Domestic Capacities and Global Integration: Drivers of Digital Diffusion in Developing Economies

Abstract

The study examines the effects of domestic absorptive capacities (DAC) and external integration dynamics on digital diffusion (DD) across developing economies. The study uses a balanced panel of sixty-eight developing economies from 2010 to 2023 and employs panel-corrected standard errors (PCSE) technique to estimate regression estimates. The findings that higher DAC such as income per capita (INC), capital formation (CAP), and financial development (FD) foster both internet penetration (NET) and mobile usage (MOB), used as proxies for DD. These highlight the importance of DAC in expanding DD in developing economies. Interestingly, macroeconomic instability (MIS) does not undermine DD, reflecting its resilience to short-run economic fluctuations and the price inelastic demand for digital technologies.  Conversely, TRD and FDI show significant and negative direct effects on DD, implying crowd-out effects from ICT sectors to well-established manufacturing sector. However, their moderating effects are positive under higher INC context, revealing the primacy of DAC to benefit from TRD and FDI. Moreover, REM significantly increases DD, though its moderating effects show that these inflows are often channeled toward consumption of non-ICT goods and services, in high income context. Broadly, the study suggests that global integration factors (TRD, FDI, REM) are important drivers, the sustainability of DD in developing economies is primarily dependent on DAC.