Digital infrastructure has become a key component of 21st century policy agendas aimed at promoting inclusive growth and economic development. Similar to many trade policies, positive aggregate effects do not necessarily imply that all communities gain equally, especially as digital development interacts with existing frictions and inequalities (Foster et al., 2017). This project asks how improvements in Internet infrastructure affect domestic firm-to-firm trade and firm dynamics in Kenya. It studies how changes in connectivity impact the degree of domestic market integration and how potential welfare gains from investments in Internet infrastructure are distributed across localities.
The project combines a model of spatial production networks with detailed firm- and transaction-level data to address the proposed questions. It first complies a comprehensive dataset tracking changes in Internet infrastructure, quality, and reliability over time for East Africa’s largest economy. The data will then be linked with large scale administrative panel data covering formal private sector firms and their firm-to-firm relationships. The resulting data set will be used to test policy-relevant predictions of the model, leveraging transformative upgrades to Internet infrastructure in Kenya which primarily affected periphery firms and made reliable internet more affordable for businesses. The data will also be used to calibrate key parameters of the model and run counterfactuals to study aggregate welfare implications of relevant policy options.
The first policy implication of the project relates to the extent to which governments should engage in the roll-out of upgrades to Internet infrastructure. Such upgrades include the expansion of the fibre network, which is critical for both fixed broadband coverage and (relatively cheaper) fixed LTE, or future upgrades to 5G technology. Policy options that increase the speed of upgrades versus those that ensure universal coverage might come with trade-offs. Government-led investments and subsidies require scarce fiscal resources, while coverage mandates ask for resources from network providers. The second policy implication relates to policies that are effective in promoting domestic market integration, which are critical for companies operating in industries where economies are of scale and market size is key. A key goal of the project is to examine the extent to which greater connectivity can overcome existing barriers to more integration and domestic trade.