The Effect of Broadband Infrastructure on Entrepreneurial Activities: The Case of Germany

In this paper we investigate whether local characteristics influence entrepreneurial activities. One local characteristic that may drive the decision to establish a firm in a specific region is the supply of infrastructure. Infrastructure important for entrepreneurial activity may take different forms and functions. First, trade and industrial growth require physical infrastructure like streets, rails and waterways. Second, particularly for knowledge- and technology- based ventures the knowledge infrastructure is crucial. Third, an additional type of knowledge spillovers may foster local entrepreneurial activities: the local business community. Those networks may help create specific and tacit business knowledge and contacts which may be vital for entrepreneurial firms. We further focus on a region’s broadband availability which may spur entrepreneurial activities. New broadband infrastructure may reduce the necessity of physical proximity. Furthermore, taking broadband as a virtual marketplace and an infrastructure for customer contact, its roll-out and the increase of quality is a requirement for firm formations. Using a county-year panel structure we consider the impact of broadband availability on company foundations and control for standard impact factors on venture activities. The central variable of our analysis is a broadband indicator. Broadband penetration is measured on a county basis. A county is equipped with broadband if at least one main distribution frame (MDF) in the county is upgraded to allow for broadband access. We account for different issues with MDFs: Multiple MDFs may be installed within one county, MDFs at county boundaries do not only provide access to households and companies in that county but also to connected consumers in the neighboring counties, and changes of county boundaries across time must be taken into account. On sector level, we find a significantly positive influence of broadband availability on entrepreneurial intensities in high-tech industries like software and technology-intensive services (knowledge-intensive services). In contrast, no influence exists if we look at all sectors. Moreover, other infrastructural drivers of founding activities follow the results known from the literature. In consequence, our study provides evidence for an additional driver of entrepreneurial activities which supports the current broadband initiative in European countries and which also supports the effort to increase high-tech companies providing them with an adequate high-speed data infrastructure.

Heger, Diana, Miriam Rinawi and Tobias Veith (2011), The Effect of Broadband Infrastructure on Entrepreneurial Activities: The Case of Germany, ZEW Discussion Paper No. 11-081, Mannheim.