CRTP-3

Modern Telecommunications Infrastructure and Economic Activity: An Empirical Investigation

Shane M. Greenstein and Pablo T. Spiller
April 1995

That improvements to infrastructure lead to more economic activity is not a controversial 
statement, but the magnitude of the gains from infrastructure investment or modernization 
are unknown. This study focuses on one type of infrastructure, telecommunications, and 
measures its impact. There is considerable debate today about the economic merits of 
modernizing the network to the technical frontier allowed by digital technologies. 

Two sectors are considered: (1) Fire, Insurance, and Real Estate, and (2) Manufacturing. 
Results show that the modernization of the telephone network is associated with more 
Fire, Insurance, and Real Estate activity in the local region, while it is not associated
with more manufacturing. Once other determinants for growth are controlled for, a doubling 
of fiber optic cable leads to at least a ten percent, possibly even much higher, increase 
in the level of economic activity in Fire, Insurance, and Real Estate. This relationship 
persists in all specifications and samples. This result implies that the level of 
modernization of a telecommunications network has an economically important influence 
on the amount of high-tech white collar activity in a region, while it is less important 
for manufacturing activity which typically employs less modern telecommunications services.