment mechanisms. Knowing that security mechanisms are in place, businesses are more likely to offer products and services in that country and customers are more likely to use available forms of payment to purchase through the Internet.

Participation in New International Standards Development
In addition to international agreements addressing IPR issues, other standards agreements aimed at promoting Internet capability and e-commerce development are under consideration by multinational bodies such as the WTO, the UN and other regional bodies. Where a country is actively engaged in developing international standards and is willing to adapt its own laws and policies to comply with those standards where possible, e-commerce in that country will benefit from greater market access and ease of transactions throughout the border-less e-commerce world.

F. E-Commerce Technical and Operational Factors

Protocol (Standards) Making Process
A well-established telecommunications and Internet infrastructure provides many of the necessary building blocks for development of a successful and vibrant e-commerce marketplace. An open protocol standards-making process will contribute to the technical development of e-commerce.

Product Restrictions
Restrictions upon purchasing certain legal products (e.g., prescription drugs) may have the unintended effect of forcing consumers to purchase restricted products and, incidentally, other unrelated products in other countries. Other products may be restricted for political or cultural reasons with similar effect.

Delivery Infrastructure
Successful e-commerce requires a reliable system to deliver goods to the business or private customer. Customers may be attracted by the convenience of ordering online but if their purchases are not delivered in a dependable and prompt manner, this advantage of e-commerce may be lost. The development of the transportation and postal infrastructures of a particular country will impact e-commerce heavily on this point.

Availability of Payment Mechanisms
Secure forms of payment in e-commerce transactions include credit cards, checks, debit cards, wire transfer and cash on delivery. The availability of these forms of payment, the development of new forms (e.g., smart cards, Internet banking accounts) and public confidence in using them are all factors in how quickly e-commerce will become part of a country's commercial environment. The absence of methods of secure forms of payment will prevent true "virtual" transactions from taking place.

General Business Laws
The application of general business laws to the Internet will serve to promote consumer protection by insuring the average consumer that the Internet is not a place where the consumer is a helpless victim. E-contracts should have the force of law, dispute resolution forums should be available and grievances should be remedied. Securities laws and financing regulations should allow for ease in obtaining investment to develop e-commerce businesses.

Public Attitude to E-Commerce
The public attitude toward using e-commerce in daily life is a significant factor in the success of e-commerce. In some societies, face-to-face dealing and bargaining at the point of sale are traditional elements of retail transactions. Shopping may be valued as an opportunity for social interaction where more than just goods and payment are exchanged. Even the age of the general population may influence e-commerce development, though many differ on how it might do so. A younger population may be more open to using the new technology while an older population may be better able to afford access to the Internet and the goods sold through e-commerce.

Business Attitude to E-Commerce
The willingness of companies to move away from traditional ways of doing business and develop methods and models that include e-commerce is essential. E-commerce-friendly business laws, including securities laws, financing laws and commercial contracting laws must be in place to encourage these sorts of changes in business attitudes.

Governments and businesses wishing to encourage and develop e-commerce must be aware of less tangible cultural factors in business and society at large. Since these factors often are particular to a country or region, a more localized and flexible approach will be necessary to fully exploit market opportunities.

III. The Global Economy and E-Commerce: An Overview

In 1999, the global ICT market topped US$2 trillion and maintained 9 percent growth. The industry is expected to break US$3 trillion total by 2004.^[6] Ninety million Internet devices were brought on line in 1999 bringing the world total to 260 million. The number of personal computers (PCs) rose to nearly 400 million by the close of 1999. Since PC prices are expected to continue to fall, this trend is likely to continue.

Presently, North America leads the world in Internet use and e-commerce. In March 2000, the total number of Internet users worldwide was estimated at 304 million - 45 percent in the U.S. and Canada, 27 percent in Europe, 23 percent in the Asian-Pacific, 3.5 percent in Latin America, 1.5 percent in Africa and the Middle East.^[7] Internet users are estimated to top 350 million by the end of year 2000.

Though North America will continue to lead in Internet use, growth will be significantly faster in other regions where ICT infrastructure is less developed. By the year 2005, North America will represent 30 percent of all Internet users, Western and Eastern Europe will account for about a third and Latin America and Africa/Middle East are estimated at 7.3 percent and 3.8 percent respectively.^[8] Almost a quarter of the worldwide online population will reside in the Asia-Pacific region. In that region, Internet use is expected to double in the next five years to almost 190 million in 2005. China is expected to contain the largest number of Asian Internet users by 2005.

