The Internet and Autocracy: Unpacking the Effects of
Internet Freedom
Jonathan Cham
Claremont Graduate University
150 E 10th St
Claremont, CA 91711
jonathan.cham@alumni.cgu.edu
Abstract
Previous work has demonstrated the importance of
entrepreneurship and economic freedom in encouraging economic
growth. However, the conditions under which societies tend to
liberalize their economies toward business friendly environments
have yet to be established and therefore merit further study. Using
cross-sectional, time-series data, this paper finds a robust, positive
relationship between Internet usage and the ease of doing business
within countries. Moreover, this effect is particularly strong in
countries with lower levels of democracy. Because the
relationship between Internet usage and the ease of doing business
is dynamic and theoretically endogenous, a Difference GMM
approach is used to isolate the exogenous effects of Internet use
by businesses. Given the increasing prevalence of information and
communication technologies (ICTs) throughout the world, a
robust relationship between Internet use and the ease of doing
business suggests that the ease of doing business will continue to
improve in the future.
CCS Concepts
•Applied Computing → Economics; •Social and Professional
Topics → Government Regulation;
Keywords
Internet Use, Economic Freedom, Ease of Doing Business,
Democracy, Difference GMM, Regression Analysis
1. Introduction
  statistical model that will be used. In Section 6, I use time-series,
How should one account for China’s unparalleled growth in the
21st century? In October of 2014, China became the largest
economy in the World, surpassing the United States in terms of
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DOI: http://dx.doi.org/10.1145/2912160.2912190
gross domestic product (GDP) when adjusted for purchasing
power parity (PPP). [1] Since reforms began in 1978, China’s
economy has grown by 2,800%, adjusting for inflation and has
lifted more than 500 million people out of poverty. [2] And while
the secret recipe for economic growth is still fiercely debated
among economists, a clear driver of China’s growth has been their
liberalization of capital. Looking at data from 1952 to 1998,
Gregory Chow found that 54% of China’s growth came from
increases in capital accumulation, while 32% came from increases
in technology. [3] As labor in China has always been abundant,
only a mere 13% came from increases in labor supply. In short,
Chow found that China’s economic miracle can be explained by
the reforms enacted under Deng Xiaoping that liberalized China’s
economy, as well as opened it to international investment and
trade.
The relationship between economic freedom and economic
growth is well established in the literature. [4][5][6] Yet far less
understood are the causal factors that predict economic freedom.
In this paper, I argue that Internet use by businesses strongly
predicts the ease of doing business within a country, a key
component of economic freedom. Moreover, this effect intensifies
in countries with lower levels of democracy. In this regard,
Internet use presents an exciting new way to encourage economic
freedom within countries.
In Section 2, I discuss the current literature on economic freedom
and the ease of doing business. In Section 3, I lay out the
theoretical framework for the effect of Internet access on
economic freedom, particularly as it interacts with democracy.
Section 4 contains a brief description of the data used in this study
and provides summary statistics. In Section 5, I discuss the
cross-sectional data to demonstrate the relationship between
Internet usage and the ease of doing business. Key to this is
addressing problems of endogeneity, auto-correlation, and model
bias, which I address in Section 6.2. In Section 6.3, I test the
interaction between autocracy and network usage. Finally, Section
7 concludes with a discussion on key findings and future work.
2. Literature
While many researchers have studied the effect of economic
freedom on economic growth, far fewer have studied the causes of
economic freedom. This distinction is understandable, as
economic liberalization can be seen as an exogenous policy
choice made by the government in power. Yet such a choice is
both constrained by domestic special interests and deterred by the
instability that often follows an economic reform. In many cases,
such reforms only happen after an economic crisis takes place. [7]
This paper attempts to untangle the exogenous factors and
interactions that lead to policy change. In this section, I discuss
some of the previous work on economic freedom and the
weaknesses in the Economic Freedom Index (EFI) as a predictor
of economic growth.
2.1 Causal
 Predictors
 of
 Economic
 Freedom
The relationship between economic freedom and economic
growth has been verified across various studies over the years.
 Freedom
 vs.
 Ease
 of
 Doing
[4][5] Many of these studies use the Economic Freedom of the
World Index (EFI), which measures economic freedom based on
five criteria: 1.) Government Size, 2.) Legal System and Property
Rights, 3.) Sound Money, 4.) Freedom to Trade Internationally,
and 5.) Regulation. [8] Not only is this relationship robust and
predictive, but further testing also suggests that this relationship is
causal in nature. For instance, Gwartney (1999) uses 10-year lags
to show that Granger causality flows from economic freedom to
growth, and not vice versa. [4][9] As will be discussed in Section
2.2, the robustness of this relationship has been challenged by
several subsequent studies. However, there remain clear
advantages to a market that facilitates new business creation and
efficiently adjusts to changes in demand.
If this relationship is correct, it’s worth asking what factors
facilitate the economic reform that can improve economic
freedom. But within the previous literature, surprisingly few
variables are suggested to cause economic freedom. Three
variables that often arise are political stability, political freedom,
and foreign aid. First, because the positive effect of economic
freedom on growth is highly reliant on its criteria of “legal
structures and security of private ownership,” political stability is
a fundamental pre-requisite for economic freedom. [6] Political
stability is defined as the “perceptions of the likelihood that the
government will be destabilized or overthrown by
unconstitutional or violent means, including politically-motivated
violence and terrorism,” [10] A sitting government, concerned by
the possibility of violent regime change, may be unwilling to
allow greater freedom for its people.
Second, studies have revealed a strong relationship between
political freedom and economic freedom. According to De Haan
& Sturm (2003), a democratic system provides the legitimacy
needed to enact reforms, as well as the legal institutions required
to guarantee property rights. [11] Ergo, democratic freedom leads
to economic freedom. Feng (2003) furthers this argument by
rejecting the reverse causality. In his book, “Democracy,
Governance, and Economic Performance,” Yi Feng demonstrates
that Granger causality flows from political to economic freedom.
[12] These results show that past economic liberalization is no
guarantee of future democratic reform. However, Feng argues
that the provision of one form of freedom without the other
creates a “contradiction of freedom,” and predicts that such
contradictions will not endure in the long run. This “contradiction
of freedom” raises an obvious question: If democracy leads to
economic freedom, then what causes countries to liberalize their
economies in the absence of democracy? In Section 3.3, I argue
that as political rights decrease, Internet usage becomes more
important in predicting economic freedom.
Finally, some studies suggest a causal relationship between
foreign aid and economic freedom. [5][13] Foreign aid from
international financial institutions (IFIs) is often predicated on
commitments to economic reform. In particular, the IMF and
World Bank insist that countries should move toward
liberalization of their economies by allowing property rights,
entrepreneurship, and free trade. However, Boockmann & Dreher
(2003) question the strength of this relationship, finding no
significant relationship between the amount of credit received by
a country and subsequent increases in economic freedom. [14] On
the contrary, receiving foreign aid may remove pressure to reform
in times of economic crisis. Some countries even choose to slow
down or avoid reform in order to remain eligible for future credits.
2.2 Economic
Business
