The Social Rate of Return of Mobile Broadband Infrastructure Investment

The social rate of return of mobile broadband infrastructure is an important indicator for informing the allocation of public and private capital to the telecommunications sector, yet no estimates are currently available in the literature. The consensus in the literature is that to estimate the social rate of return of infrastructure one must combine two components: first, the value added of the infrastructure to the economy (or numerator of the rate of return); and second, the incremental cost of infrastructure expansion.In recent years, significant literature has begun to accumulate measuring the output elasticity of broadband infrastructure (Vergara Cobos and Malasquez, 2023). Using cross-country panel data econometrics and micro-econometric approaches, reliable estimation of the marginal product associated with rising service penetration is possible. On the other hand, there has been substantial progress in modeling the global cost of mobile broadband infrastructure deployment (Oughton, 2023), enabling evaluation of system marginal cost at the country level. This paper brings both strands of the literature together to estimate the social rate of return for investments in (primarily) 4G mobile networks, adapting a methodology first used by Canning and Bennathan (2000) for the electricity and transport sectors. The paper contributes to the literature by exploring how both the marginal product and the marginal cost of mobile broadband infrastructure investment evolve as penetration rises. We enhance this previous method in two ways. Firstly, by estimating the causal effect of mobile broadband infrastructure on economic output (GDP) via a General Method of Moments – Instrumental Variable (GMM-IV) technique. Secondly, by calculating the marginal cost of mobile broadband infrastructure using demand forecasting and remote sensing, following Oughton (2023).The social rate of return of mobile broadband investment is of high importance because it informs the cost-benefit analysis of future investment policy decisions. Consistent with economic theory, the paper finds that the marginal product of mobile broadband infrastructure declines at higher levels of penetration, while the marginal cost increases. This leads to very high rates of return (40-60%) for investments at very low levels of penetration (10%), declining rapidly to modest rates of return (<10%) at very high levels of penetration (90-100%). This is consistent with the findings of Canning and Bennathan (2000) of significant excess returns to infrastructure investment in countries with large infrastructure constraints. The research also indicates that at any level of penetration, social rates of return to investments in broadband networks are higher for countries in higher income brackets. Again, this mirrors similar results in the literature that state that returns to energy infrastructure are lower in lower income countries (LICs)