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Bridging the ‘Digital Divide’: Information Technology & Growth in Small Developing States

Bridging the ‘Digital Divide’: Information Technology & Growth in Small Developing States. Robert Read & Didier Soopramanien. IT & Economic Growth Theory. Endogenous growth theory suggests that IT has several types of impact:

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Bridging the ‘Digital Divide’: Information Technology & Growth in Small Developing States

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  1. Bridging the ‘Digital Divide’: Information Technology & Growth in Small Developing States Robert Read & Didier Soopramanien

  2. IT & Economic Growth Theory Endogenous growth theory suggests that IT has several types of impact: • Technology transfer – ‘learning-by-doing’ and leading edge technologies. • Education - human capital and skills. • Externality effects – no diminishing returns to scale on investment

  3. IT & Economic Development Technology transfer is necessary but insufficient for growth and convergence between countries. • ‘Leap-frogging’ and absorptive capacity. • Environment encouraging innovation and adoption of new technology • Availability of appropriate skills.

  4. Small States & Growth Theory Endogenous growth theory highlights key role of specific factors • Human capital. • Technology. • Trade. • Quality of economic policies. All are important growth determinants in small states.

  5. IT & Growth in Small States IT is important in the context of the growth of small states because: • IT has key role to play in services, including tourism – a key source of their comparative advantage. • This implies that IT has a critical role in the future growth of small states • Subject to labour supply and skills constraints.

  6. Size Constraints on IT The small size of the domestic market has important implications of IT adoption: • Lack of ‘critical mass’ reduces the scope for scale economies associated with new technologies and ideas. • Small size reduces the spillover benefits of new technologies (as with FDI). • Constrained physical and human resources – absorptive capacity.

  7. Potential of IT in Small States • Widens the market through trade and information diffusion. • Provides a platform for marketing and information exchange – strengthening comparative advantage. • Greater scope for business to business (B2B) interaction in the supply chain.

  8. Impact of IT in Small States • Strengthening of comparative advantage of open economies. • Promotion of service industries in small states, e- tourism. • Reduction or elimination of geographical and spatial barriers of remote and island states.

  9. Study Hypotheses • e-commerce is related to market size. • Adoption is influenced by: - The stock of physical capital (investment in infrastructure). - The stock of human capital (investment in education). • e-commerce has a positive effect on economic growth.

  10. Endogenous Determination ofe-Commerce Adoption Development of an endogenous framework for adoption of e-commerce. Threshold effect in small states (minimum market size). ‘Double barrier’ effect (minimum levels of both physical and human capital stocks).

  11. Physical Capital Human Capital Market Size Telecom Infrastructure E-commerce Economic Growth

  12. Data • Sample size: - i) 205 states – 129 > 3m, 76 < 3m. - ii) 126 states – 93 > 3m, 33 < 3m. • e-commerce adoption – Internet hosts. • Telecom infrastructure – ITU. • Human capital – UNESCO. • World Bank Development CD-ROM. All data is for 2000

  13. SURE Methodology SURE - seemingly unrelated regression equations. Used given endogenous relationship between the variables. LnHosts = f (LnDGCF, LnEnrol, LnTel, LnGDP, other factors + error term) GDP = f (LnDGCF, LnHosts, LnEnrol, LnTel, LnGDP, other factors + error term)

  14. Composite Measure of Investment CMI = f (LnTel, LnEnrol, LnDGCF) This is substituted into previous equations. Factor analysis

  15. Model Specification LnHosts = f (CMI, LnGDP, other factors +error term) LnGDP = f (CMI, LnHosts, other factors +error term) Model 1 LnHosts = f (CMI, LnGDP, Small, other factors + error term) LnGDP = f (CMI, LnHosts, Small other factors + error term) Model 2 Small state is ‘small’ = 1; 0 otherwise.

  16. Model Specification 1

  17. Model Specification 2

  18. Empirical Results • The growth impact of e-commerce depends upon: - Minimum thresholds of physical and human capital stocks. - Telecoms infrastructure. • Small size limits the ‘accelerator’ effects of growth on e-commerce adoption. • Small size does not directly affect the adoption of e-commerce.

  19. Conclusions • Endogeneity between growth, resources and e-commerce affects adoption. • There is a ‘digital divide’ between small and larger states. • ‘Critical mass’ in telecoms, physical and human capital. • e-commerce needed to maintain the competitiveness of small states. • Most important for remote island states.

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