Using data from 1995 to 1999, the authors show that the growth in Internet adoption increased export growth even at the nascent stage of the technology. They find that a 10 percentage point increase in the growth of web hosts increases export growth by 0.2 percentage points. Our results on bilateral exports are similar and more importantly, we confirm their hypothesis that Internet adoption in the exporting country is more important for exports.<sup>1</sup> Similarly, Clarke and Wallsten (2005) use 2001 data to show that an increase in Internet adoption in developing countries can increase exports to developed countries. They control for the endogenous relationship between the Internet and trade flows by instrumenting the Internet adoption with whether there is a single monopoly over data transmission services in the country. There are other papers that employ similar technique and data to show that the Internet has a positive effect on trade flows.<sup>2</sup> Studies also show that the Internet has a positive impact on services exports (Freund and Weinhold, 2002; Choi, 2010). While these studies established that the Internet can increase international trade, they do so in a limited way: the studies combine the effects of Internet adoption in the exporter and importer and they only examine its effects on aggregate trade. In our paper, we examine the different effects of the Internet on trade through various angles: the Internet adoption in importer and exporter, and the extensive and intensive margins. We also deal with the endogeneity issues in the estimation through an instrumental variable.

The rest of the paper is organized into four sections. Section 2 describes the data and the methodology in the empirical estimation. Section 3 presents the main results in three parts. The first part reports the estimates for the bilateral exports, the intensive margin and the extensive margins. The second part examines how similarities in Internet adoption affect exports. The third part presents the results for trade in differentiated and homogeneous goods. Section 4 describes the robustness checks where the instrumental variable and an alternative measure of the Internet is used. Section 5 provides the concluding remarks.

# **2. Empirical Methodology and Data**

We examine the impact of the Internet on international trade using a gravity-like specification. The first dependent variable will be the bilateral export flows. The export flows can be further decomposed mathematically into the intensive and extensive margins: average exports and the number of products exported respectively. We will consider the following decomposition: where Vijt is the value of bilateral export flows from country i to country j , xijt is the average bilateral export value per product exported, and nijt is the number of SITC 4 digits products exported between the countries in time t . Taking the logarithms of the left and right-hand-side of the decomposition above, we obtain: As OLS is a linear operator, the coefficients for the same variable in the regressions on average exports and the number of products will add up to the coefficient in the regression on bilateral exports. For example, when ln Vijt , ln xijt , and ln nijt are regressed on Internet adoption, the coefficients on the

> 1 Freund and Weinhold (2004) argue that higher Internet adoption in the importing country allows the importer to source from a wider range of exporters and substitute away from existing exporters.

> 2 For example Vemuri and Siddiqi (2009), Lin (2014) and Riker (2014).

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