- freely available
Economies 2014, 2(1), 78-94; doi:10.3390/economies2010078
Abstract: The effects of Internet education on economic growth are examined using a cross
- freely available
Economies 2014, 2(1), 78-94; doi:10.3390/economies2010078
Abstract: The effects of Internet education on economic growth are examined using a cross-section of 36 high-income countries. Internet usage rates are employed as a proxy for Internet education across countries. Regression results show that the frequent usage of the Internet has a positive and significant effect on economic growth. The estimated growth effect of Internet skills is also found to be greater than the growth effect of math and science skills. The results are, in general, robust across model specifications.
That the information technology (IT) can importantly influence the domestic economy is now widely recognized. The ‘IT-led growth’ suggests that investments in IT industries enhance labor productivity, and hence, the economies equipped with computer-related technologies grow faster than other countries. Oliner and Sichel  and Jorgenson  find that the sustained growth of the U.S. economy in the late 1990s is largely related to the increased investment in IT industries. Schreyer  and Daveri  also find similar results for other developed economies.
However, the growth effects found for developed economies often cannot be generalized to less developed countries (LDCs). For example, Kraemer and Dedrick, Dewan and Kraemer [6,7] and Pohjola  find that the growth effects of IT are small and insignificant for LDCs, perhaps due to inadequate IT investments in developing countries. Surveys of other empirical evidence are found in Dedrick, et al., Indjikian and Siegel  and Shih, et al.. All these studies use the amount of investment in computer hardware as a separate form of physical capital within an aggregate production function framework, which is a sharp contrast to our use of Internet education as human capital in growth models.
2. Literature on Internet Education and Economic Growth
Education in Internet skills enhances the productivity of the future labor force, which, in turn, helps promote economic growth. These days, more countries are increasing investments in information and communication technologies (ICT). New investments in such high-tech industries may require more capital than labor, and hence, the marginal rate of technical substitution (MRTS), which is the ratio of marginal productivities of labor and capital, would be relatively high. The high MRTS suggests that labor is more productive in such capital-intensive countries. The high productivity of labor is largely due to human capital, such as being educated Internet skills. In this case, marketing and management skills are also highly developed in industrialized countries, and thus the production process will be more efficient. The Internet skills of the labor force are thus treated here as human capital which is regarded as an advancement in total factor productivity.
More specifically, average Internet usage rates can be used as a measure of Internet skills in each country. A rapid increase of computer-related technology in recent years makes the Internet a central force of technology advancement. For example, most industrialized countries that have a rapid growth in frontier technologies are closely related to higher usage rates of the Internet. Late comers, such as East Asian economies with a higher percentage of the labor force that utilizes the Internet, also tend to learn advanced technologies overseas faster than other countries. This suggests that the percentage of Internet users in each country can be used as a quality measure of human capital alongside Hanushek and Kimko’s  index of math and science skills. Litan and Rivlin  described the benefits of the Internet at an industry level; Czernich, et al.  investigated the significant effects of broadband infrastructure on economic growth; Miranda and Lima  quantitatively analyzed the evolution of the Internet over the past two decades. No studies have discussed the role of Internet education in the growth of nations.1
This paper thus investigates empirically the effects of Internet skills on economic growth employing a cross-section of 36 high-income countries. The average annual usage rates of Internet over time are employed here as a proxy for different levels of Internet skills of the labor force across countries. Employing the Internet usage rates as a quality measure of human capital offers two large advantages. First, most empirical studies in the growth literature used schooling—the quantity measure of education, assuming that the quality of education is constant across countries (Barro, ; Mankiw, et al. ; Islam,, among others). However, Internet skills—the quality measure of education—differ across countries and suggest why some countries have a rapid growth in advanced technologies and thus a subsequent economic growth faster than other countries. Second, we can directly compare a relative size of the growth effects of two different quality measures of human capital: one is the growth effect of proficiency in high school math and science (Hanushek and Kimko ; Hanushek and Woessmann [20,21]); the other is the growth effect of Internet usage rates that are used here as a measure of the Internet skills of the future labor force.
3. Empirical Model and Dataset
Following Bosworth and Collins, our empirical model is specified based on a Cobb-Douglas production function in which output is a function of capital, labor, and a term for total factor productivity:
We divide both sides of the production function by labor L:
With this framework, the growth in output per worker is decomposed of the contributions of an improvement in total factor productivity, growth in capital per worker and increases in educational attainment per worker. Because total factor productivity is not directly observable, it is measured indirectly. That is, total factor productivity is the amount of output growth that remains after we have accounted for the determinants of growth that we can measure directly. This is sometimes called the Solow residual.
The capital-labor ratio is replaced by the initial level of income that determines the speed of convergence. The convergence hypothesis is based upon diminishing returns to reproducible capital. In other words, poor countries with low capital-labor ratios are able to grow faster than rich countries, because the marginal productivity of capital is relatively high in lower-income economies. The hi