Abstract

We develop a unifying framework to investigate the effects of firms’ internet presence on productivity and market structure. Using information on website adoption as an indicator of online trading, we treat the decision of entering an e-commerce market equivalent to the decision of entering a foreign market. Our theoretical framework draws from a dynamic model of international trade, which accounts for firms’ heterogeneity in productivity levels and in the returns to productivity enhancing investments. We test the predictions of our model using UK and Spanish company account data, over the 1995-2010 period merged with information of companies’ online status. The period analysed is associated with the early stage of internet diffusion and our sample countries represent fast (the UK) and slow (Spain) diffusion. Our results show that website adoption is associated with higher productivity growth and with a reduction in market concentration in both countries. The increase in competition operates via a negative selection mechanism, whereby productivity growth is inversely related to the pre-entry productivity levels. We also find that productivity gains decline over time.