How to Overcome the Digital Divide? The Determinants of Internet Diffusion

We document the existence and the persistence of the digital divide and investigate the determinants of the Internet diffusion in both developing and developed countries. Our study innovates on the following: i) we use a data set that covers more countries and years than the earlier studies ii) We use the GMM estimator which requires milder assumptions to be consistent than the traditionally used panel data estimators in technology diffusion studies. We find that i) the digital divide is likely to persist over time, ii) the Internet diffusion process is dynamic which makes static estimators inconsistent, iii) Internet adoption starts later but goes faster in developing countries, iv) inflows of the foreign investment and better human capital boost the diffusion of Internet for the developing countries only and v) GDP per capita has a negative impact on Internet diffusion in the developing countries and a positive impact in developed countries. This last finding seems surprising but it is consistent with the conditional convergence hypothesis as well as with the resource curse theory.