In this paper, we study the spatial spillover effects of internet usage on manufacturing output. Using repeated cross-section datasets of 40,154 manufacturing firms located in 91 developing and transition economies, we adopt an original shift-share instrumental variable set-up, and find that a greater diffusion of email technology in locations increases manufacturing firm’s sales and productivity. This result is driven by local email dissemination within industries, supporting the existence of network or knowledge spillover effects among proximate firms, engaged in similar or interlinked activities. By contrast, the dissemination of email technology across other industries located in the same place reduces manufacturing firms’ performance. However, these inter-industry spillovers are U-shaped, indicating that they remain negative below a local email incidence threshold established at approximately 50% of the local universe of firms, and turn positive only once this threshold is reached. Last, we find that positive Internet spillovers are mediated by firm’s own use of the internet technology, and by its absorptive capacity, reflected by its share of skilled production workers, its multi-plant status, and its maturity.