Digital connectivity and firm participation in foreign markets: An exporter-based bilateral analysis

Abstract

This paper studies how the bilateral digital connectivity resulting from the deployment of telecommunications SubMarine Cable (SMC) affects firm participation in export markets. Based on a heterogeneous firm model and using an unbalanced panel of bilateral trade data across 48 countries during the period 1997–2014, we find that an SMC connection between two countries is associated with an increase in the number of bilateral exporters in developed countries, together with a reduction in the number of bilateral exporters in developing countries. This negative association between bilateral connectivity and firm participation in export markets appears to be stronger in the poorest developing areas, where firms have lower digital absorptive capacity: Middle East & North Africa and Sub-Saharan Africa. The growth in world connectivity spurred by SMCs deployment has therefore had a heterogeneous effect on firms’ decision to export, pushing more firms from high-income countries to enter export markets and some incumbent exporters from lower-income countries to exit them.