Revisiting Solow's Productivity Paradox: Internet Use and Firm Performance in Africa and Latin America

Abstract

Over the last decade, Internet penetration in the developing world has proceeded at an astounding rate, following a leaps and bounds trajectory in which certain stages of technological development have been bypassed altogether. This development mirrors a similar explosion of Information and Communications Technologies (ICTs) decades ago in the developed world, one that economist Robert Solow famously dismissed as immaterial in the formulation of his so-called productivity paradox, the observation that the rise of computing capacity did not increase productivity. This paper studies a modern quandary in Solow's productivity paradox, assessing the linkages between Internet use and rm-level productivity in low- and middle-income countries. I use data from across 12 countries in Africa and Latin America, collected as part of the World Bank Enterprise Surveys. Using panel estimation strategies to account for unobserved rm characteristics over time, I nd that manufacturing rms that use the Internet experience a productivity boost on the order of 20-24% relative to their peers that do not. When broken down by geography, results remain signi cant only in Latin America. The ndings suggest, then, that network externalities are an important prerequisite for the productivity impacts of the Internet to be felt, and that poor infrastructure continues to hinder entrepreneurs in the developing world. Implications are profound for business managers operating in constrained environments, as well as for policy makers looking to jumpstart economic development through technological innovation.