Wednesday, 1 June 2011

Broadband and productivity

New Zealand is to spend billions of dollars on ultra-fast broadband (UFB) and I have to ask why? Often the answer is that UFB will increase productivity and lend to greater employment.
The productivity boost from that investment would add 1.8 percent to GDP and create 70,000, the minister has said.
But will it? Below is the abstract from a Motu Working Paper, “The Need for Speed: Impacts of Internet Connectivity on Firm Productivity" by Arthur Grimes, Cleo Ren and Philip Stevens (Motu Working Paper 09-15 Motu Economic and Public Policy Research October 2009):
Fast internet access is widely considered to be a productivity-enhancing factor. Internet access speeds vary regionally within countries and even within cities. Despite articulate pleas for network upgrades to accelerate internet access, there is little rigorous research quantifying benefits to individual firms that arise from upgraded internet connectivity. We use a large New Zealand micro-survey of firms linked to unit record firm financial data to determine the impact that differing types of internet access have on firm productivity. Propensity score matching is used to control for factors, including the firm’s (lagged) productivity, that determine firms’ internet access choices. Having matched firms, we examine the productivity impacts that arise when a firm adopts different types (speeds) of internet connectivity. Broadband adoption is found to boost productivity but we find no productivity differences across broadband type. The results provide the first firm-level estimates internationally of the degree of productivity gains sourced from upgraded internet access.
The paper's conclusion reads, in part,
After estimating our prediction models for connectivity choices, we match each “treated” firm with a set of like “control” firms (both in terms of their estimated propensity to have broadband and on their observable characteristics). Two types of matching (kernel and stratified) are adopted to check robustness of results. We then estimate the average treatment effect for treated firms (ATT) across a range of samples. We focus on ATTs relating to shifts from: (i) broadband versus no broadband, (ii) slow versus no broadband, and (iii) fast versus slow broadband. We find a (levels) productivity effect of broadband relative to no broadband of approximately 10% across all firms. The estimates indicate a marginally stronger impact on firm productivity for firms in rural (low population density) relative to urban (high density) areas but the differences are not significantly different. Our estimates show that all of these productivity gains can be attributed to adoption of slow relative to no broadband, with no discernable additional effect arising from a shift from slow to fast broadband. (Emphasis added)
Thus we conclude that a shift to broadband connectivity (from dial-up) appears to raise firm productivity but a move from slow to fast broadband may have no effect on productivity at all.

A similar note is struck by Bronwyn Howell and Arthur Grimes ("Feeding a Need for Speed or Funding a Fibre ‘Arms Race’? Productivity Questions for FTTH Network Financiers", New Zealand Institute for the Study of Competition and Regulation, April 2010) when they write:
Fast internet access is widely considered to be a productivity-enhancing factor. However, despite promises of substantial gains from its deployment, the evidence from recent empirical studies suggests that the productivity gains may not be as large as originally hypothesised. If substantiated, these findings suggest that current government plans to apply significant sums to bring forward the deployment of fast fibre networks (e.g. in both Australia and New Zealand) may ultimately be unlikely to generate returns to the extent anticipated by their sponsors.
So, again, why are we spending billions on ulta-fast broadband? If we are to spend huge amounts of money on UFB I would at least want to know that there are good reasons for doing so. I'm not sure increases in productivity is such a reason.


Anonymous said...

I have wondered the same thing myself. The IT and telecommunication industries and similar, seem to have captured govt in order to achieve huge subsidies. I suspect by far the largest use of UFB will be donwnloading TV and movies - hard seems right to burden the taxpayer with the bill for this.

Anonymous said...

The wonderful causality effect is alive and well and flying in the face of excellent research, common logic and market forces.

The government have their cause and effect backwards (ie: high GDP countries have high speed broadband, therefore if we have high speed broadband we will have high GDP).

To be fair though we look to politicians for the silver bullet - and let's extend the metaphor a little further, with the wrong target in mind NZ will never hit the bull’s-eye of high GDP!