Digital vulnerability and performance of firms in developing countries

Almost all coastal economies are now connected to the global Internet through over 300 telecommunications submarine cables (SMCs), so digital vulnerability is now shaped by two structural factors, independent from policy: exposure to broadband infrastructure outages and physical distance to these infrastructures, which increases exposure to network failures. We estimate the impact of Internet penetration on local firm performance by adopting an instrumental variable approach reflecting these two sources of digital vulnerability. Multilevel estimations are conducted over a sample of around 44,000 firms from about 250 locations in some 60 developing and transition countries. Results stress large impacts of higher Internet penetration rates at the location level, induced by lower digital vulnerability, on firms’ average revenue and labour productivity, and to a lesser extent, on temporary employment. This evidence is, amongst others, robust to the exclusion of exporters, big firms, foreign firms, and firms created after SMC arrival.