Estimating the effect of the Internet on international trade

This paper estimates the effect of the Internet on promoting international trade. The Internet can reduce the information cost for traders. We study the effect of the Internet on trade by augmenting the gravity equation with the Internet. The empirical results show that a 10% increase in the Internet users increases international trade by 0.2%–0.4%. The results are not sensitive to circumstances such as adding time-varying country fixed effects into the gravity and controlling for infrastructure measures. The results do not seem to be resulting from some small subset of the data and the results are robust to considering zero trade flows. Furthermore, our results are not driven by the time series variation of the panel data either. To address the endogeneity issue, we use the civil liberty index from the Freedom House as an instrument, system-GMM (generalized method of moments) approach and heteroskedasticity identification strategy, and the results still show strong effect of the Internet on trade improvement.