BROADBAND ACCESS: All very useful but it doesn”t make UK firms more successful

Broadband use has no significant effect on the performance of firms – and policies designed to improve broadband access are unlikely to make firms more successful. That is the conclusion of new research by Professor Richard Kneller and colleagues to be presented at the Royal Economic Society''s annual conference 2015.

Their study tests for the direction of causation between the use of broadband and firm performance by exploiting a digital divide in the regional availability of ADSL broadband, where firms located one side of the street had access to broadband services while those on the other side did not.

This disparity in internet access stems from an historical accident, whereby telecommunications in the area around Hull in North East England is delivered by a separate company (Kingston Communications) from the rest of the UK (British Telecom). As a result, firms located on opposite sides of this telecoms boundary received access to broadband at very different points in time and for reasons that have nothing to do with the quality or foresight of their managers.

During the five-year period in which the disparity of broadband access existed, firms with broadband access experienced a significant increase in broadband adoption (relative to firms on the opposite side of the divide), but this did not result in improved firm performance.

The researchers note that over the last decade, our home and work lives have been transformed by the increased availability of broadband internet. For firms this has meant greater connectivity with their customers and suppliers. Firms have responded by developing new business models, offering new types of products and services and by participating in increasingly complex international supply-chains.

Typically, those firms that have been the most active users of these technologies have been the ones that have been most successful, experiencing rapid growth in sales and employment. This has led some to conclude that broadband caused greater firm performance and therefore governments need to intervene to improve access to broadband.

But how confident can we be of that conclusion? It may just as likely be the case that successful firms, run by more proficient managers, were more likely to adopt and exploit the potential of broadband? If that is true, as this study suggests, then a policy with the sole purpose of improving broadband access will end up wasting taxpayers'' money.

The (Fuzzy) Digital Divide: The Effect of Broadband Internet Use on UK Firm Performance by Timothy DeStefano, Richard Kneller and Jonathan Timmis