chapter  12
10 Pages

Direct network effects

The rapidly growing connectivity of individuals and organizations achieved through improved communications networks (e.g., the Internet, mobile telephone networks, and satellite communications systems) has allowed a consequent increase in the flow of business transactions. These physical networks are often characterized by the existence of strong direct network effects: the more people who use them, the more useful they are to any individual user.2,3 Accordingly, sophisticated and well-connected country-specific networks have become recognized as the “competitive weapons” with which battles for comparative advantage are won. In his recent bestselling book The World Is Flat, Thomas Friedman argues as follows:

Information technologies are important not only because they are big global businesses in and of themselves, but also because they are critical to advancing productivity and innovation. . . . The more you connect an educated population to the flat world platform in an easy and affordable way, the more things they can automate, and therefore the more time and energy they have to innovate.