Working Paper Series no. 709: Digital vulnerability and performance of firms in developing countries

Almost all coastal economies are now connected to the global Internet through over 300 telecommunications submarine cables (SMCs), so digital vulnerability is now shaped by two structural factors, independent from policy: exposure to broadband infrastructure outages and physical distance to these infrastructures, which increases exposure to network failures. We estimate the impact of Internet penetration on local firm performance by adopting an instrumental variable approach reflecting these two sources of digital vulnerability. Multilevel estimations are conducted over a sample of around 44,000 firms from about 250 locations in some 60 developing and transition countries. Results stress large impacts of higher Internet penetration rates at the location level, induced by lower digital vulnerability, on firms’ average revenue and labour productivity, and to a lesser extent, on temporary employment. This evidence is, amongst others, robust to the exclusion of exporters, big firms, foreign firms, and firms created after SMC arrival.

Over the last few decades, international connectivity underwent a dramatic improvement promoted by the laying of 321 fibre submarine cables (SMC) over 1990–2015. More than 99% of the world’s telecommunications – Internet content, phone and video calls, classified diplomatic messages – passes through SMCs. SMC international networks now irrigate a USD 20.4 trillion industry and connect 3 billion Internet users across the world (Towela & Tesfaye, 2015). As a consequence, almost all coastal developing and transition countries are now plugged into the global Internet through SMCs. Fast-growing Asian and South American countries have been rapidly connected to Northern economies, and Africa’s digital isolation from the rest of the world has rapidly fallen since 2005. This rapid expansion of the international broadband infrastructure network and the following boom in Internet services raises strong expectations for many low-income countries’ economic catch-up, notably, through its potential for fostering innovation, productivity, trade, and job creation.

In the 2000s, some papers, focused on aggregated data or on firm level data, find a positive effect of Internet penetration rates on international trade, productivity and growth. These positive impacts are mainly explained by a reduction in transaction costs and improvements in knowledge spillovers.

This paper brings additional insights into this area of research by providing new evidence on the local impact of improved access to the Internet on three firm outcomes – their sales revenue, their labour productivity, and their number of temporary employees[1] – in developing countries. To estimate the causal impact of firms’ Internet access on their performance, we propose a novel identification strategy based on geographical and geological determinants of digital vulnerability.[2] We proceed to an instrumental variable approach, in which the first instrument reflects the exposure of maritime telecom infrastructures to the risk of cable outages caused by seismic events in their neighbourhoods. Because isolated populations face a lower infrastructure coverage and are more exposed to telecommunication network failures, we use the local and aggregated geographical distances of Internet users from infrastructure nodes (SMC landing stations or Internet exchange points) as a second set of instruments.

To examine to what extent Internet access shapes firm outcomes, single-level and multilevel IV estimations are conducted using WBES[3] data on firms’ characteristics, outcomes, and Internet usage aggregated at the location level. Data aggregation aims at addressing two main concerns: i) a possible endogeneity bias due to a correlation between decisions of firms, and ii) inference problems caused by the instrumentation of a dichotomous firm-level variable (has the firm used the Internet or not).

Based on a large sample of 44,250 firms located in 255 cities/provinces in 62 developing countries, IV estimates provide evidence of a large and positive impact of Internet access on firm performance at the location level. An increased used of the Internet (either email or website use) is found to be a consistent tool to boost sales, productivity, and temporary employment. Indeed, we find that a 10% increase in the local incidence of email use among firms increases by 26% their revenues, by 21% their labour productivity, and in less robust way, by 6 temporary employment. Our findings support that the digital divide, i.e., disparities in the quality of Internet access across different cities or provinces, dampens the effect of improved Internet access on economic outcomes at the macro level. It therefore suggests that the impact of broadband arrival is heterogeneous within countries.

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Working Paper Series no. 709: Digital vulnerability and performance of firms in developing countries
  • Published on 02/25/2019
  • 46 pages
  • EN
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Updated on: 02/25/2019 14:29