Breaking Invisible Barriers : Does Fast Internet Improve Access to Input Markets ?

Overview & Synopsis

Why is aggregate productivity lower in developing countries? This paper argues that a key part of the answer lies in information frictions that distort domestic production networks and hinder efficient supplier matching. It uses theory and empirics to study how such frictions constrain firm-to-firm trade and distinguishes two channels through which they operate: communication frictions, the cost of transmitting known information, and information acquisition frictions, the cost of discovering and evaluating suppliers. Combining firm-to-firm transaction data from Türkiye with rollout of fiber-optic cable, instrumented by proximity to a preexisting infrastructure, we show that improved connectivity reshapes production networks along two margins: firms reallocate input purchases toward better-connected provinces and diversify their supplier base within those provinces. A spatial model with endogenous production networks is developed and estimated in which communication cost reductions drive reallocation across origins and information cost reductions broaden firms’ supplier sets. Counterfactuals show that easing these frictions through fiber expansion generates sizeable welfare gains, high-lighting the quantitative importance of information frictions for aggregate productivity.