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: Technology transfer – ‘learning-by-doing’ and leading edge technologies. Technology transfer – ‘learning-by-doing’ and leading edge technologies. Education - human capital and skills. Education - human capital and skills. Externality effects – no diminishing returns to scale on investment Externality effects – no diminishing returns to scale on investment

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

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.

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. 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 This implies that IT has a critical role in the future growth of small states Subject to labour supply and skills constraints. Subject to labour supply and skills constraints.

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. 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). Small size reduces the spillover benefits of new technologies (as with FDI). Constrained physical and human resources – absorptive capacity. Constrained physical and human resources – absorptive capacity.

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

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

Study Hypotheses e-commerce is related to market size. e-commerce is related to market size. Adoption is influenced by: 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. e-commerce has a positive effect on economic growth.

Endogenous Determination of e-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).

Physical Capital TelecomInfrastructure E-commerce Human Capital Market Size Economic Growth

Data Sample size: Sample size: -i) 205 states – 129 > 3m, 76 3m, 76 < 3m. -ii) 126 states – 93 > 3m, 33 3m, 33 < 3m. e-commerce adoption – Internet hosts. e-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 2000

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)

Composite Measure of Investment Factor analysis 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 Specification

Model Specification 1

Model Specification 2

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.

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