Bridging the ‘Digital Divide’: Bridging the ‘Digital Divide’: Information Technology & Information Technology &

Growth in Small Developing Growth in Small Developing StatesStates

Robert Read &Robert Read &

Didier SoopramanienDidier Soopramanien

IT & Economic Growth TheoryIT & Economic Growth Theory

Endogenous growth theory suggests that Endogenous growth theory suggests that IT has several types of impact:IT has several types of impact:

Technology transfer – ‘learning-by-doing’ Technology transfer – ‘learning-by-doing’ and leading edge technologies.and leading edge technologies.

Education - human capital and skills.Education - human capital and skills. Externality effects – no diminishing returns Externality effects – no diminishing returns

to scale on investmentto scale on investment

IT & Economic DevelopmentIT & Economic Development

Technology transfer is necessary but Technology transfer is necessary but insufficient for growth and convergence insufficient for growth and convergence between countries.between countries.

‘‘Leap-frogging’ and absorptive capacity.Leap-frogging’ and absorptive capacity. Environment encouraging innovation and Environment encouraging innovation and

adoption of new technologyadoption of new technology Availability of appropriate skills.Availability of appropriate skills.

Small States & Growth TheorySmall States & Growth Theory

Endogenous growth theory highlights key Endogenous growth theory highlights key role of specific factorsrole of specific factors

Human capital.Human capital. Technology.Technology. Trade.Trade. Quality of economic policies.Quality of economic policies.

All All are important growth determinants in are important growth determinants in small states.small states.

IT & Growth in Small StatesIT & Growth in Small States

IT is important in the context of the growth IT is important in the context of the growth of small states because:of small states because:

IT has key role to play in services, IT has key role to play in services, including tourism – a key source of their including tourism – a key source of their comparative advantage.comparative advantage.

This implies that IT has a critical role in the This implies that IT has a critical role in the future growth of small statesfuture growth of small states

Subject to labour supply and skills Subject to labour supply and skills constraints.constraints.

Size Constraints on ITSize Constraints on IT

The small size of the domestic market has The small size of the domestic market has important implications of IT adoption:important implications of IT adoption:

Lack of ‘critical mass’ reduces the scope Lack of ‘critical mass’ reduces the scope for scale economies associated with new for scale economies associated with new technologies and ideas.technologies and ideas.

Small size reduces the spillover benefits of Small size reduces the spillover benefits of new technologies (as with FDI).new technologies (as with FDI).

Constrained physical and human resources Constrained physical and human resources – absorptive capacity.– absorptive capacity.

Potential of IT in Small StatesPotential of IT in Small States

Widens the market through trade and Widens the market through trade and information diffusion.information diffusion.

Provides a platform for marketing and Provides a platform for marketing and information exchange – strengthening information exchange – strengthening comparative advantage.comparative advantage.

Greater scope for business to business Greater scope for business to business (B2B) interaction in the supply chain.(B2B) interaction in the supply chain.

Impact of IT in Small StatesImpact of IT in Small States

Strengthening of comparative advantage Strengthening of comparative advantage of open economies.of open economies.

Promotion of service industries in small Promotion of service industries in small states, states, ee- tourism.- tourism.

Reduction or elimination of geographical Reduction or elimination of geographical and spatial barriers of remote and island and spatial barriers of remote and island states.states.

Study HypothesesStudy Hypotheses

ee-commerce is related to market size.-commerce is related to market size. Adoption is influenced by:Adoption is influenced by:

-- The stock of physical capital The stock of physical capital (investment (investment in infrastructure).in infrastructure).

-- The stock of human capital The stock of human capital (investment (investment in education).in education).

ee-commerce has a positive effect on -commerce has a positive effect on economic growth.economic growth.

Endogenous Determination ofEndogenous Determination ofee-Commerce Adoption-Commerce Adoption

Development of an endogenous framework Development of an endogenous framework for adoption of for adoption of ee-commerce.-commerce.

Threshold effect in small states (minimum Threshold effect in small states (minimum market size).market size).

‘‘Double barrier’ effect (minimum levels of Double barrier’ effect (minimum levels of bothboth physical and human capital stocks). physical and human capital stocks).

Physical CapitalPhysical Capital

TelecomTelecomInfrastructureInfrastructure

E-commerceE-commerce

Human CapitalHuman Capital

Market SizeMarket Size

Economic GrowthEconomic Growth

DataData

Sample size:Sample size:-- i) 205 states – 129 > 3m, 76 < 3m.i) 205 states – 129 > 3m, 76 < 3m.-- ii) 126 states – 93 > 3m, 33 < 3m.ii) 126 states – 93 > 3m, 33 < 3m.

ee-commerce adoption – Internet hosts.-commerce adoption – Internet hosts. Telecom infrastructure – ITU.Telecom infrastructure – ITU. Human capital – UNESCO.Human capital – UNESCO. World Bank Development CD-ROM.World Bank Development CD-ROM.

All data is for 2000All data is for 2000

SURE SURE MethodologyMethodology

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)

Composite Measure of InvestmentComposite Measure of Investment

Factor analysis

Component Matrixa

.934

.927

.750

LOGTEL

LNENROL

LOGDFCF

1

Component

Extraction Method: Principal Component Analysis.

1 components extracted.a.

This is substituted into previous equations.

CMI = f (LnTel, LnEnrol, LnDGCF)

LnHosts = f (CMI, LnGDP, other factors +error term) LnGDP = f (CMI, LnHosts, other factors +error term)

LnHosts = f (CMI, LnGDP, Small, other factors + error term)

LnGDP = f (CMI, LnHosts, Small other factors + error term)

Small state is ‘small’ = 1; 0 otherwise.

Model 1

Model 2

Model SpecificationModel Specification

Model Specification 1

Model Specification 2

Empirical ResultsEmpirical Results

The growth impact of The growth impact of ee-commerce -commerce depends upon:depends upon:

-- Minimum thresholds of physical Minimum thresholds of physical andand human capital stocks.human capital stocks.

-- Telecoms infrastructure. Telecoms infrastructure. Small size limits the ‘accelerator’ effects of Small size limits the ‘accelerator’ effects of

growth on growth on ee-commerce adoption.-commerce adoption. Small size does Small size does notnot directly affect the directly affect the

adoption of adoption of ee-commerce.-commerce.

ConclusionsConclusions

Endogeneity between growth, resources Endogeneity between growth, resources and and ee-commerce affects adoption.-commerce affects adoption.

There is a ‘digital divide’ between small There is a ‘digital divide’ between small and larger states.and larger states.

‘‘Critical mass’ in telecoms, physical and Critical mass’ in telecoms, physical and human capital.human capital.

ee-commerce needed to maintain the -commerce needed to maintain the competitiveness of small states.competitiveness of small states.

Most important for remote island states.Most important for remote island states.