The Fraser Institute’s Economic Freedom Index (EFI) is widely
used in studies of economic growth, largely thanks to its broad
coverage of countries from 1970-2012. [4][5] However, recent
studies have questioned the strength of this relationship. In
particular, the “Government Size” component of the EFI is a
relatively weak predictor of economic development, and
uncorrelated with other components of the EFI. [5] A more
damning critique comes from Carlsson and Lundström (2002),
who found that while the overall EFI has a positive relationship
with economic growth, only “legal structures and security of
private ownership” has a robust and positive effect. [6] If the
benefit of economic freedom is its positive effect on growth, then
the EFI may be inadequate to measure this effect.
The World Bank’s Ease of Doing Business (EDB) measure offers
a strong alternative to the EFI. As its name suggests, the EDB
measures the ease of starting a business, maintaining it, and going
through financial insolvency. While many studies have found a
relationship between economic freedom and growth, others argue
that entrepreneurship is the “missing link” between these two
variables. [15][16] For instance, Kreft & Sobel (2005) find that
the EFI has a strong, positive relationship with entrepreneurship,
as defined by the percentage change in the number of sole
proprietorships within the U.S. by state.
Klapper, et al. (2009) expands on this by linking the ease of
starting a business with a country’s average entry density rate.
Similar to Kreft & Sobel’s definition of entrepreneurship,
Klapper, et al. define “entry density” as the number of newly
registered limited liability corporations within a country each
year, divided by that country’s working age population. Using the
EDB’s “Ease of Starting a Business” component, they find a
significantly positive relationship between the ease of starting a
business and subsequent new business formation. [17][18] As
demonstrated by these studies, the EFI and EDB are both strong
predictors of entrepreneurship. However, the EDB cuts to the
heart of the matter, by directly measuring the ease of starting a
business. Moreover, the EDB abandons any measurement of
“Government Size,” whose relationship with economic growth is
relatively weak.
This study will use the Distance to Frontier (DTF) measure of the
EDB. Specifically formulated for time-series analysis, the DTF
index scores each country on their ease of doing business, relative
to a theoretical “frontier” representing an ideal business
environment. Within my sample, the EFI and DTF are highly
correlated at 77%. However, when the “Government Size”
component is removed from the overall EFI, the correlation
increases to 85%. Given the theoretical and statistical relationship
between these two variables, the EDB offers a useful proxy for the
effects of economic freedom. Under the assumption that
entrepreneurship drives economic growth, this paper will focus on
the ease of doing business as its key dependent variable.
3. Theory
 and
 Hypothesis
  communication technology, and 3.) Once an online product is
The ease of doing business is critical for business formation and
economic growth. However, while many studies have explored
the effects of this variable, few have established the causal factors
that drive its improvement. I argue that Internet usage drives
economic reform by providing economic incentives for a more
liberal market economy. In this paper, I test the following two
hypotheses: 1.) Internet usage increases the ease of doing business
and 2.) Internet usage is particularly important in non-
democracies for predicting the ease of doing business.
3.1 The
 Internet
 and
 Economic
 Freedom
  endogenous, and furthermore, that the increasing importance of
The adoption of any new technology is inherently disruptive to the
status quo. Economists often discuss this effect in terms of
creative destruction, the process by which new innovations and
paradigms displace old ones. Yet information and communication
technologies (ICTs) in particular offer an additional layer of
disruption: ICTs change the way people connect and organize,
both within and across societies. Clay Shirky hits on this point
precisely when he discusses “How the Internet will (one day)
transform government.” [19] The process of integrating new ICTs
into a society can lead to significant economic opportunities, but it
can also result in conflict, as it challenges the ways in which
societies are structured.
ICTs drive economic reform in three ways: 1.) Closing idea gaps,
2.) Enabling entrepreneurship, and 3.) Increasing horizontal
connectivity. First, ICTs lead to the dispersion of new ideas.
According to Romer (1993), the differences between the
economic strength of nations is often exacerbated by the gaps in
knowledge between them. [20] Romer draws a clear distinction
between technological gaps, the differences in capital goods
 Internet
 in
 Non-­‐democracies
between countries, and what he refers to as “idea gaps,” the
differences in paradigms. A far more fundamental problem than
not having a piece of equipment is not understanding the value of
this tool, or even knowing that this equipment exists. As cultures
increasingly connect with one another, they inevitably share ideas
on management, manufacturing, and innovation. This dispersion
of ideas is what led the “Asian Tigers” to leapfrog over America
in industrial production.
In this regard, the Internet is groundbreaking in its ability to
connect people through forums, open-source encyclopedias, and
online classes. These technologies open access to resources that
were once monopolized by a few. The Internet’s ability to
stimulate growth through increasing connectivity, and thereby
closing idea gaps, creates strong incentives for countries to adopt
policies that facilitate Internet growth.
3.2 The
 Internet
 and
 the
 Ease
 of
 Doing
 Business
  monopoly on information. One example is the use of e-mail
Second, Internet users represent the demand for Internet-based
products, and the ICT businesses that fulfill that demand are often
entrepreneurial by nature. Whereas large corporations face
significant hurdles in adapting to new innovations, grassroots
developers are often the vanguard of new technology. In most
cases, these technologies eventually become institutionalized
when capital-rich companies sufficiently master and monopolize
them. However, the Internet has thus far resisted this trend. There
are three reasons why the Internet is an inherently entrepreneurial
medium. 1.) Online businesses have a relatively low cost-of-entry,
2.) Those in the ICT industry are far more exposed to creative
destruction due to the fast-paced evolution of information and
developed, the reproducibility of data allows developers to
quickly scale-up production.
Due to its entrepreneurial nature, ICT development relies on a
country’s ease of doing business in order to thrive. In that sense,
the direction of causality would flow from the ease of doing
business to Internet usage. Guillen & Suarez, (2005) demonstrate
this point when they use privatization and market competition to
predict future Internet use. [21] However, this explanation again
characterizes economic freedom as an exogenous variable that can
neither be explained nor predicted. On the contrary, I argue that
the relationship between Internet usage and economic freedom is
information and communication technology has become self-
perpetuating within the global economy. In Guillen’s study,
variables related to economic freedom became completely
insignificant in a dynamic model. By contrast, the lagged
dependent variable and the year of observation accounted for
much of the variation in Internet use. This alone is not surprising,
but it does point to the steady pace at which ICTs are expanding,
independent of other factors. More to the point, it belies a naïve
interpretation that ICT development is merely the causal product
of a healthy business environment.
Given the growing importance of information and communication
technology within and between countries, some spillover into
public policy should be expected. And assuming that Internet
growth is uniquely stunted by policies that stifle entrepreneurial
activity, then growth-maximizing states face significant pressure
to liberalize their economies.
3.3 The
Third, governments have not yet gained the capacity to control the
Internet. In 1985, then-Secretary of State George Shultz described
the relationship between technology and autocracy thusly:
“Totalitarian societies face a dilemma: either they try to
stifle these [information and communication]
technologies and thereby fall further behind in the new
