What is driving businesses to adopt the use of the internet?

Few would contest that the internet revolution has saved us a lot of time keeping in touch with others and conducting searches. For firms, time saved is labor saved and this is particularly attractive in countries that have stricter labor laws. What I’m suggesting here is that stricter labor laws may encourage firms to adopt modern labor-saving technologies such as the internet and computers. In theory this could magnify the adverse effect of stricter labor laws on employment and wages documented in the literature. So what does the data tell us?

Figure 1 shows that the above story may be true for the Eastern Europe and Central Asia region (ECA). The percentage of firms that use email to communicate with clients and suppliers (from Enterprise Surveys, 2009) is significantly higher in countries with stricter labor laws, and this holds even when we account for differences across countries in firm-size, GDP per capita and other firm/country characteristics.

In sharp contrast, aspects of the business environment other than labor laws that increase firms’ cost of doing business tend to reduce email usage (figure 2). This is not surprising since a higher cost of doing business discourages investment in modern technology. But a rigorous analysis to ascertain or reject the internet-labor laws relationship is still required to properly understand how labor laws affect the choice of technology, employment and wages.

Source: Enterprise Surveys (2009) and Heritage Foundation. For labor laws, Figure 1 uses the Labor Freedom index (2005-08 averages). Quality of the overall business climate in Figure 2 is the average of all sub-indices of Index of Economic Freedom excluding labor regulation (2005-08 averages). Both of these variables are taken from Heritage Foundation’s Index of Economic Freedom.