Spatial internet spillovers in manufacturing

Does local internet diffusion spur manufacturing firm performance in developing countries? To answer this question, we conduct instrumental variable estimations, using repeated cross-section data on 40,154 manufacturing firms from 91 developing and transition economies, and find that a 10 percentage-point increase in the incidence of email use in locations where firms operate, raises by 36% their sales and sales per worker. This evidence turns out to be driven by the local dissemination of email technology within industries, rather than across industries. This higher performance in manufacturing is also found to be accompanied by output diversification, driven by inter-industry spillovers, and work-force contraction, driven by intra-industry ones. However, we further provide evidence of U-shaped inter-industry spillovers, i.e. negative inter-industry spillovers turning positive once the email incidence threshold reaches ∼ 50% of the local universe of firms, suggesting that network effects are at play. Last, these threshold effects seem related to the presence of outward-oriented firms, which tend to operate in places where internet is more diffused. Overall, this paper shows that local industrialisation paces may diverge between poorly and highly digitalised environments.