industrial revolution, or else they permit these
technologies and see their totalitarian control inevitably
eroded. In fact, they do not have a choice, because they
will never be able entirely to block the tide of
technological advance.” [George Shultz, 1985]
Christopher Kedzie refers to this as the “dictator’s dilemma” in
his dissertation, “Communication and Democracy: Coincident
Revolutions and the Emergent Dictators.” [22] Kedzie argues that
as “horizontal communication technologies” displace centrally
controlled, “top-down vertical systems,” those in power are forced
to choose between economic development and maintaining their
technology during the 1991 coup against then-Soviet president
Mikhail Gorbachev. Citizens used the RELCOM network to
gather and disperse information on the coup, thwarting an
attempted media blackout by opposition forces.
Since 1991, this phenomenon of mass communication has echoed
over generations of protest movements. From Twitter users during
the Arab Spring to FireChat users in Hong Kong, information and
communication technologies find ways to resist censorship. [23]
Still, communication by itself is a poor predictor of democracy.
As Evgeny Morozov points out, the same technology that notifies
citizens about protests can alert government officials as well. [24]
Moreover, the idea that the Internet will lead to democracy and
peace assumes that the users of the Internet are inherently
peaceful and democratic. In fact, governments often use the
Internet to drum up public support for their own cause. Taylor
Boas suggests that the continued anarchic nature of the Internet
relies on whether its architecture follows a “control-frustrating”
design. [25] Much of the technology we refer to as the “Internet”
came from ARPANET, a computer network developed in the
1960’s for military communication. Given its function,
ARPANET required a decentralized design, which could allow
the network to endure the physical destruction of any member
device. The adoption of a “stupid network,” which moved
information indiscriminately between devices, removed the need
for a central computer to facilitate this communication. But with
no central computer to manage communication, exerting perfect
control over this system became impossible.
If the Internet is “control-frustrating” by design, this technology
presents a “dictator’s dilemma” to autocratic regimes. Unchecked
communication has the potential to foment regime change, as
dissidents are able to organize and spread their message. As such,
the proliferation of information and communication technologies
within non-democracies is somewhat surprising. Perhaps the
willingness by non-democracies to accept ICTs demonstrates their
ability to exert imperfect, but effective control over their Internet
space. [24][25] Yet to the extent that the Internet poses a risk to
autocratic regimes, the economic incentives for ICT development
appear to outweigh them.
3.4 Example:
 The
 Internet
 in
 China
  In short, China’s Internet users are not particularly democratic.
China provides a useful lens for discussing the effects of Internet
access in non-democratic nations. With over 668 million Internet
users, China hosts the largest Internet population on Earth. [26]
What’s more, this market is still growing. From 2012 to 2015,
household Internet access nearly doubled in China, while mobile
broadband penetration rose from 2% to 21%. This growth
generated new demand for Internet products, which companies
like Tencent, Sina, and Alibaba have rushed to meet. According to
the Network Readiness Index (NRI), the number of ICT patents
per million people in China grew from 2.7 to 8.5 during these four
years, and business-to-consumer Internet use rose steadily. [27]
Still, the government’s role in all this remains mixed. On the one
hand, the ease of starting a business in China saw notable
improvements during this period. For instance, China decreased
the number of procedures needed to start a business from 14 to 11,
which in turn dropped the time required from 38 to 31 days. On
the other hand, the number of regulations businesses faced also
increased, most notably in the ICT industry. The Chinese
government regulates China’s Internet space through the so-called
“Great Firewall” (GFW), a highly sophisticated content-filtering
regime. The GFW filters content by funneling data through a few
chokepoints controlled by government censors. As data passes
through these points, the GFW can block specific content like an
online article or block content more broadly based on its
characteristics and source.
However, the GFW is not perfect, and a growing number of
Chinese “netizens” are using circumvention tools to access
restricted websites like foreign news and social media. Using the
first nationally representative survey on circumvention tool use,
Shen & Zhang (2015) estimated that 11% of Chinese Internet
users also used circumvention tools. [28] These Internet users
tended to be young and well educated. Additionally, they
possessed “an open-mind, interest in the outside world, and low
confidence in the domestic information sources.” Yet these
Internet users also tended to be more conservative on certain
issues than their peers. They were “less supportive of liberal
grassroots political reform” and more opposed to the economic
reforms initiated by Deng Xiaoping. As Shen & Zhang put it,
exposure to competing opinions led to “distrust, cynicism,
confusion, and ambivalence.” However, Shen & Zhang muse that
this distrust might actually be a healthy attitude within non-
democracies. In fact, they found that those who distrusted
domestic and foreign media were also more active citizens and
“more likely to voice their opinions and to contact government
officials for complaints.”
The China example is informative for several reasons. On the one
hand, China clearly benefits from ICTs and is thus willing to
tolerate limited gaps in its information control. This seems to
confirm the “dictator’s dilemma” posed by Secretary Shultz. On
the other hand, the Chinese experience rejects the narrative that
Internet-generated grassroots movements will upend government
control. Recent studies on authoritarian deliberation reveal an
increasing government capacity to co-opt online discourse. This is
particularly true in China where online activity is monitored and
identity registration is required for Internet use. Within field tests,
Wallin (2014) found that “registered users tend to act against their
own preferences and participate more in nationalistic debates.”
[29] Wallin describes China’s Internet as a system of “enforced
engagement,” where exit is difficult and protest is discouraged by
threat of sanction. Stripped of the means to resolve dissatisfaction
through exit or voice, Wallin argues that participants may convert
their dissatisfaction into “loyalty” to the regime.
But they are hungry for more media to consume at faster speeds.
There is an ever-growing demand for Internet products in China,
which the market is struggling to provide. Evan Osnos describes a
new wave of Chinese reporters like Hu Xuli of Caixin who play
“edge ball” by testing the limits of what can be safely reported on.
[30] On the web, Chinese bloggers attract millions of readers by
reporting on stories that other news outlets won’t touch. And
when even this is insufficient, Internet users scale the Great
Firewall in search of alternate opinions and foreign news.
Certainly, the quality of information accessible in China remains
restricted. But there is undeniably more communication
happening than ever before.
Figure 1. Mean Ease of Doing Business (DTF) scores at
different levels of Internet use.
Looking at the data as a whole, there seems to be something indicator thus far. This study utilizes the DTF measure to better
categorically different about the economic freedom in autocracies capture change within a country over time. Within our sample, the
with widespread Internet access compared to their low ICT peers. DTF includes 1,112 observations across 188 countries from the
As shown in Figure 1, the difference in the average ease of doing years 2010 to 2015. The distribution for DTF is fairly normal,
business at high and low Internet use is noticeably larger among with a mean of 60 and a standard deviation of 12. However, this
autocratic countries. This suggests that Internet usage may have a distribution is slightly flat with an excess kurtosis score of -0.34.
stronger effect on the ease of doing business at lower levels of
democracy. Perhaps Internet users can create market pressure
where democratic pressure is absent. Or perhaps this correlation is 4.2 Internet
 Usage
 