Total Internet purchases in 1999 were estimated at US$130 billion and are projected to reach US$2.5 trillion by 2004. In 1999, companies invested US$280 million in e-commerce infrastructure and Internet presence and venture capitalists in the U.S. risked US$32 billion in web-based businesses.^[9]

In the short term, e-commerce and advertising revenues will remain largely within the United States. By 2003, the U.S. will retain more than half of all e-commerce revenue, with Europe representing about a third.^[10] Advertising is even more U.S.-centric. The U.S. accounted for 85 percent of all online ad revenues last year, according to Forrester Research, and will keep more than two-thirds through 2004.

As in North America, worldwide growth in Internet usage will be followed by increases in online transactions and e-commerce revenue. In Asia, online revenues are expected to grow from US$6.6 billion in 1999 to US$340 billion in 2003. In Japan, business-to-business (B2B) e-commerce grew by 400 percent in 1999 and is expected to grow by as much as 20,000 percent between 1999 and 2003.

It is to be noted that while e-commerce is expected to continue its remarkable growth, it still represents only small percentage of total retail sales. In 1999, e-commerce in the U.S. accounted for 1 percent of total retail sales and is expected to reach only 15 percent by 2010.^[11]

IV. CHINA
A. Introduction

No country has been more eager to embrace electronic commerce yet more fearful of its impact, than China. During the last three years, Chinese business and government have pursued an aggressive plan to prepare the country for electronic commerce. At the same time, regulators have imposed strict information controls and economic regulation on the Internet to protect the current government regime. Reconciling these two forces dominates discussion of the Internet and e-commerce in China.

China is a communist country yet over the past 20 years, the government has been moved its economy purposefully from a planned to a market-based system. As a result of reforms undertaken since 1978, the economy has grown more than tenfold. The gross domestic product is expected to increase 7.2 percent from 1999 to 2000. Foreign trade has increased by the same factor as Chinese manufacturers have begun to compete in the global marketplace in goods including personal computers.^[12]

Lately, China has had limited success maintaining its economy in the face of the Asian financial crisis. Structural problems, the problem of reducing employment levels in the state enterprise system, unemployment in general and low rates of income especially in rural areas all pose serious challenges to long-term economic growth.

The potential market for e-commerce in China is huge but the investment risks are great as well. China has virtually none of the regulatory, technical and operational elements that, taken together, will allow and promote e-commerce growth in the near future. Also, content issues will continue to impede growth of the Internet and e-commerce.

B. Telecommunications in China

China is the world's fastest growing telecommunications market.^[13] Growth has resulted from widespread economic reforms that rely on advancing high-technology industries. According to an official government report, the Chinese communications industry earned over 289 billion yen (US$34.9 billion) in 1999, up nearly 25 percent from the year before.^[14] Since 1992, China's ICT spending has experienced a compound annual growth rate of approximately 30 percent. At this rate, China would present a US$174 billion ICT marketplace by 2004. In comparative terms, China's share of worldwide ICT spending has increased more than any other country but Brazil. In 1992, China accounted for just 0.6 percent of the global ICT spending. By 1999, this percentage had jumped four-fold to 2.3 percent.^[15]

The Chinese government recognizes that continued development requires market liberalization and technological advances in the telecommunications and information technology sectors. Infrastructure investment is also a key element of China's economic growth potential with major infusions planned for the telecommunications sector. China’s forward-looking, centrally-planned and infrastructure-focused development program means that the country will continue to make major investments in high-capacity, high-speed and advanced technology. The government's approach to reforms, however, has retained a very active role for regulators and state-owned enterprises which is likely to impede Internet and e-commerce growth.

As with most things in China, there is a divergence in infrastructure between urban areas and rural areas. Overall, China has 8.7 fixed phone lines per 100 people, but in urban areas the number rises to 27.7. At the end of 1999, China had 6.4 cellular subscribers per 100. Although cellular penetration trails fixed-line at the moment, by 2001, cellular penetration will exceed fixed line penetration (12.8 to 12.1 per 100). Because of this, mobile telephony is expected to play a large role in the development of e-commerce in China.

1. Regulatory Factors

Regulatory Authority
The Chinese government is torn between the desire to create a modern telecommunications infrastructure and concerns about security and control of information. Recent actions to liberalize the domestic telecommunications market notwithstanding, the industry remains highly regulated. The three telecommunications providers are operated by state-run organizations, all with close ties to the Ministry of the Information Industry (MII), the industry's chief regulator.

