This paper provides city-level evidence on the impact of fast Internet on firm performances in developing and transition economies. Over the last two decades, international connectivity has been boosted by the laying of more than 300 submarine telecommunication cables (SMC). Almost all coastal developing and transition countries are henceforth plugged to the global Internet, so that the remaining structural impediments to Internet economy’s growth are twofold: first the digital isolation, i.e. the gap between Internet users and the existing and often lacking terrestrial telecommunication infrastructure network; and second, the country’s exposure to SMC faults.
We estimate the impact of Internet access on firm performance by adopting an instrumental variable (IV) approach reflecting these two digital vulnerabilities.
Estimations are carried out using large a sample of firms from more than 2,600 cities in some 60 developing and transition countries. They stress that a 10% increase in the incidence of e-mail use among firms, induced by lower digital vulnerabilities, raises the firm’s average annual sales by 24%, average sales per worker by 18%, and temporary employment by 15%. This result is robust to the exclusion of outliers, of exporters and big firms, of firms created after SMC arrival, and to the use of other proxies for firms’ access to Internet. It therefore suggests the existence of large spillover effects of fast Internet at the local level.
- First, exploiting an original database on telecommunication infrastructures’ deployment worldwide, we show that the variety of firms’ and countries’ experiences of digital isolation explains the telecommunication constraint. In fact, we show that the distance to existing fibre infrastructure nodes is a critical determinant of Internet use. As a consequence, remote, landlocked countries, or countries with a large territory, face structural handicaps that may deprive them of the potential benefits of the digital revolution. According to our estimates, a 100km increase in the centroid distance to SMCs induces a 15,287 USD annual loss by firm, a 478 USD annual loss per worker.
- Second, we show that even if digital isolation in various developing countries has been significantly reduced by the laying of hundreds of SMCs across the world, many countries remain highly vulnerable to cable breaks, whether they are caused by seaquakes, piracy, or fishing, or anchoring. Our results specifically stress the importance of a country exposure to seaquake induced SMC breaks for the development of the Internet economy and the performance of firms, but the underlying mechanisms can be extended to previously-mentioned other sources of cable faults. As a matter of fact, an increase of 10 seaquakes within a 1000km radius from SMC landing points a year induces a 8,551 USD annual loss by firm, a 267 USD annual loss per worker.