Committed to Connecting the World
The Impact of Broadband
on the Economy:
Research to Date and
Policy Issues
Dr. Raúl L. Katz,
Adjunct Professor, Division of Finance and Economics,
and Director, Business Strategy Research,
Columbia Institute of Tele-information
10th Global Symposium for Regulators
“Enabling Tomorrow’s Digital World”
Dakar, Senegal, 10 November 2010
The views expressed in this presentation are those of the author and do not necessarily reflect the opinions of the ITU or its Membership.
Broadband has multiple economic impacts
BROADBAND ECONOMIC IMPACT
Consumer
surplus
Residential
penetration
Direct
benefits
Household
income
Business
penetration
Broadband
deployment
Investment in
infrastructure
deployment
Total factor
productivity
Contribution
to GDP
growth and
employment
2
Research to date confirms the contribution to GDP growth but the
amount of impact varies widely
RESEARCH EVIDENCE OF BROADBAND IMPACT ON GDP GROWTH
1.6
1.50
1.4
1.2
1.38
1.21
Contribution to
GDP growth of 1.0
10% increase in
broadband 0.8
penetration
0.90
0.85 0.82
0.67
0.6
0.4
0.61
0.26 0.24
0.23
0.14
0.2
0.08
0.31
0.16
0.08 0.09
0.17
Lo
RESEARCHER
Qiang
Czernich
/INSTITUTION World Bank U. Munich
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Waverman
LECG
Koutroumpis
Imperial C.
Katz
U. Columbia
3
However, these estimates are consistent with growing evidence of
increasing returns to broadband penetration
INCREASING BROADBAND IMPACT ON GDP GROWTH
0.025
0.0045
High penetration
0.02
0.0035
0.003
0.015
0.0025
0.002
0.01
0.0015
0.001
0.005
Cluster average impact on growth
Country Average % Impact of BB on
growth
0.004
•Denmark, Norway,
Netherlands, Sweden,
Switzerland
•Average contribution
to GDP growth: 0.023
0.0005
33
%
30
%
25
%
24
%
22
%
22
%
21
%
17
%
16
%
0
14
%
•Greece, Portugal, Italy,
New Zealand, Austria,
Hungary, Spain, Ireland
•Average contribution to
GDP growth: 0.008
0
7%
Low penetration
Broadband Penetration (2007)
Medium penetration
Source: adapted from Koutroumpis (2009)
•Germany, France, Japan, Belgium, UK,
Australia, US, Canada, Luxemburg
•Average contribution to GDP growth: 0.014
4
Broadband impact on job creation comprises two effects
IMPACT OF BROADBAND CONSTRUCTION
DEPLOYMENT OF
BROADBAND
DIRECT JOBS
INDIRECT JOBS
INDUCED JOBS
Employment
generated in the short
term in the course of
deployment of network
facilities
Employment generated by
indirect spending (or
businesses buying and
selling to each other in
support of direct spending)
Employment generated
by household spending
based on the income
earned from the direct
and indirect effects
• Telecommunications
technicians
• Construction workers
• Civil and RF engineers
• Metal products workers
• Electrical equipment
workers
• Professional Services
• Consumer durables
• Retail trade
• Consumer services
IMPACT OF BROADBAND EXTERNALITIES
PRODUCTIVITY
INNOVATION
Employment
generated in the short
term in the course of
deployment of network
facilities
Employment generated
by indirect spending (or
businesses buying and
selling to each other in
support of direct
spending)
• Marketing of excess
inventories
• Optimization of supply
chains
VALUE CHAIN
RECOMPOSITION
Employment generated by
household spending based
on the income earned from
the direct and indirect effects
•New applications and
services
•New forms of commerce
and financial intermediation
• Outsourcing of services
• Virtual call centers
• Core economic
development clusters
5
Estimates from several countries indicate that broadband network
construction effects and multipliers are significant
NETWORK CONSTRUCTION EFFECTS OF BROADBAND
COUNTRY
UNITED
STATES
RESEARCHER
/ INSTITUTION
Katz (Columbia)
Atkinson (ITIF)
SWITZERLAND
Katz (Columbia)
GERMANY
Katz (Columbia)
UNITED
KINGDOM
Liebenau (LSE)
AUSTRALIA
Government
STIMULUS
INVEST.
(US$
million)
NETWORK DEPLOYMENT JOBS
ESTIMATE
DIRECT
INDIRECT
$ 6,390
37,300
31,000
$ 10,000
63,660
~$ 10,000
~80,000
~30,000
N.A.
$ 47,660
281,000
126,000
135,000
$ 7,463
76,500
$ 31,340
INDUCED
TOTAL
59,500
165,815
134,500
MULTIPLIERS
TYPE
I (*)
TYPE
II (**)
127,800
1.83
3.42
229,475
2.58
3.60
~110,000
1.38
N.A.
