On the Effect of the Internet on International Trade

43 Pages Posted: 9 May 2001

See all articles by Caroline L. Freund

Caroline L. Freund

World Bank - Macro, Trade and Investment

Diana Weinhold

London School of Economics & Political Science (LSE) - Department of International Development

Date Written: December 2000

Abstract

The Internet stimulates trade. Using a gravity equation of trade among 56 countries, we find no evidence of an effect of the Internet on total trade flows in 1995 and only weak evidence of an effect in 1996. However, we find an increasing and significant impact from 1997 to 1999. Specifically, our results imply that a 10 percent increase in the relative number of web hosts in one country would have led to about 1 percent greater trade in 1998 and 1999. Surprisingly, we find that the effect of the Internet on trade has been stronger for poor countries than for rich countries, and that there is little evidence that the Internet has reduced the impact of distance on trade. The evidence is consistent with a model in which the Internet creates a global exchange for goods, thereby reducing market-specific sunk costs of exporting.

Keywords: sunk costs, world wide web, gravity equation, digital divide

JEL Classification: F1

Suggested Citation

Freund, Caroline L. and Weinhold, Diana, On the Effect of the Internet on International Trade (December 2000). FRB International Finance Discussion Paper No. 693. Available at SSRN: https://ssrn.com/abstract=260238 or http://dx.doi.org/10.2139/ssrn.260238

Caroline L. Freund (Contact Author)

World Bank - Macro, Trade and Investment ( email )

1818 H Street, N.W.
MC3-329
Washington, DC 20433
United States
(202)458-0847 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/cfreund

Diana Weinhold

London School of Economics & Political Science (LSE) - Department of International Development ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
(44) 171-955-6331 (Phone)

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