purely coincidental, and technologically savvy autocracies are The key independent variable for this study is network usage as
more tolerant of greater Internet access and economic freedom. In measured by the World Economic Forum (WEF). While the WEF
either case, the interaction between Internet usage and democracy offers several measures of Internet access in its Network
must be accounted for in my model. This provides the following Readiness Index (NRI), the methodology for its network usage
two hypotheses: component has remained relatively consistent since 2006. As
such, network usage provides the largest sample size that can be
generalized across all years of observation. However, this may
H1. Internet Usage is positively related to the Ease of Doing change in the future as the data set expands. Network usage is
Business.
scored from 1-7 (best), and contains three subcomponents: 1.)
H2. Internet Usage has a stronger positive relationship with the Individual usage, 2.) Business usage, and 3.) Government usage.
Ease of Doing Business in countries with lower levels of [27][32] Within our sample, this variable contains 1,109
democratic accountability. observations across 151 countries from the years 2008 to 2015. It
has a mean of 3.67 and a median of 3.45, with a standard
deviation of 0.98. As the distance between the mean and median
4. Data
 and
 Descriptive
 Statistics
  suggests, this variable is skewed to the right, with wealthier
countries enjoying disproportionately greater access to the
4.1 Ease
 of
 Doing
 Business
  Internet in all categories.
This study uses the Ease of Doing Business as its dependent
variable. The World Bank’s “Ease of Doing Business” measure To deal with the problem of skewness, I use a log transformation,
ranks countries from 1 to 189 (worst) based on 10 measures of which reduces skewness from 0.57 to 0.13, with 0 indicating
doing business. [31] These are: 1.) Starting a Business, 2.) normal distribution. However, this transformation actually
Dealing with Construction Permits, 3.) Getting Electricity, 4.) exacerbates the problem of kurtosis, by decreasing excess kurtosis
Registering Property, 5.) Getting Credit, 6.) Protecting Minority from -0.62 to -0.83. This transformed network usage variable has
Investors, 7.) Paying Taxes, 8.) Trading across Borders, 9.) a mean of 1.27 and a standard deviation of 0.27. As
Enforcing Contracts, and 10.) Resolving Insolvency. heteroskedasticity still remains a concern, robust standard errors
will be included in testing.
However, since the EDB rankings only compare economies
relative to each other in a given year, it is ill suited for tracking a
single country’s progress across time. To solve this deficiency, the
World Bank developed a secondary measure called “Distance to
4.3 Control
 Variables
 