China Telecom, the state-run monopoly, continues to dominate the fixed-line services market, including local, long-distance, international and data transmission services. Historically, the company has controlled the industry by restricting access to its network. As a government monopoly, it also influences policy through its close association with regulators.

Licensing
Research did not uncover any information.

Accounting System
Research did not uncover any information.

Local Competition
Competition, however, is emerging in China. In 1994, an alternative, state-designated telecommunications competitor, China United Telecommunications (Unicom), began offering services in urban areas. Together, China Telecom and Unicom control the wireless sector (with 100 percent of the market) and dominate the paging sector (with nearly 70 percent of the market). Last year, China's third domestic provider, China NetCom, introduced limited service, primarily in metropolitan areas. Once complete, NetCom's sophisticated fiber-optic network will offer enhanced services at lower prices than its competitors.

In preparation for China's entry into the WTO, the Chinese government has begun to make changes in the telecommunications industry. The MII replaced the Ministry of Posts and Telecommunications as the industry overseer in 1998 and the telecommunications sector was split from the postal sector. The MII has encouraged greater competition between China Telecom and Unicom, using administrative means to create a more level playing field. China Telecom itself will be restructured into four separate operational entities focussing on fixed-line, mobile, paging and satellite services.

Available Services
Research did not uncover any information.

Foreign Competition and Ownership
The communications market in China remains closed to foreign investors. Foreign interests are prohibited from holding a direct equity position in Chinese telecommunications service companies, or having any degree of operational control without permission from the State Council, which has been resolute in denying permission. As a result, foreign involvement has been limited to arms length agreements whereby foreign companies surreptitiously provide investment in exchange for a share of operating revenue. Until it was able to obtain state funding last year, China Unicom entered into this type of agreement as a way to circumvent the investment ban. Toward the end of 1998, these arrangements came under scrutiny from the MII, which reaffirmed that foreign investors are not allowed "to participate in the design, construction, operation and management of telecommunications networks."

These rules, however, should begin to change later this year in preparation for China's accession to the WTO. First, as a WTO member, China will be required to adhere to the WTO Basic Telecommunications Agreement, implementing certain regulatory reforms and opening basic telecommunications to other members of the WTO. Additionally, as part of its November 1999 agreement with the U.S. government, the Chinese government will relax foreign ownership restrictions immediately upon its accession to the WTO. The agreement allows up to 50 percent foreign ownership in value-added services in two years and 49 percent foreign ownership in mobile and fixed-line services, domestic and international, phased in over five to six years after accession.^[16]

The development of telecommunications technology presents yet another dilemma for the Chinese government. The MII would like to foster the development of a domestic manufacturing industry, and has used its control over China Telecom to ensure that purchasing favors locally-made products. However, to acquire best-in-class technology from the global market, the MII cannot afford to favor domestic companies to the exclusion of foreign technology firms. Foreign investors must be allowed sufficient access to the China market to continue investing and transferring technology. To this end, under the 1997 Guidelines for Foreign Investment in Industries, micro-electronic technology and information and communications system network technologies are listed as two newly emerging industries in which foreign investments are encouraged. The Guidelines also list the manufacture of digital communications multi-media systems and the manufacture of equipment for network accessing communications systems as industries in which foreign investments are encouraged.

The government still directs the type of technology adopted in China through its stringent control of frequency and standards. For various wireless technologies, this is a major hurdle. The recent surge in popularity of IP telephony in China challenged the MII’s desire to protect its traditional long-distance business. The speed with which technology is evolving and converging is making it increasingly difficult for the MII to maintain its control.

The MII’s aim to establish a nationwide broadband multimedia network will continue to drive the market, although China’s large, still under-served market means the MII will need to devote the bulk of its efforts to basic telecommunications infrastructure over the next three to five years. Convergence trends have a long way to go before they become evident in China, except in the more prosperous provinces and economic zones, where networks are being upgraded to prepare for emerging convergence technology.

2. Technical and Operational Factors

Spectrum Efficiency and Management
Research did not uncover any information.

Network Architecture
Investment in new equipment and extension of the country's communications infrastructure have only recently become priorities for policy makers as telecommunications is increasingly linked with continued economic growth. Currently, China lags behind its Western and East Asian counterparts in the availability of telecommunications services. According to official government reports, teledensity reached 13 percent nationwide in 1999 with the level closer to 30 percent in major urban areas. The telephone lines connect nearly 80 percent of villages across the country, making limited telecommunications available to most Chinese.^[17]

It is clear that China’s telecommunications regulator has been very concerned with public security. It has taken measures to ensure that there is ample control over the flow of information on its networks. However, strict control over telecommunications, the Internet and electronic commerce is likely to hinder Internet use and e-commerce development.

