Digital Vulnerability and Performance of Firms in Developing Countries

Abstract

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.