the Frontier” (DTF) which scores each country from 1-100 (best), While there are several ways to measures political rights, this
with 100 representing the best possible performance across each study uses “Democratic Accountability” as defined by the PRS
Group. [33] Democratic accountability is one component of
Table
 1.
 Summary
 Statistics
 

  (1)
  (2)
  (3)
  (4)
  (5)
 
VARIABLES
  N
  Mean
  SD
  Min
  Max
 

 
 
 
 
 
 
DTF:
 1-­‐100
 (Best)
  796
  62.34
  12.41
  33.35
  92.50
 
Network
 Usage:
 1-­‐7
 (Best)
  940
  3.764
  0.982
  2.010
  6.070
 
Business
 Net
 Use:
 1-­‐7
 (Best)
  940
  3.871
  0.946
  2.060
  6.218
 
Logged
 Business
 Net
 Use
  940
  1.325
  0.239
  0.723
  1.827
 
GDP
 per
 capita
  1,043
  20,036
  20,491
  522.5
  140,000
 
Logged
 GDP
 per
 capita
  1,043
  9.322
  1.213
  6.259
  11.85
 
Trade
 as
 %
 of
 GDP
  991
  91.78
  57.82
  21.66
  455.3
 
Foreign
 direct
 investment
  985
  5.695
  15.94
  -­‐57.43
  430.6
 
Democracy:
 1-­‐6
 (Best)
  1,233
  4.115
  1.628
  0
  6
 
External
 Conflict:
 1-­‐12
 (Best)
  1,233
  9.804
  1.313
  4
  12
 
Internal
 Conflict:
 1-­‐12
 (Best)
  1,233
  9.115
  1.585
  3.042
  12
 

 
 
 
 
 
 
