Tracing the adoption of digital technologies

Summary

Focus

In recent decades, expanding internet access has benefited economic development, particularly in emerging markets. At the same time, digital divides persist, excluding many people from the benefits of digitalisation. Factors like income inequality, market competition, quality improvements and affordability can influence the adoption of digital technologies. To narrow the digital divide, understanding the contribution of these factors to the adoption process is key.

Contribution

This paper analyses the adoption of smartphones, which are essential to access the internet in emerging markets. It builds a framework of demand and supply to identify the key factors that drive smartphone adoption. It also proposes policies to narrow the digital divide and expand smartphone adoption. This framework can be used to study the adoption of other digital technologies as well.

Findings

We find that the most important factors driving smartphone adoption in emerging markets are improvements in quality and changes in the income distribution of the population. A 10% expansion in the size of the smartphone market can be achieved by reducing the value added tax by 9 percentage points. The same adoption target can also be achieved by providing lower-income individuals with a targeted subsidy for smartphones.

Abstract

Internet-based digitalisation has ushered in a new wave of economic development in emerging markets, but persistent digital divides still exclude many from the benefits. To narrow these divides, it is important to understand the factors that shape the adoption of digital technologies. In this paper, I develop a structural model of consumer demand and supply to understand the main drivers of adoption of an essential digital technology: smartphones. Through counterfactual simulations, I quantify the role of growth in income and in income inequality, expansion of 4G network coverage, foreign entry, and improvements in device quality in shaping the smartphone market. I find that changes in the income distribution and in device quality are the most important factors driving smartphone adoption. I also provide a comparison of policies that can be used to spur smartphone adoption. I find that compared to ad valorem tax reductions and uniform subsidies, targeted subsidies are the least costly for the government and are the most effective for redistribution, being (almost) fully appropriated by consumers.

JEL classification: L10, L86, O33

Keywords: digitalisation, digital divide, technology adoption, demand estimation