The Internet and Trade

Abstract: This paper aims to assess the effects of internet usage on bilateral trade volumes. Increasingly companies are conducting business online. If the effect of an increased internet usage on trade is positive then it would be yet another reason for policy makers to invest in the development and expansion of IT infrastructure. Three main models are specified using the fixed effects estimator, including the least squares estimator and a Poisson maximum likelihood estimator. This paper uses an extensive panel data set of 180 countries and the most recent internet usage data available (2000-2014) to examine the effects of internet usage on bilateral trade. By using a gravity model specification the results are indicating a significant positive relationship between internet usage and bilateral trade performance. The effect is larger when more weight is given to countries with smaller internet usage rates. The spatial relationship of this effect is also examined via a Hausman-Taylor estimation and a random effects model. The results from these models indicates that there is a proximity effect, the larger the distance between trading countries, the smaller the effect of internet usage on trade.