Has the Internet Increased Trade? Evidence from Industrial and Developing Countries

If the Internet made it easier for firms to enter new markets by reducing communication and search costs then it may also have made it easier to export goods and services. We find that higher Internet penetration in developing countries is correlated with greater exports to developed countries, but not with trade between developing countries or with exports from developed countries. Interpreting the correlations is difficult because causation may run from Internet use to exports or from trade openness to Internet use. To test whether Internet use affects export behavior, we endogenize Internet use by using countries’ regulation of data services and Internet provision as instrumental variables. The results are robust to endogenizing Internet penetration, suggesting that access to the Internet does affect export performance of firms in developing countries. In other words, Internet access appears to stimulate exports from poor countries to rich countries. Moreover, the analysis suggests that regulatory policies affecting telecommunications and Internet development indirectly affect trade, further emphasizing the importance of deregulating potentially competitive services in the telecommunications industry. World Bank Policy Research Working Paper 3215, February 2004 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org. * George Clarke is a Senior Economist in the Development Research Group at the World Bank. Scott Wallsten is a fellow at the AEI-Brookings Joint Center for Regulatory Studies and resident scholar at the American Enterprise Institute. Contact information for George Clarke: Development Research Group – Competition Policy and Regulation, World Bank, MSN MC3-300, 1818 H Street, N.W., Washington, D.C. 20433. Fax: 202-522-1155. Tel: 202-473-7454. Email: [email protected]. Contact information for Scott Wallsten: AEI-Brookings Joint Center, 1150 17th Street, N.W., Washington, D.C. 20036. Fax: 202-862-7169. Tel: 202-862-5885. Email: [email protected] P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed