# **1. Introduction**

The process of technological adoption and diffusion has been extensively studied in the literature<sup>1</sup> . A casual look at data on the diffusion of different technologies reveals that, at a given point in time, there are important differences in the degree of diffusion or adoption across countries<sup>2</sup> .

In this paper we focus on the diffusion of the Internet. Understanding the process of Internet adoption and diffusion as well as the main determinants of cross-country differences in this process seems to be of particular interest in the case of Internet adoption since, as it has long been acknowledged, the Internet is a key tool of economic development (Röller, H., and L. Waverman, 2001; Sanchez-Roble, B 1998; Kenny, C. 2003). Figure 1 illustrates the significant disparity in Internet diffusion for eight countries. Although the percentage of Internet users was quite low in the United States in 1990, the use of this technology increased to 22 percent in 1997 and 63 percent in 2004. In China, the percentages were 0.03 percent in 1997 and 7.2 percent in 2004, whereas in Tanzania it was virtually 0 percent in 1997 and 0.9 percent in 2004. The observed differences in the levels of Internet adoption across countries raise important policy questions. Of particular interest to policymakers in developing countries is the need to understand the process of diffusion to anticipate if their countries will eventually catch up and close the digital divide and, if not, what policies should be adopted to increase the speed of Internet adoption.

In this paper we make use of a unique dataset to study the process of Internet diffusion in a large set of countries for the period 1990-2004. Our analysis includes both developed and developing countries and provides separate results for different groups of countries, based on their level of income. The paper has two different parts. In the first part, we show that the process of Internet diffusion across the world is well described by an S- shape pattern. An important advantage of our dataset that differentiates it from previous studies aimed at estimating the adoption pattern followed by a new technological product is that our study includes data for the first years in which Internet was adopted and hence it facilitates the estimation of a complete S-shape curve. We estimate S-shape curves for different groups of countries and find that low income countries have a much steeper adoption profile and their curve lies to the right of that of high income countries. This finding provides support to the hypothesis that Internet adoption follows a leaderfollower model whereby low income countries, as followers, have lower adoption costs<sup>3</sup> .

> 1 See for instance Keller (2001), Comín and Hobijn (2003), Caselli and Coleman (2001), Comín _et al_ . (2006), Barro and Sala-i-Martin (1997), and Jovanovic and Lach (1989).

> 2 Chinn and Fairlie (2007) show that, in the year 1993 many developing countries had computer and Internet penetration rates that were 1/100<sup>th</sup> of the rates found in North American and Europe

> 3 This hypothesis was developed by Chong and Micco, 2003 but these authors did not test their hypothesis.

2