Bridging the

1
Bridging the Digital Divide Information
Technology Growth in Small Developing States

• Robert Read
• Didier Soopramanien

2
IT Economic Growth Theory

• Endogenous growth theory suggests that IT has
  several types of impact
• Technology transfer learning-by-doing and
  leading edge technologies.
• Education - human capital and skills.
• Externality effects no diminishing returns to
  scale on investment

3
IT Economic Development

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

4
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.

5
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.
• This implies that IT has a critical role in the
  future growth of small states
• Subject to labour supply and skills constraints.

6
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.
• Small size reduces the spillover benefits of new
  technologies (as with FDI).
• Constrained physical and human resources
  absorptive capacity.

7
Potential of IT in Small States

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

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Impact of IT in Small States

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

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Study Hypotheses

• e-commerce is related to market size.
• 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.

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Endogenous Determination ofe-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).

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Physical Capital
Human Capital
Market Size
Telecom Infrastructure
E-commerce
Economic Growth
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Data

• Sample size
• - i) 205 states 129 gt 3m, 76 lt 3m.
• - ii) 126 states 93 gt 3m, 33 lt 3m.
• e-commerce adoption Internet hosts.
• Telecom infrastructure ITU.
• Human capital UNESCO.
• World Bank Development CD-ROM.
• All data is for 2000

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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)
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Composite Measure of Investment

CMI f (LnTel, LnEnrol, LnDGCF)
This is substituted into previous equations.
Factor analysis
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Model Specification
LnHosts f (CMI, LnGDP, other factors error
term)   LnGDP f (CMI, LnHosts, other factors
error term)
Model 1
LnHosts f (CMI, LnGDP, Small, other factors
error term) LnGDP f (CMI, LnHosts,
Small other factors error term)
Model 2
Small state is small 1 0 otherwise.
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Model Specification 1
17
Model Specification 2
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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.

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Conclusions

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