Infrastructure and Rights-of-Way
Research did not uncover any information.

C. The Internet in China

The Internet presents significant opportunities for Chinese economic development, but free access to news and information poses challenges to the current political regime. Though the government has said a comprehensive nationwide set of rules will be released in 2000, recent rapid growth of China's Internet industry has so far outpaced the government's ability to regulate it. As a result, Beijing has undertaken a unique approach to the Internet: promote its development while restricting its content and availability. In China, 1999 was proclaimed "The Year of Getting on the Internet."^[18]

Internet use in China is growing at a rate three times faster than the global average.^[19] Since 1996, the number of Internet users has increased 300 percent annually. According to government reports, Internet users more than doubled from 4 million to 8.9 million during the last six months of 1999 alone.^[20] These Internet users are now able to access nearly 150,000 mainland-based Chinese Web sites, and over 2,300 registered government-sponsored sites.^[21]

Internet use is largely concentrated in urban areas around Shanghai, Beijing, and Guanzhou where computers, communications infrastructure, and wealth are concentrated. According to the U.S. Department of Commerce, Shanghai has the highest computer penetration level. The city has 1.3 million computer users, representing 10 percent of the city's population.^[22] According to China Computerworld, 18 percent of urban Chinese households have purchased a PC, with ownership as high as 35.4 percent in the city of Guangzhou.

Estimates for China’s potential Internet growth are staggering: it is estimated that the number of Internet accounts will grow to 116 million in 2004, making China one of the largest Internet markets in the world. This will be made possible by widespread use of mobile phones and personal electronic assistants (such as the PalmPilot) to access the Internet. Personal computers are still prohibitively expensive for most Chinese and should remain an urban phenomenon for the medium term.

In an effort to control the flow of information over the Internet, the Chinese government has developed a hierarchical system of companies and organizations controlling access to the Internet. China's dominant Internet backbone, CHINANET, operates as a subsidiary of China Telecom. Construction of the backbone began in 1995. By June of the following year, CHINANET had been extended to all thirty provincial capitals. Three years later, it had been extended to all major cities in China making it the nation's most extensive network by a large margin. In most of the country, it is the only digital access available. Today, the network carries 82 percent of China's Internet traffic and is suitable for e-commerce.^[23] The CHINANET backbone primarily supports China Telecom Internet traffic with excess capacity sold to a limited number of smaller ISPs. However, the monopolistic power of China Telecom has enabled the carrier to charge very high leasing fees, limiting the market share of competing service providers.

Portal sites have become popular, and the state-controlled China.com had an extremely successful IPO on the NASDAQ in late 1999. Other widely-visited portals include Sina, 8848, and Madeforchina. Most provide both Internet content and physical goods. Their content and operations, however, are subject to increasing state scrutiny.

1. Regulatory Factors

Regulatory Authority
In an attempt to control the Internet in China, the government has created an unwieldy regulatory environment. In 1998, the MII was formed to regulate Internet activities and spur the growth of the domestic Internet. Under the auspices of the MII, the government closely oversees telecommunications, multimedia, broadcasting, satellites and the Internet. The MII also manages licensing, security, content and access. Other government agencies are also involved in regulating ICPs and e-commerce activities.^[24] Many observers believe this regulatory system will ultimately collapse under its own weight as providers and users proliferate and methods to circumvent government intervention become widely known. For the time being, however, the government has taken a heavy hand towards regulation.

Chinese ISP services are controlled by a few backbone service operators (e.g., China Telecom, China Unicom and JiTong Telecom) under licenses directly by the MII. ISPs must complete rigorous licensing procedures. Once licensed, the provider must register with communications and security agencies at both national and regional levels. New laws require providers to complete an additional licensing procedure with the Administration for Industry and Commerce, which then grants a logo that must be posted on the provider's web site.^[25]

The process of securing licensing from the various agencies and departments responsible for Internet regulation is a complex process. For many companies interested in serving the Chinese market, simply obtaining a copy of all the applicable rules presents a significant entry barrier. The other primary impediment to licensing is the continued dominance by China Telecom, the country's incumbent telecom provider and primary ISP.

In addition to licensing, Beijing recently issued new rules requiring all Internet companies to register for government verification. Companies that handle online advertising, design or electronic commerce must list details such as their registered capital, address, server name and business range on a web site run by the Administration for Industry and Commerce. After confirming the information, the Administration will give companies a special electronic seal of approval that will appear on the companies' web sites. Every qualified online trading company is required to use the logo on its home page so consumers and other companies can decide whether to do business with the company.

