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”“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.

2

Broadband has multiple economic impacts

Broadband

deployment

Direct

benefits

Investment in

infrastructure

deployment

Residential

penetration

Consumer

surplus

Household

income

Business

penetration

Total factor

productivity Contribution

to GDP

growth and

employment

BROADBAND ECONOMIC IMPACT

3

Research to date confirms the contribution to GDP growth but the

amount of impact varies widely

1.38

1.21

1.50

0.900.85 0.82

0.670.61

0.230.14

0.08

0.26 0.240.16

0.08 0.09

0.31

0.17

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Low-M

ed. I

ncom

e

High

Inco

me

OECD-H

igh

OECD-L

ow UK

US

Franc

e

Ger

man

y

OECD-H

igh

OECD-M

ed.

OECD-L

ow

Ger

man

y-High

Ger

man

y-Lo

w

L. A

mer

ica

Bra

zil

Chile

Indi

a

Mal

aysia

RESEARCH EVIDENCE OF BROADBAND IMPACT ON GDP GROWTH

Contribution to

GDP growth of

10% increase in

broadband

penetration

KatzKou-

troumpis

Waver-

manCzernichQiang

World Bank U. Munich LECG U. ColumbiaImperial C.

RESEARCHER

/INSTITUTION

4

However, these estimates are consistent with growing evidence of

increasing returns to broadband penetration

0

0.005

0.01

0.015

0.02

0.025

7% 14%

16%

17%

21%

22%

22%

24%

25%

30%

33%

Broadband Penetration (2007)

Co

un

try A

vera

ge %

Im

pact

of

BB

on

gro

wth

0

0.0005

0.001

0.0015

0.002

0.0025

0.003

0.0035

0.004

0.0045

Clu

ste

r avera

ge i

mp

act

on

gro

wth

Source: adapted from Koutroumpis (2009)

Low penetration•Greece, Portugal, Italy,

New Zealand, Austria,

Hungary, Spain, Ireland

•Average contribution to

GDP growth: 0.008

Medium penetration•Germany, France, Japan, Belgium, UK,

Australia, US, Canada, Luxemburg

•Average contribution to GDP growth: 0.014

High penetration•Denmark, Norway,

Netherlands, Sweden,

Switzerland

•Average contribution

to GDP growth: 0.023

INCREASING BROADBAND IMPACT ON GDP GROWTH

5

DEPLOYMENT OF

BROADBAND

IMPACT OF BROADBAND CONSTRUCTION

IMPACT OF BROADBAND EXTERNALITIES

Broadband impact on job creation comprises two effects

DIRECT JOBSEmployment

generated in the short

term in the course of

deployment of network

facilities

INDIRECT JOBSEmployment generated by

indirect spending (or

businesses buying and

selling to each other in

support of direct spending)

INDUCED JOBSEmployment 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

PRODUCTIVITYEmployment

generated in the short

term in the course of

deployment of network

facilities

INNOVATIONEmployment generated

by indirect spending (or

businesses buying and

selling to each other in

support of direct

spending)

VALUE CHAIN

RECOMPOSITIONEmployment generated by

household spending based

on the income earned from

the direct and indirect effects

• Marketing of excess

inventories

• Optimization of supply

chains

•New applications and

services

•New forms of commerce

and financial intermediation

• Outsourcing of services

• Virtual call centers

• Core economic

development clusters

6

Estimates from several countries indicate that broadband network

construction effects and multipliers are significant

COUNTRY

RESEARCHER / INSTITUTION

STIMULUS INVEST.

(US$ million)

NETWORK DEPLOYMENT JOBS ESTIMATE

MULTIPLIERS

DIRECT INDIRECT INDUCED TOTAL TYPE I (*)

TYPE II (**)

UNITED STATES

Katz (Columbia)$ 6,390 37,300 31,000 59,500 127,800 1.83 3.42

Atkinson (ITIF)$ 10,000 63,660 165,815 229,475 2.58 3.60

SWITZERLAND Katz (Columbia)~$ 10,000 ~80,000 ~30,000 N.A. ~110,000 1.38 N.A.

GERMANY Katz (Columbia)$ 47,660 281,000 126,000 135,000 542,000 1.45 1.94

UNITED KINGDOM

Liebenau (LSE)$ 7,463 76,500 134,500 211,000 2.76

AUSTRALIA Government$ 31,340 ~200,000

6

(*) (Direct + indirect)/direct

(**) (Direct + indirect + induced)/direct

NETWORK CONSTRUCTION EFFECTS OF BROADBAND

77

The contribution of broadband externalities to employment

comprises three simultaneous effects

Incremental

broadband

penetration

e-business

impact on firm

productivity

Macro-

economic

productivity

Impact on

employment

Enhanced

innovation

Impact on

employment

Outsourcing of

servicesDisplacement to

service sector

Impact on

employment

+

+

+

+

+ +

+

-/+

-

-

Note: This causality chain was adapted from a model originally developed by Fornefeld et al., 2008 in a report for the

European Commission

+

8

These effects result in different output and employment impact

depending on broadband penetration

T+1 T+2 T+3 T+4

Ec

on

om

ic Im

pa

ct

HI

LO

GDP

Employment

T+1 T+2 T+3 T+4

Ec

on

om

ic Im

pa

ct

HI

LO

GDP

Employment

High Broadband Penetration Regions Low Broadband Penetration Regions

• High economic growth initially,

diminishing over time (“supply shock”

effect)

• New Economic Growth (innovation, new

services)

• High stable economic growth (“catch up”

effect)

•Capital/labor substitution limits employment

growth (“productivity effect”)

Increase in

BB

penetration

Increase in

BB

penetration

99

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

10

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

Cost per line

Total investment

requirement

Consumer

surplus

Economic

benefits

• Construction effect

(multipliers)

• Contribution to GDP

growth

• Job creation

• Spill over effects

(innovation, new

business creation)

• Access to public

services and

information

• Savings in transport

time

• Health and education

services

RETURN ON INVESTMENT

1010

11

A broadband policy should also address the demand gap: why are

there households that could buy broadband but do not?

BROADBAND DEMAND GAP

Country

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 %

(*) 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.

Sources: Analysis by the author, based on data from EU; FCC; BMWi;

OECD; PTS - Sweden; and Israel Minister of Communication .

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)

12

Finally, it is imperative that fiscal policies affecting broadband

adoption be coordinated with national objectives

Source: Adapted from Katz et al. (2010c)

0

5

10

15

20

25

30

35

40

45

50

1 3 5 7 9

11

13

15

17

19

21

23

25

27

29

31

33

35

37

39

41

43

45

47

49

51

Ta

x a

s a

pro

po

rtio

n o

f T

CM

O

Mexico

TAX PERCENTAGE OF TOTAL COST OF

OWNERSHIP OF MOBILE SERVICES

Malaysia

Brazil

South Africa

Zambia

Turkey

Tanzania

ArgentinaTunisia

• 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

Country Distribution

1313

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

14