Digital Infrastructure

Digitization is advancing and requires increasingly powerful digital infrastructure. To this end, European and national funding measures are aimed at the rapid and wide-reaching development of such digital infrastructure. By the year 2020, urban and rural areas all across Europe are set to enjoy download speeds of at least 100 Mbps. Germany is pursuing the same goal for mobile internet as well by 2022 as part of the 5G rollout. Research findings by the ifo Institute show that leading up to 2007, the initial rollout of broadband technology gave rise internationally to substantial growth effects. However, whether digital infrastructure is used to its full potential will depend not only on its penetration and availability, but also to a great extent on the intensity of use. Currently, demand for high bandwidth in Germany lags well behind availability.

Digital Infrastructure Promotes Economic Growth

The diffusion of broadband internet between the years 1996 and 2007 had an economically significant and robust growth effect, as shown in an ifo study by Oliver Falck, Ludger Wößmann, and co-authors that examines economic growth in 25 OECD countries. Using an instrumental variable approach enables them to isolate the impact of the internet on the economy from that of parallel developments, such as increasing use of computers and the spread of mobile technology. This shows that the introduction and use of broadband technology is a significant contributor to per capita economic growth. For example, an increase in the broadband user rate of 10 percentage points would increase annual GDP growth per capita by 0.9–1.5 percentage points.

Digital Infrastructure Promotes ICT Skills

The availability of digital infrastructure also promotes the acquisition of valuable ICT skills among the general population, based on the learning-by-doing mechanism of using new technologies at home or at work. In another ifo study, Falck and his co-authors use new data from the PIAAC study (an international comparative study to assess the key competencies of adults between the ages of 16 and 65) to demonstrate the learning-by-doing effect of broadband availability. They also show that skills acquired in this way reap substantial rewards on the labor market.

Unlocking the Full Growth Potential through Internet Use

Despite the fact that the sluggish spread of (private) infrastructure impeded internet use in the early years, in many countries almost all households now have access to a guaranteed minimum internet speed. The focus of broadband expansion is now on the rapid provision and use of higher speeds. However, it is a slow process and may result in the full growth potential of new technologies not being tapped. In turn, this hinders key follow-on innovation.

How Can Digital Infrastructure Be Successfully Expanded?

The ifo Institute emphasizes that digital infrastructure is of paramount importance to society and the economy, but warns against overly ambitious targets for public broadband funding. If the expansion of high-speed broadband does not match up with current demand, it runs the risk of reaching a technical impasse. Digital technologies are constantly changing and their path of development is difficult to predict. Technology neutrality is therefore an important prerequisite for the further expansion of digital infrastructure.

The ifo Institute believes that responsibility for expanding digital infrastructure should lie with the private sector. Investment incentives for private providers must be protected through regulation, not undercut by government funding programs. State support for the expansion of digital infrastructure should be secondary and based on actual local requirements. The ifo Institute’s research findings suggest that policymakers should first and foremost address the low-intensity use of high bandwidth and the dearth of digital skills across society.

Last updated: January 2020