542,000
1.45
1.94
211,000
2.76
~200,000
(*) (Direct + indirect)/direct
(**) (Direct + indirect + induced)/direct
6
The contribution of broadband externalities to employment
comprises three simultaneous effects
+
Incremental
broadband
penetration
e-business
impact on firm
productivity
+
+
-
Macroeconomic
productivity
Enhanced
innovation
+
Impact on
employment
Impact on
employment
+
Impact on
employment
+
-/+
+
Outsourcing of
services
+
Displacement to
service sector
Note: This causality chain was adapted from a model originally developed by Fornefeld et al., 2008 in a report for the
European Commission
7
These effects result in different output and employment impact
depending on broadband penetration
High Broadband Penetration Regions
Low Broadband Penetration Regions
GDP
GDP
HI
Economic Impact
Economic Impact
HI
Employment
LO
Employment
LO
T+1
T+2
T+3
T+4
Increase in
BB
penetration
• High economic growth initially,
diminishing over time (“supply shock”
effect)
• New Economic Growth (innovation, new
services)
Increase in
BB
penetration
T+1
T+2
T+3
T+4
• High stable economic growth (“catch up”
effect)
•Capital/labor substitution limits employment
growth (“productivity effect”)
8
The importance of economic effects of broadband points to the
criticality of a policy tool kit aimed at maximizing adoption
●
National broadband plans outline coverage and service targets, assign spectrum to
maximize the impact of wireless broadband, focus on demand stimulation, define
competition policy, and tackle any potential supply obstacles
– Articulate a vision and create awareness within polity and civil society
– Coordinate policies and involvement from public and private sector
– Develop state policies
– Build ownership and accountability at the highest level of government
●
Competition policies aimed at stimulating private sector investment and innovation are
critical
●
At the same time, governments should acknowledge that they will need to intervene
– Address any market failures through universal service funds
– Alleviate investment constraints to stimulate private sector flows
– Potential entry as an investor of last resort
9
Coverage and service targets need to be defined on the basis of
rigorous analysis of level of investment and social and economic
returns
Coverage and service
targets
Existing
infrastructure
Infrastructure
gap
•
Modernization of
existing lines to deliver
target service levels
Deployment of new
lines to achieve
coverage targets
Required technology by
zone
•
•
Economic
benefits
•
•
•
•
Construction effect
(multipliers)
Contribution to GDP
growth
Job creation
Spill over effects
(innovation, new
business creation)
Consumer
surplus
•
•
•
Access to public
services and
information
Savings in transport
time
Health and education
services
Cost per line
Total investment
requirement
RETURN ON INVESTMENT
10
A broadband policy should also address the demand gap: why are
there households that could buy broadband but do not?
BROADBAND DEMAND GAP
Households
passed (*)
Households
connected
Demand
Gap
Australia
89 %
69 %
20 %
Denmark
96 %
76 %
20 %
France
100 %
77 %
23 %
Germany
98 %
58 %
40 %
Israel
100 %
83 %
17 %
Italy
95 %
55 %
40 %
Republic of Korea
100 %
93 %
7%
Spain
93 %
61 %
32 %
Sweden
100 %
89 %
11 %
United Kingdom
100 %
68 %
32 %
United States
92 %
62 %
31 %
Country
(*) Note: Household passed is defined as a residence where the broadband
network is deployed; this differs from connected, which means the residence
is linked to the network for provisioning the service.
REASONS FOR NOT ACCESSING TO
THE INTERNET AT ALL
Reasons
Percentage of
answers
United
States
United
Kingdom
Relevant ( lack of interest,
busy doing other tasks, other
reasons)
45 %
60 %
Price (the cost of broadband
is too high, does not have a
computer)
15 %
28 %
Service availability
16 %
14 %
Easy to use (difficulty – senior
citizen – physical handicap)
22 %
16 %
Sources: Horrigan, J. (2009); Ofcom (2008)
Sources: Analysis by the author, based on data from EU; FCC; BMWi;
OECD; PTS - Sweden; and Israel Minister of Communication .
11
Finally, it is imperative that fiscal policies affecting broadband
adoption be coordinated with national objectives
TAX PERCENTAGE OF TOTAL COST OF
OWNERSHIP OF MOBILE SERVICES
50
Turkey
40
35
Zambia
30
25
20
•
Brazil
Argentina
Tunisia
Tanzania
Mexico
South Africa
15
•
Malaysia
10
Taxation has a negative
impact on deployment of
mobile broadband: there is a
negative relation between
mobile taxes and 3G
handset penetration
If taxes limit adoption of
wireless broadband, they
ultimately affect economic
growth
5
51
49
47
45
43
41
39
37
35
33
31
29
27
25
23
21
19
17
15
13
11
9
7
5
3
0
1
Tax as a proportion of TCMO
45
Country Distribution
Source: Adapted from Katz et al. (2010c)
12
In summary…
●
Research evidence is consistently pointing to the positive economic of broadband
●
Data analysis also indicates that economic impact increases with broadband
penetration
●
Economic impact varies by region indicating that broadband deployment needs to be
carefully coordinated with economic development policies (training, firm relocation,
etc.) to maximize impact
●
Broadband policies are critical to maximize the economic impact of technology
(national broadband plans, competition policies, demand stimulation, alignment of
taxation with development and technology objectives)
●
Policy development needs to be based on rigorous economic analysis which requires
an important effort in data generation
13
14