From traveling businessmen and women using PDAs as movable offices to large consortiums sharing supercomputing capabilities around the globe, advanced Internet technology has revolutionized the business world. It has obviously had an economic impact, changing the very way that companies do business. But what exactly is the impact? And how can businesses and regional planning boards benefit from a better understanding of the interplay between a business’s location and its adoption of Internet technology?

In their article “How Did Location Affect Adoption of the Commercial Internet? Global Village vs. Urban Leadership” (Journal of Urban Economics, 2005), Shane Greenstein, a professor in the Kellogg School’s Management and Strategy Department, and co-authors Chris Forman (Carnegie Mellon University; graduate of the Kellogg School’s Managerial Economics and Strategy doctoral program) and Avi Goldfarb (University of Toronto; graduate of Northwestern’s Economics doctoral program) present the results of the first in-depth survey of the variation of advanced Internet use with geography on private, non-farm businesses.

“No one has ever before given a comprehensive picture across the whole range of the U.S. economy,” Greenstein says. The study evaluates two popular hypotheses about the economic impact of advanced Internet use. It provides important information for companies evaluating relocation options and for groups dedicated to stimulating regional economic growth.

The global village hypothesis parallels the “death of distance” concept first proposed by author Frances Cairncross in 1997. It suggests that the Internet will eliminate the impact of geographic distance from economic activity—businesses in Des Moines and Wichita will compete equally with those in Los Angeles and New York City.

The urban leadership hypothesis proposes that urban-based companies more quickly adopt and benefit from advanced technology because of greater access to complementary infrastructure and support services in urban settings. Thus, it suggests that a geographic divide, often called the “digital divide,” favors urban companies.

In order to determine the true impact of location on adoption, Greenstein and his co-authors had to distinguish simple, low-cost Internet uses, like e-mail and browsing, from more advanced applications, such as database management, shipment of goods, and e-commerce. Using a survey carried out in 2000 by Harte Hanks Market Intelligence (a commercial market research firm) of Internet use at 86,879 commercial establishments with 100 or more employees, the authors determined that 88.6% of establishments used simple Internet functions, such as e-mail and browsing, while only 12.6% used the more advanced applications. Urban-based businesses reported greater usage of advanced applications (14.7%) than rural businesses (10.6%). Table 1 summarizes the main findings.

Table 1: Main Findings by Purpose, Technology, and Location

“It’s literally true that e-mail is everywhere,” Greenstein says, confirming that the global village model accounts for simple Internet use. However, differences emerge in the evaluation of advanced applications and depend on whether companies communicate within their establishment or between geographically distinct establishments.

Costs associated with Internet functions rise with complexity. E-mail and browsing functions are relatively simple and low cost. The level of authentication and security required in communications between establishments, say to transfer funds or track product shipments, requires greater complexity and higher cost.

For simple communications between establishments, the global village hypothesis holds. The authors found that all establishments regardless of location willingly incur the costs needed to allow simple communication with other establishments. Isolated establishments are quick to adopt regardless of the higher costs of rural locations and, in fact, the net benefits of adoption increase as population size and density decrease.

However, when it comes to advanced communications within an establishment, the urban village hypothesis takes over and the high costs of installing and monitoring the technology become a greater hurdle for rural companies. In this case, urban-based companies benefit from the greater economies associated with higher population density. Also, IT-intensive industries tend to concentrate in urban centers, providing an additional layer of benefits to urban-based businesses relying on local support networks.

“It’s that contrast that we were really looking for,” Greenstein says. “And that’s what we found.” The authors discovered a distinction between the technologies that were ending isolation and those that were not. “The technologies that did not impact isolation followed the urban leadership hypothesis, just like we thought. But the applications that ended isolation were equally common everywhere. They did not appear to be sensitive to the costs that we knew to vary by location.”

These findings are important for companies seeking to lower costs and increase competitive advantage through location. “We’re now in an era where companies are choosing to relocate in response to how the Internet has changed the economic landscape,” Greenstein says. “But firms need to think about the frontiers of technology they want to use and why.”

For companies interested only in core technologies that allow advanced communication within an establishment, it is cheaper to locate in a major urban area. The cost savings can be “a big deal for companies starting from scratch,” Greenstein says. If companies require simple technologies to facilitate communication between locations, “there’s no advantage to urban areas as far as we can tell,” he says.

The results also convey an important message to planners seeking to encourage regional growth. “Our findings place a lot of importance on making sure the infrastructure is in place to permit smaller and isolated firms to take advantage of technology to communicate with urban centers,” Greenstein says. If local labor markets cannot support smaller companies, these companies will not be able to overcome the distance—and IT-related economic growth could stall.

Further reading
Cairncross, Frances. The Death of Distance: How the Communications Revolution Will Change Our Lives. Boston: Harvard University Press, 1997.