In late January 2000, the government suddenly promulgated the Regulation of Commercial Encryption Codes, requiring all businesses using encryption technology to register their encryption software at the National Commission on Encryption Codes Regulations by January 31st. It also mandated that firms must eventually register the names and e-mail addresses of all users of encryption technology. In mid-March, China reversed this strict regulation that would surely have put a chill into foreign investment in China and hurt its prospects for WTO membership.

The Chinese government's ambivalent attitude toward the Internet as a whole is reflected in recent advances and retreats in regulation of foreign investment. While recognizing that the Internet can be a major engine of growth, perhaps quickly leveling the playing field with more developed economies, the government is concerned about maintaining control of the economy and of information. In September 1999, the government announced a ban on foreign investment in Internet Content Providers (ICPs), following an earlier ban on foreign investment in ISPs. A week after the MII promulgated the ban, however, the ICP Yahoo! launched its China service. In November 1999, the MII announced draft regulations that would allow direct foreign investment in e-commerce, but would prohibit ICPs from using content from non-Chinese sources. In January 2000, the government relaxed its ban on foreign ISP investment and announced that foreign firms would be allowed to invest in three cities. This is to expand to 14 additional cities next year and eventually to all cities and regions.

The effect of these changes in the regulatory environment is unclear. The Chinese government is either unwilling or unable to enforce fully many of the Internet and e-commerce regulations it has established. Barriers to foreign money in the IT sector were lowered upon the realization that growth would require at least some foreign investment. Data show that as much as US$100 million in foreign investment has poured into China’s Internet sector and that more than 50 percent of ICPs have foreign funding. Most popular Chinese-language portals, such as Sina.com, Netease.com and Sohu.com, have received substantial amounts of foreign capital investment.

China’s policy on investment by foreigners as ISPs or ICPs should change with its accession to the WTO. According to the agreement between China and the United States, once China joins the WTO, it will allow foreign investment in China-based Internet companies. Foreign service suppliers will be able to provide a variety of services including electronic mail, voice mail, online information and data base retrieval, electronic data interchange, online information and data processing (including transaction processing), and paging services. Foreign service suppliers may hold 30 percent foreign equity share upon accession, 49 percent after one year, 50 percent after two years. Foreign service suppliers may provide services to designated cities and regions according a schedule which depends on the date of accession to the WTO. After two years, foreign service providers will be allowed to provide service to the entire country.

As part of its accession into the WTO, China has also pledged to sign the Information Technology Agreement (ITA). The agreement commits China to eliminate its tariffs, currently as high as 13 percent, on information technology products by 2005. The agreement will dramatically increase access to China's domestic market for goods and services and is expected to will spur competition, enhance service offerings, and reduce costs.

Despite the WTO agreement between China and the United States, however, the MII states that foreign investors still will need government approval and licenses to enter China’s Internet market. The MII will be responsible for examining and approving foreign investment projects in the ISP sector. Content provided by ICPs will be reviewed by other agencies before MII approves it for public networks. An ICP licensing system will be established, the details of which have yet to be clarified.

In another move to control content, information and foreign investment, the government is restricting non-state-owned concerns from going public overseas and is developing state-owned Internet competitors. For instance, the state telecommunications regulator has set up the portal CCIDNET.com as a competitor to any independent portals serving the China market. With these bureaucratic hurdles blocking competition from the private sector, state-owned web sites will clearly be at the front of the line for some time in China.

There are several reasons why China’s Internet policies are often self-contradictory. While certain laws may seem entirely clear on paper, in practice the government exercises considerable discretion in enforcement. Delineation between the operations of ICPs, ISPs, Application Services Providers (ASPs) and e-commerce ventures is not always clear, complicating government efforts to control discrete areas of Internet activity. Foreign investors avoid bans on investment by using moribund but listed Hong Kong enterprises as a front or using Chinese citizens educated and residing abroad to give the appearance of Chinese ownership. Not least of all, Internet regulation is subject to turf battles among various government agencies including the MII, which regulates ISPs; the State Bureau of Secrecy, which enforces the ban on transmission of state secrets; and the State Administration of Radio, Film and Television, which oversees content provision generally.

