The Impact of Institutional Change on Internet Diffusion in Small Transition Economies Meelis Kitsing PhD Candidate Department of Political Science University of Massachusetts Amherst

Coase Workshop 2004 Research Question How do institutions affect Internet diffusion in small transition economies?

Coase Workshop 2004 Why research the Internet diffusion? Public policy: enlargement of the European Union, the eEurope+ and eEurope programs, agendas of governments, international organizations and NGOs. Political economy of transition The performance of different political and economic systems (free markets vs. social democratic corporatism) Role of institutions in economic performance Market failures and public sector failures Trade, FDI and technology transfer

Coase Workshop 2004 Literature Per capita GDP and Internet diffusion (Arnum and Conti 1998, Kiiski and Pohjola 2001, Beilock and Dimitrova 2003). Infrastructure development and Internet diffusion (Arnum and Conti 1998, Beilock and Dimitrova 2003). Competition policy and Internet diffusion (Dasgupta et al 2001). Trade policy and technology transfer (Dollar 1993, Besley and Case 1993). Telecom sector regulation (Taylor 2002, Heimler 2000) Institutions and performance (North 1990, 1994). Political Economy of Transition (Balcerowicz 1995) Innovation and creative destruction (Schumpeter 1975)

Coase Workshop 2004 Hypothesis If the institutions increase overall economic openness in a country, the higher the potential to increase the number of Internet users per 10,000 inhabitants despite the country’s initial starting position, when holding everything else constant.

Coase Workshop 2004 Methodology A qualitative approach Dependent variable is Internet penetration Independent variables are institutions and their change Broad: Path of Transition, Political Economy System, FDI Regime, and Trade Policy. Sector-specific: Market Access in Telecom Sector, Privatization, Independence of Regulators. Dynamic analysis: initial starting position is taken into account.

Coase Workshop 2004 Explaining Internet Diffusion Geography Size of country Per capita GDP Political Openness Infrastructure (Main Telephone Lines) Number of personal computers Internet Access Costs Literacy

Coase Workshop 2004 Findings Little hope for specific Internet policy without broader changes. Broader institutional framework matters Open trade and FDI regime. Telecom sector specific institutions Independence of regulator – informal and formal. Credible commitments to market opening and avoiding regulatory capture. Privatization: not just if but how. Even if monopoly exist in voice telephony, then liberalization of other services (data transmissions, ISPs, backbone providers et al) is crucial.