Number
 of
 Countries
  122
  122
  122
  122
  122
 
“political risk,” which the PRS uses to measure a country’s terms of economic freedom, cultural and political characteristics
political risk of instability due to regime change. The PRS of a society tend to affect the speed and direction of economic
democratic accountability variable measures government reform. Based on the scatterplot in Figure 2, omitting the
responsiveness, using a score from 1 to 6 (best). Within my individual fixed-effects from the model appears to bias the
sample, the democratic accountability variable covers 1,233 coefficient upward. A fixed effects model addresses these
observations across 137 countries from 2007-2015. It has a mean concerns by controlling for the time-invariant “fixed-effects” of
of 4.11 and a median of 4.50, suggesting that the sample is countries, such as culture, history, geography, and existing
skewed to the left, with a small fraction of countries possessing government systems.
disproportionately undemocratic governments. Autocorrelation presents an additional concern. In all models,
I include several variables in the model to better account for the some of the variance in the dependent variable will not be fully
domestic and international conditions under which reforms take explained by any of the independent variables. This unexplained
place. In a cross-sectional analysis, one of the best predictors of variance is stored in the error term, and when error terms are
economic freedom is a country’s level of economic development. correlated across time, it can seriously damage the model’s
Economies that are more developed generally enjoy higher levels efficiency. When analyzing Internet usage, Guillen offers two
of economic freedom. This can be measured through GDP per methods for dealing with autocorrelation. The first is a fixed
capita, adjusted for purchasing power parity (PPP). Next, I include effects model, which controls for any country-level, time-
indexes for internal and external conflict to proxy the effects of invariant factors that are not captured in any other explanatory
political stability. Both indexes come from the PRS International variable. However, Guillen rejects this option as it “seriously
Country Risk Guide (ICRG) and are measured on a 12-point limits the ability of independent variables to explain variation
scale, with higher scores indicating greater stability. Internal because all cross-sectional information is absorbed by the fixed
conflict data is based on the likelihood of civil war, political effects.” Instead, he uses a dynamic panel analysis by adding a
violence, or civil unrest. Meanwhile, external conflict data is lagged dependent variable to his model. For the purposes of this
based on war, cross-border conflict, and foreign pressures. study, I use both methods when appropriate.
To measure a country’s level of openness to the international
community, I control for foreign direct investment (FDI) and trade
as a percentage of GDP. Like GDP per capita, data for these
variables come from the World Bank’s World Development
Indicators (WDI). [34] While previous studies have controlled for
foreign aid and overseas development assistance (ODA) per
capita, these variables make little sense when developed
economies are included in the sample and would add substantial
heteroskedasticity to the model.
Finally, I rely on several political variables from the PRS Group
as instruments in a Difference GMM analysis. These include: 1.)
Composite Risk, 2.) Military in Politics, and 3.) Contract
Viability. For all PRS variables, higher scores suggest better
political environments. Three additional instruments are taken
from World Bank data: PPP-adjusted GDP (in constant dollars),
population, and a Latin American dummy variable.

5. Model  Specifications  
5.1 Multicollinearity  
Figure  2.  Scatterplot  of  relationship  between  Business  Internet  
One of the immediate problems in studying Internet usage is what
Guillen, et al. (2005) refers to as the “global digital divide.” Usage  and  the  Ease  of  Doing  Business.  
Wealthy countries possess the resources necessary to adopt new
technologies as they develop. Guillen finds that “GDP per capita,
democratic freedoms, [and] cosmopolitanism” contribute most to 5.3 Bias  and  Endogeneity  in  “Small  T,  Large  N”  
the percentage of Internet users within a country. This covariance Data  Sets  
between Internet usage and socioeconomic status is a real concern Finally, the data set itself offers significant analytical constraints
when both are included in the same model, as it raises the due to its limited coverage across time. While there are 122
possibility of a type-1 error. Within my sample, overall Internet countries in this model (N=122), each country only contains a
usage is correlated with GDP per capita at 71%. One solution maximum of 5 years of observations (T=5), with a mean of 4.3
would be to proxy the effects of Internet usage through an years. When analyzing dynamic panel data, studies include a
alternative explanatory variable that is less correlated with GDP lagged dependent variable to control for the variation predicted by
per capita. Internet usage by businesses fits this role well, with a the previous observation period, thereby isolating the dynamic
correlation of 52%. effects of explanatory variables. However, in “small T, large N”
data sets, a lagged dependent variable may add significant bias to
the model. If residual autocorrelation is present, as in this case,
5.2 Data  Trending  and  Autocorrelation   coefficients may be biased downward. [35] Moreover, a Nickell
Path dependent outcomes observed within a country’s economic bias occurs when the demeaning process used in fixed-effects
structure are common and offer certain analytical challenges. In models is applied to dynamic panel data. [36]
One solution for this is the generalized method of moments possibility of a type 1 error. Third, coefficients may be biased
(GMM) proposed by Arellano-Bond (1991) and Arellano-Bover downward in the lagged dependent variable model due to
(1995)/Blundell-Bond (1998). [37] A Difference GMM approach autocorrelation, making them appear statistically insignificant.
addresses many of the weaknesses above by relaxing some of the
standard assumptions in an OLS approach. This model assumes Table  2.  Effect  of  Business  Net  Use  on  DTF:  OLS,  Fixed  
that: 1.) “The process may be dynamic,” 2.) There may be Effects  
“arbitrarily distributed fixed individual effects,” 3.) “Some
regressors may be endogenous,” 4.) Both serial correlation and     (1)   (2)  
heteroskedasticity may be present, and 5.) “The idiosyncratic     OLS   Fixed  Effects  
disturbances are uncorrelated across individuals.”
A major advantage of Difference GMM modeling is the way it Log  Business  Net  Use   18.74***   1.695*      
addresses the problem of endogeneity between dependent and (11.76)   (2.31)  
independent variables. Ordinarily, this problem is solved through    
the use of instrument variables. However, because good Democracy   1.201***     0.113    
instruments are often hard to find, a Difference GMM approach (5.76)   (0.25)  
uses lagged versions of existing variables within the model,    
though additional instruments can be included. Within the model, Internal  conflict   0.346     -­‐0.846*        
variables are specified as either endogenous or exogenous, (1.24)   (-­‐2.18)        
depending on theory and post-estimation testing. Assuming that  
the relationship between Internet use and the ease of doing  
External   conflict   -­‐0.281     -­‐1.250*        
business is endogenous, a Difference GMM approach will (-­‐0.93)   (-­‐2.35)        
produce less biased coefficients compared to a standard OLS  
model.  
Logged   GDP  per  capita   4.441***     10.01***    
(13.45)   (6.72)  
 
