Regulation and Innovation in Telecommunications1

Information and communication technologies (ICTs) are an important determinant of productivity growth and innovation. This study examines the effects of sector regulation on innovation in telecommunications and related information industries. A typology of innovation processes in ICT industries is developed. The conditions conducive to innovation under varying economic conditions are explored theoretically. Conjectures derived from this conceptual analysis are tested using data for 32 countries for the years 1997-2010. Two ICT innovation indicators (number of secure servers and fixed broadband access lines) were utilized to test the effects of sectoral regulation. In line with other studies of the effects of regulation on innovation, the study finds that more stringent regulation had a statistically significant negative effect on the number of secure servers and the number of fixed broadband access lines. This result holds for a broad measure of regulatory density as well as for the stringency of market access regulation and price regulation. JEL codes: L51, L86, L96 1 The authors would like to thank Deutsche Telekom AG for support to conduct this study and Dr. Andreas Fier for helpful comments on earlier drafts of the paper. Johannes M. Bauer (corresponding author), Professor of Telecommunication, Information Studies, and Media, Michigan State University, East Lansing, Michigan 48824, USA, email: [email protected]; Woohyun Shim, Senior Researcher, Synthesys, Inc., East Lansing, Michigan 48823, USA.