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

This paper provides evidence of large positive effects of Internet use on local firm performance, using a sample of some 30,000 firms from 38 developing and transition countries. We adopt an IV approach emphasizing firm’s digital vulnerability to seismic shocks upon the telecommunications submarine cable network, and find that a 10% increase in Internet incidence raises by 36% their total annual sales, by 26% sales per worker, by 12% the number of permanent workers. Contrary to other studies on the effect of ICT adoption on trade, we do not find significant evidence on firms’ exports. A greater use of Internet by manufactures is also found to increase their number of production (unskilled) workers in a larger extent than non-production workers, which nuances recent evidence on a skilled-biased digital revolution. The concern for omitted variable bias, reverse causality or measurement error is lowered by proceeding to a wide range of restrictions upon the sample composition and the instrument set calibration, and by controlling for location, sector, year, country-by-year fixed effects.

Over the last few decades, international connectivity underwent a dramatic improvement promoted by the laying of around 400 fibre submarine cables (SMCs) over 1990–2018. Nowadays, more than 99% of the world’s telecommunications – Internet content, phone and video calls, classified diplomatic messages – passes through SMCs, irrigating a USD 20.4 trillion industry and connecting 3 billion Internet users across the world.

Almost all coastal developing and transition countries have now access to the global Internet through SMCs. Fast-growing Asian and South American countries have been rapidly connected to Northern economies, while Africa’s digital isolation from the rest of the world has rapidly fallen since 2009 (Cariolle, 2018). This densification of the SMC network (Graph 1) has stimulated digital ecosystems worldwide, and raised strong expectations for many low-income countries’ economic catch-up, notably through fostered innovation, productivity, trade, and job creation.

However, countries’ higher dependence on SMCs for international telecommunications has increased their vulnerability to SMC faults. SMC faults have local-level economic consequences, by disrupting telecommunications and disorganizing the economic activity, especially for populations that are remote from key connectivity infrastructures. They also represent a major concern for operators and governments, which face high maintenance, repair and insurance costs related to SMC failures, which are often reported on Internet tariffs.

Since the 2000s, various studies have highlighted the positive effect of Internet penetration rates on international trade, productivity and growth. These positive impacts are mainly explained by a reduction in transaction and transport costs, as well as knowledge and technology spillovers. This paper provides new evidence on the local impact of improved access to Internet on four firm outcomes: their total revenue, their labour productivity, their exports, the size and the composition of their workforce. In particular, the main novelty of this paper lies in its instrumental variable (IV) approach, emphasizing the firm’s digital vulnerability to shocks upon the SMC network. Our instrument set indeed reflects local spatial inequalities in terms of Internet access, by combining information on the SMC network’s exposure to seismic shocks with the firm’s location distance to international connectivity infrastructures. Our results stress that this exogenous source of within-country spatial heterogeneities in Internet access has important consequences on firm outcomes.

The empirical analysis is conducted using data from the World Bank Enterprise Surveys on more than 30,000 surveyed firms, located in around 125 locations in some 38 developing and transition countries. Pseudo-panel estimations put in evidence large positive impact of ICT use on local firms’ performance. According to baseline estimates, a 10% increase in the incidence of email use in locations raises by 36% the firms’ average annual sales, by 26% average sales per worker, by 12% the average number of full-time permanent workers. We also study the effect of Internet diffusion on manufactures’ workforce composition[1], that is, their number of production and non-production workers, and their number of skilled and unskilled production workers. Results highlight a positive and significant effect of Internet use on both production and non-production workers, but a stronger effect on the former. They also stress that the positive effect of Internet on production workers is driven by the increase in the number of unskilled production workers, which nuances recent empirical and theoretical evidence on a skilled-biased digital technological change. Importantly, the concern for omitted variable, reverse causality or measurement error biases is lowered by proceeding to a wide range of restrictions upon the sample composition and to various instrument set calibrations, and by controlling for location, sector, year, country-by-year fixed effects.

Through the IV approach followed in this paper, we point out the rise of new digital vulnerabilities countries may be subject to: the arrival of SMCs has boosted the Internet economy as a whole but has also increased the economy’s exposure to fibre cable breaks and Internet shutdowns. Our results indeed stress the importance of the SMC network exposure to seismic risk for the development of the Internet economy and for the performance of firms, but the underlying mechanisms can be extended to other sources of cable faults, such as maritime activities, piracy, or other natural hazards. Another finding is that within-country spatial heterogeneities are found to be a central element of the ICT-growth nexus. In fact, we show that the location distance to international connectivity infrastructures is a critical transmission factor of the effect of seismic shocks on Internet diffusion among firms. In other words, firms that are remote from infrastructures have a higher exposure to telecommunication disruptions, which may deprive them of the potential benefits of the digital revolution.

 

[1] Detailed information on service firms’ workforce composition was not available.

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Working Paper Series no. 709: Digital vulnerability and performance of firms in developing countries
  • Published on 02/25/2019
  • 39 pages
  • EN
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Updated on: 08/13/2019 17:20