 FDI   -­‐0.0387***     0.00122    
6. Results   (-­‐5.13)   (0.94)  
6.1 Initial  Testing:  OLS  and  Fixed  Effects          
In this section, I test whether the Distance to Frontier (DTF) Trade  as  %  of  GDP   0.0293***   0.0134  
measure of Doing Business is statistically related to Internet (3.74)   (0.79)  
usage, using an OLS and fixed-effects model. All models use    
robust standard errors to address problems of heteroskedasticity. Constant   -­‐9.494**     -­‐14.34    
Additionally, I apply a log-transformation to Internet use and (-­‐3.14)   (-­‐0.90)        
GDP per capita in order to address their abnormal distribution.  
Finally, to address concerns of multicollinearity between Observations   488   488  
economic development and Internet usage, I use business Internet Adjusted  R-­‐squared   0.726   0.364  
usage as my key independent variable, as discussed in Section 5.1. AIC   3187.9   1538.5  
The results from these tests show a fairly strong relationship t  statistics  in  parentheses  
between a country’s DTF score and business Internet usage. *  p<0.05,  **  p<0.01,  ***  p<0.001    
While this relationship remains significant in both the OLS and  
fixed-effects models, the coefficient for business Internet usage is
substantially smaller in the latter. This suggests that the positive 6.2 Further  Testing:  Dynamic  Models  
effect of Internet use is substantially greater between countries To address these issues, I use a Difference GMM approach, as
compared to within a single country. However, all variables discussed in Section 5.3. In this model, I specify three variables as
become completely insignificant when a lagged dependent potentially endogenous: logged business Internet use and GDP per
variable is added to the OLS model. capita from the main model, as well as a lagged dependent
While most coefficients are the expected sign, one surprising variable for dynamic modeling. In a Difference GMM model, the
lagged forms of all explanatory variables are considered as
result is the negative coefficients for internal and external conflict
instruments for creating exogenous explanatory variables. To
in the fixed effects model. Based on PRS scoring, a negative
these, I add six additional instruments: Contract Viability,
coefficient indicates that greater conflict predicts an increase in
Military in Politics, the PRS Composite Risk Rating, Population,
the ease of doing business. These coefficients are only significant
in the fixed effects model, which controls for the variation Logged GDP, and a dummy variable for Latin American
countries.
between countries. Therefore, one possible interpretation is that
challenges to the de jure government by internal or external forces As shown in Table 3, the coefficients in the Difference GMM
leads to a decentralization of control over the economy. model are relatively similar to those in the dynamic fixed effects
While these results appear to support my first hypothesis, there model. The coefficient for Internet use is higher in the Difference
are several concerns regarding their efficiency and validity. First, GMM model compared to both fixed effects models, but it is
substantially lower than the coefficient from the OLS model.
the unexpectedly high coefficient for business Internet use in the
Assuming the OLS coefficient is biased upward by endogeneity,
OLS model may be caused by endogeneity between Internet usage
the Difference GMM coefficient is more believable. One reason
and the ease of doing business. The substantive effect of business
for concern might be the coefficient sign for GDP per capita. In
Internet usage is 22 points, or 35% of the total variation in DTF.
both the fixed effects and Difference GMM models, coefficients
Second, a Wooldridge test for autocorrelation in panel data
reveals significant autocorrelation in the model, which raises the for the untransformed GDP per capita variable are consistently
negative. Because this sign flips positive after a log- not control for country fixed effects in their model. While De
transformation, the negative coefficient may be caused by the Haan’s analysis focused on the period from 1975-1995, which
abnormal distribution of GDP per capita between countries. saw the collapse of the Soviet Union, democracy scores have
Based on post-estimation testing, the Difference GMM approach remained relatively stable during the period of 2010-2015
is successful in dealing with the three problems discussed earlier. pertinent to this study. If a country’s government structure
Using an Arellano-Bond test for first and second-order becomes time-invariant, it is controlled for in a fixed effects
autocorrelation in the first difference, I fail to reject the null- model. Second, De Haan’s analysis applied specifically to the
hypothesis of no autocorrelation. Furthermore, the model passes effects of democracy in developing countries, which are more
the Hansen and Sargan test of over-identification, as well as the susceptible to irregular government change. However, in
Difference-in-Hansen tests of exogeneity. politically stable governments, a fixed effects model would likely
absorb the effects of democratic accountability
These results confirm Hypothesis 1 by providing strong evidence
for a positive relationship between Internet use and the ease of However, democracy still plays a role in predicting DTF. Using
doing business across a variety of models. However, while this the previous OLS model in Section 6.1 as a base, I interact
relationship is highly significant, it should be noted that the democratic accountability with Internet usage. Due to the lack of
substantive effect of Internet usage on the ease of doing business trade and FDI data from autocratic countries, I remove these two
is relatively low. The total range of logged business Internet use is variables from the model. Under these conditions, the interaction
1.10. As such, based on the coefficient provided by the difference term is highly significant at the 99% confidence level, while all
GMM model, an increase from the lowest observed Internet use to other coefficients remain fairly consistent. Based on the
its highest observed value would only increase a country’s DTF interaction term, Internet usage appears to have the largest effect
score by 4.67 points. Considering that the total range of DTF is on DTF at extremely low levels of democracy. As shown in
59.15, Internet use only explains 8% of its total variation. In short, Figure 3, the coefficient for Internet usage drops by approximately
Internet use is significant, but not game changing. That being said, 50% as democratic accountability rises from 0 to 6.
given that the ICT industry only accounts for a fraction of most These results appear to confirm Hypothesis 2. However, this
economies, the relative influence of ICT is remarkably large. interaction term is relatively unreliable in predicting DTF, as it
becomes insignificant with the inclusion of trade and FDI. While
Table  3.  Effect  of  Business  Net  Use  on  DTF:  Dynamic  Fixed   this weakness may be partly due to an underrepresentation of
Effects,  Difference  GMM   autocratic countries across those two variables, further study
should test the robustness of this relationship as data on key
    (1)   (2)   variables expands over time.
Fixed  Effects   Difference  
      GMM  

