Spatial Internet Spillovers in Manufacturing

Does local internet diffusion spur manufacturing performance in developing countries? To answer this question, we conduct instrumental variable estimations, using repeated cross-section data on 44,073 manufacturing firms from 109 developing and transition economies, and find large positive spillover effects of local email incidence on manufacturing firms sales and sales per worker. This evidence is driven by the local dissemination of email technology within industries rather than across industries. However, further analysis stresses that inter-industry spillovers are actually U-shaped, that is, negative at low email incidence rates but turning positive once incidence reaches approximately 50% of the local universe of firms. This suggests that local internet spillovers across industries are subject to network effects. Last, these threshold effects seem related to the presence of outward-oriented firms, which are known to exhibit higher digital absorptive capacity. Overall, this paper shows that local industrialisation paces may strongly diverge between poorly and highly digitalised environments.