The Effects of Internet Use on Productivity and Growth at the Firm Level

The internet is profoundly transforming every aspect of production and business processes. Firms now employ various applications of the internet for the purpose of marketing, supply-chain management, human resources management, and etc. Consequently, the use of internet can provide firms with an opportunity to enhance productivity and develop new goods and services. Even though the positive benefits of the internet on business activities seem to be obvious, there have been few empirical studies which carefully quantify the effects of the internet on firm performance. It is essential to explore firm-level data in order to understand the exact economic impact of internet use. This study investigates the effects of internet use on labor productivity, sales, and employment growths at the firm-level in Korea using data from the Survey of Business Activities for the period of 2006-2008. The survey is annually conducted by the Statistics Korea and covers all firms in both the manufacturing and service sectors, with more than 50 employees. The estimation sample includes 7,873 manufacturing firms and 4,346 service firms. The results of the study indicate that a firm using the internet in its production and business processes has about 1.5%p higher annual labor productivity growth rate and 0.6%p higher sales growth rate than a firm not using the internet. The results also suggest that the annual growth rate of employment for a firm using the internet is about 1.4%p higher than that for a firm not using the internet. The analysis on a subsample of manufacturing and service sector firms shows that the positive effects of internet use on the growth rates of labor productivity and sales are much more significant for manufacturing firms than for service sector firms. The effect of internet use on employment, on the other hand, is similar for manufacturing and services sector firms