Submarine Cables, the Internet Backbone, and the Trade in Services

Abstract

Submarine cables are undersea digital bridges that allow ideas and information to move across space. Submarine cables are expensive infrastructure investments and their high costs raise the question about their economic returns, especially in developing countries. Specifically, It is not known what laying submarine cables means for services trade which depends heavily on exchanging ideas and information. Using a novel data set for connecting the world countries by submarine cables, this study considers the variation in the number of submarine cables as well as the timing of connection to identify the effects of submarine cables. To deal with endogeneity, two novel instruments are developed. The results confirm that submarine cables stimulate services trade in some sectors. Benefits to developing countries are higher where more sectors expand their services trade and no sectors lose. This suggests a catch-up effect and higher gains from laying submarine cables in developing countries.