Until recently, Chinese Internet users were forced to rely on slow connections via the telephone system. A directive of September 1999 stipulated that the businesses of the telecommunications (currently providing Internet access) and cable TV companies (which can provide faster cable modem access) must remain separate. This effectively banned cable modems, but in January 2000 the city of Shanghai was given an exception, allowing the entry of cable modem technology into the market.

Soon thereafter, Legend, the state-backed PC maker, was given permission to market home systems that combine broadband Internet access and online investing, further eroding the 'convergence' ban. Now MeetChina, an e-commerce venture in cooperation with Legend and Motorola, is set to offer wireless e-commerce service, accessible to consumers using only a relatively cheap device such as Motorola’s MobilePad. In contrast with its earlier attitude, the state seems increasingly willing to let the market decide what form Internet access technology will take.

Cost of Access
Access to the Internet remains a luxury for the privileged few. Users must obtain a permit to access the Internet. Once licensed, users face high access charges, which are set by the government. Recent restrictions on access to the Internet demonstrate the Chinese leadership's desire to exploit the Internet for business while constricting information it considers threatening to Communist Party rule.^[26]

China Telecom is the only Internet backbone service provider and reseller of capacity to other ISPs. High access fees in the past have meant that many fledgling ISPs have not survived, and have also kept end-users’ fees high, stunting Internet growth. For this reason, China Telecom made two major cuts in their rental rates to ISPs in 1999 as part of the MII attempt to expand the number of Internet users.

Labor and Immigration Policies
Research did not uncover any information.

Government Incentive Programs
Research did not uncover any information.

Content Control/Censorship
The government requires all web sites to undergo security checks by the government to prevent the release of sensitive national information to foreign nationals. The State Bureau of Secrecy closely monitors Internet activity to ensure that it is not jeopardizing state security. On January 25, 2000, the State Security Bureau issued the State Secrecy Protection Regulations for Computer Systems on the Internet, retroactive to January 1, 2000. The Bureau announced that "all organizations and individuals are forbidden from releasing, discussing, or transferring state secret information on bulletin boards, chat rooms, or in Internet news groups."^[27]

The regulation concerns 'state secrets', defined in official government parlance so vaguely that it could mean any material not specifically authorized by the government for publication. Under previous laws, individuals posting such information on bulletin boards, chat rooms, or news groups were responsible for it. Under the new rules, however, any individual or company transmitting such information can be held responsible. This will, if enforced, effectively require ISPs and web sites to police the content passing through their domain, even that for which they have no original responsibility. To ensure compliance, information providers and transmitters will have to check any data published or disseminated with an appropriate government agency. Web sites and ISPs that do not remove offending information after one warning may be shut down.

Given the number of users, web sites and e-mails on the Internet, it will be virtually impossible to monitor all of the content that could contain 'state secrets' under the government’s definition. But the new regulations stand as the first direct application of China's state secret laws to the Internet.^[28]

In March, the MII established the Internet Information Management Bureau to restrict Internet content accessible by Chinese Internet users to prevent the "infiltration of harmful information on the internet."^[29] The Ministry also barred the dissemination of foreign news on Chinese portals.

While governments around the globe wrestle with questions of Internet regulation, the Chinese government is exercising significantly broader control by exerting its ownership influence on content as well. To curb the flood of foreign media, the government has developed its own web sites.^[30] Chinadotcom, a state-affiliated web portal, now dominates the domestic Internet market. Xinhua, the official Chinese news agency and one of Chinadotcom's shareholders, strictly censors the portal's content.^[31] Other government-backed web sites, including Qianlong, which groups nine major media-companies, and CCIDNET.com, operated by the MII, supply state-approved content and receive preferential regulatory treatment. In addition, the Chinese government has set up a special police force to monitor activity on the Internet.

Many observers doubt whether China's plans to control the Internet will be effective. The government's own web sites are less popular than their private counterparts and Chinese web users are becoming more sophisticated in circumventing the censors, partly by using 'proxy' servers to retrieve blocked sites.^[32]

2. Technical and Operational Factors

Registration of domain names in China is governed by the Provisional Administrative Measures on Registration of China Internet Domain Names (promulgated May 1997). In the market of Chinese-character domain names, two institutions register domains: the Singapore-based I-Dns, and China’s own China Internet Network Information Center (CNNIC). CNNIC has been authorized to register '.cn' domain names and make rules governing the standards and management of Chinese domain names. Foreign companies are not permitted to register a domain name in China unless they use their Chinese subsidiaries or representative offices as the applicants. CNNIC itself currently is commercializing the domain name market in cooperation with a U.S. strategic partner.

Protocol Standards and Development
Research did not uncover any information.