Log  Business  Net  Use   2.106*   4.227**    

(2.16)
  (2.83)
 

 
 
 
 
External
 Conflict
  -­‐1.133*
  -­‐1.313**
 
 
(-­‐2.07)
  (-­‐2.78)
 
 
 
 

 
 
 
 
GDP
 per
 capita
  -­‐0.000280*
  -­‐0.000942**
 
 
(-­‐2.31)
  (-­‐3.31)
 
 
 
 

 
 
 
 
Year
  0.109
  -­‐0.0911
 
(0.85)
  (-­‐0.27)
 
 
 
 

 

 
Lagged
  DV
  0.617***
 
  0.877**
 
 
 
(7.07)
  (2.77)
 

 
 
 
Figure
  3.
  Conditional
  Marginal
  Effects
  of
  Logged
  Business
 
Constant
  -­‐180.17
 
 
Internet
 Use
 on
 DTF
 given
 an
 increase
 in
 Democracy.
 

  (-­‐0.71)
 
 

 
 
 
Observations
  459
  323
  7. Conclusion
 and
 Discussion
 of
 Future
 Work
 
Regional development is a key piece of any foreign policy. Aiding
t
 statistics
 in
 parentheses
 
in the development of one’s neighbors is strategically useful, as
*
 p<0.05,
 **
 p<0.01,
 ***
 p<0.001
  developed countries are less likely to engage in conflict and are
often more engaged with the international community at large.
6.3 Measuring
 the
 Effects
 of
 Democracy
  This is particularly true when dealing with non-democracies,
which often find themselves in opposition with international
As demonstrated in the previous sections, democratic
norms. Through ODA, countries strengthen their national security
accountability is completely insignificant in predicting the Ease of
and improve their image abroad. However, international
Doing Business in a fixed-effects model. This is surprising given
development assistance is no easy task, since no amount of
past literature on the relationship between economic freedom and
assistance can guarantee growth in cases where the needed
democracy. [11][12] There are several explanations for this
solution is economic reform.
discrepancy. First, past studies such as De Haan, et al. (2003) did
In light of this, Internet usage offers a promising new tool for
promoting the ease of doing business within a country. The ease
of doing business is vital for the entrepreneurship necessary to
help an economy grow. This study builds on past literature by
revealing a strong relationship between business Internet usage
and the ease of doing business at the 95% confidence level. The
effect of Internet usage on the ease of doing business is
independent of GDP per capita, and remains highly significant
after isolating its exogenous effects. Moreover, this relationship
intensifies as democratic accountability decreases.
The effect of Internet usage on the ease of doing business
deserves continued scrutiny in the future as data on information
and communication technology continues to expand. First, greater
attention should be paid to the direction of causality between
Internet usage and the ease of doing business. Second, further
study could shed light on the role of Internet usage in democratic
countries and how that differs from their non-democratic peers.
Finally, case studies within countries such as China would help to
further clarify this effect.
However, the implications of this effect are promising, as Internet
access offers a direct solution for promoting economic
liberalization abroad. By facilitating connectivity, the Internet
helps to close idea gaps between nations and creates a new
entrepreneurial arena for economic growth. Moreover, as
information and communication technology becomes cheaper and
more available, it allows us to hope that economic freedom will
continue to expand.
8. Acknowledgements
  [15] Wennekers, S., & Thurik, R. Linking entrepreneurship and
I would like to thank Professor Yi Feng for his support and
guidance throughout the research and writing of this paper across
its many revisions. Thank you as well to Paul Reynolds and Zac
Bentley for their insightful feedback. Finally, I’d like to thank the
dg.o 2016 track chairs for reviewing this paper.
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