in the literature.<sup>12</sup> We perform the same regression with the lag variable and find a similar positive relationship with Internet and trade. The results are presented in the appendix.

A more robust method to address the endogeneity issue is to find an instrumental variable for the Internet adoption. We use the price of an entry-level broadband subscription as an instrument for Internet adoption. The price of broadband access affects the share of people that uses an Internet connection. Conditional on the Internet infrastructure, lower prices will result in a higher number of Internet users in a country. The price of a broadband subscription fulfils the exclusion restriction as it affects the adoption and use of Internet within the country but does not affect the level of exports. It is also unlikely that the price of broadband subscription will affect trade directly or through indirect channels other than the actual use of the Internet. This instrument is correlated with Internet adoption and the results of the first stage suggest that it is a relevant instrument.<sup>13</sup> The price data covers the period 2008-2013 and comes from various years of the ITU “Measuring the Internet Society” reports.<sup>14</sup> In the report, an ICT price basket is constructed to provide information on the cost and affordability of fixed telephones, mobile cellular and fixed broadband. In the analysis, we will use the price of fixed broadband in purchasing power parity (PPP) terms.<sup>15</sup> We present the results of the regressions in Table 6 with country-pair and year fixed effects for total trade, average trade and the number of products. The results of the OLS regressions are presented for comparison as the time period of the data used is different from Table 3 due to the data availability of the broadband subscription prices.

The two-stage least squares (2SLS) regressions confirm the results in the previous table. Internet adoption in the exporter increases bilateral exports, intensive margin and extensive margin. The 2SLS results are higher than the OLS results, suggesting that the endogenous relationship between Internet and trade may have biased the coefficients downwards. Moreover, the relationship between Internet adoption in the exporter and the intensive margin is no longer statistically significant, suggesting that most of the effect of Internet adoption on exports happens through the extensive margin. This could also be an artifact of the time period under study, which covers the financial crisis. Similarly, Internet adoption in the importer increases bilateral exports and the intensive margin, and decreases the extensive margin. The relationship between the importer’s Internet adoption and bilateral exports is not statistically significant, highlighting the larger role of the Internet adoption in the exporter in increasing exports.

> 12 See for example Freund and Weinhold (2004).

> 13 As a rule of thumb, the F-statistic of a joint test of whether all excluded instruments are significant should be bigger than 10. The F-statistics of the first stage are equal to 2177 and 2037 for the price of broadband access in the exporting country and the importing country respectively.

> 14 The sources are the ITU reports “Measuring the Information Society” published in 2014, 2013, 2012, 2011, 2010 and 2009 for the data in 2013, 2012, 2011, 2010, 2009 and 2008 respectively.

> 15 The PPP terms was used to avoid any exchange rate distortions and the price of fixed broadband refers to the price of a monthly subscription for an entry-level broadband. See ITU (2014) for details.

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