The Spillover Effect of Digitization on Entrepreneurship: Evidence from India, 2005-2011

Abstract

This study examines IT externalities on entrepreneurship by using two waves of high quality nationally representative data on approximately 12,000 households in India. Our results show a direct impact of computer use on entrepreneurship. We examine spillover effects by using the caste system in India as a measure of social distance. The results show that computer use by those belonging to the same caste in a district has a significant and positive spillover effect on entrepreneurship, but this result does not hold for those using computers belonging to a different caste. Additional analyses suggest that level of harmony in a district enhances the positive spillover effect, and individuals who live in a harmonious district enjoy higher social externalities from computer use. The results also indicate the spillover effects differ depending on technology, and we observe differences in spillover effects of computer use and mobile phone adoption. Although mobile phone adoption shows a negative association with entrepreneurship primarily due to negative spillover effects from other castes, the negative effect is positively moderated by harmony as in the case of computer use. Together, these findings provide important insights on the role of IT and social/geographic groups on entrepreneurship and suggest that spillover effects become stronger when there is a strong social harmony in a region. Our results also suggest that a more complete evaluation of technology policies should concern social returns, which can sometimes exceed private returns.