Does Rural Broadband Expansion Encourage Firm Entry?

By Yulong Chen, Liyuan Ma, and Peter F. Orazem

The national closing of schools due to the COVID-19 pandemic has heightened awareness of the digital divide in access to reliable internet use. Remote access to online schooling requires broadband internet service, which the Federal Communication Commission defines as service with download speeds of at least 25 megabits/second (Mbps) and upload speeds of at least 3Mbps.

About 17 million rural residents (26.4% of all rural residents) do not have access to reliable broadband internet (FCC 2019). This means that 80% of the US population who lack the broadband services necessary for online schooling reside in rural areas.

The federal government has invested $60 billion thus far in rural broadband deployment, and state governments have also been actively trying to incentivize rural access (ABA 2019; Stauffer et al. 2020). FCC chairman Ajit Pai recently launched the Rural Digital Opportunity Fund, which will add up to $20.4 billion to further expand broadband in underserved rural areas. Various presidential candidates have proposed even larger amounts.

While experts tout the internet as a good economic development strategy, it is not obvious that it would reverse the decades-long population shift from rural to urban markets. Since 1940, the urban population has grown 17.4% per decade while the rural population has grown just 0.5% per decade.

While it does appear that rural areas with internet access attract more new firm entry (Kim and Orazem 2016), it is more difficult to show that rural internet expansion resulting from government subsidies have been successful in generating local economic growth. For example, response to the USDA Rural Utilities Service (RUS) program was criticized for funneling many of its earliest grants to more populated counties and rural counties that already had broadband service, rather than targeting unserved rural areas (Brake 2017).

Kandilov and Renkow (2019) examine three USDA-RUS programs, the Pilot Broadband Loan Program, the Community Connect Grant Program, and the USDA Broadband Loan Program. They find that only the Broadband Loan Program had an impact on rural wages, and that no USDA-RUS programs affected rural employment.

One factor limiting the effectiveness of increased broadband supply is that rural residents are less likely to adopt broadband, even if it is available. One study reviewed by Humphreys (2019) finds that rural residents were more than twice as likely as urban residents to decline broadband service regardless of the price. The combination of thinner population density and a lower likelihood of service subscription discourages private expansion into rural markets. However, what really drives the economic reward from rural internet service is adoption by firms. Rural businesses are more likely to adopt broadband than are rural households; however, most surveyed rural businesses were unwilling to pay 10% more to get significantly improved internet speeds, as many small rural businesses do not use applications that require high-speed internet (Humphreys 2019).

One complication to finding substantial economic expansion from the installation of broadband in a rural county is its presence will not affect all rural sectors equally. Consider the retail sector as an example—broadband internet will possibly allow a rural retailer to market to remote customers, thus expanding sales. On the other hand, local customers of rural retailers can access remote sellers, such as eBay and Amazon, which may diminish local retailers’ markets.

At the same time, broadband internet may allow rural manufacturers to improve their supply chain management and access lower cost inputs or higher paying customers more easily. As a result, broadband access may make some firms or industries more profitable while lowering the profitability of other firms or sectors.

To examine this scenario, we identify a sample of counties that did not have broadband in 1999 but did acquire it by 2015. We then examine the pace of firm entry and exit overall and by sector before and after broadband access, and further decompose the results by size of market (large metropolitan areas; markets adjacent to a metropolitan area; rural markets). We find that, on net, rural broadband expansion has a small positive effect on net firm entry; however, the overall effects disguise the very different responses by individual sectors.

Table 1 shows the effect of broadband installation on firm entry and exit for different market sizes. We can interpret the values as the percentage change in the rate of firm entry or firm exit attributable to the presence of broadband internet. The first row of table 1 shows that broadband installation in a county lowers the entry rate for retail establishments by 16.8%, on average, across all markets. However, it also slows the exit rate of firms by 7.6%, in part because new firm entry poses less threat to incumbent firms. The effect is smallest in metropolitan markets and largest in suburban markets. In rural areas, broadband is associated with a 6.6% reduction in the pace of firm entry and a 4.9% reduction in the firm exit rate.
 

Contrast the effects of broadband on retail firm entry and exit with the effects on manufacturing—broadband raises the rate of manufacturing firm entry by 14.7% with only a modest reduction in the rate of firm exits; however, rural areas experience a rising rate of manufacturing firm entry while suburban markets experience a falling rate manufacturing firm entry.

The third row of table 1 shows the effects of broadband access across all sectors of the economy. Broadband installation lowers the rate of firm entry and exit across all markets. The net effect on the number of firms depends on whether the decline in firm entry rate outweighs the decline in firm exit rates.

To measure the net effect of broadband on firm numbers, we convert the estimates into implied numbers of firm entries and exits (see table 2). In retail, broadband reduces the number of firms by 2.4 establishments per market per year, which ranges from a decline of 4.5 firms in metropolitan markets to the loss of 0.06 firms, on average, in rural markets. These effects are quite small. In construction, net firm numbers rise in rural markets and fall in metropolitan markets. For other sectors—transportation, finance and insurance, and arts and entertainment—broadband leads to firms shifting from more-populated to less-populated markets. Across all sectors, broadband service leads to a shift, albeit small, of net firm entry to rural markets. The actual impact is that rural areas gain 0.054 net firms per sector per year.
 

In opposition, there is a substantial shift in healthcare delivery—firms are favoring metropolitan areas. We also find a shift in the hospitality industry (restaurants and hotels) toward denser markets.

Looking at the overall effect of broadband on net firm entry, it appears that the biggest winners from high-speed internet access are the construction, manufacturing, wholesale trade, real estate, and arts and entertainment industries. On average, broadband expansion has led to a net increase in the number of firms, all other things equal.

Our results suggest that broadband installation in rural markets does lead to a net shift of firm entry from metropolitan and suburban markets to rural markets. However, the net effects are small—a net entry of 0.054 firms per sector per year. This suggests that over 20 years, rural markets would have one additional firm in each industry, which means that the broadband effect is too small to reverse the 70-year long rural to urban shift in population and economic activity.

References

American Bar Association (ABA). 2019. “Expanding Broadband Access to Rural Communities.” Washington Letter (November).

Brake, D. 2017. “A Policymaker’s Guide to Rural Broadband Infrastructure.” Information Technology and Innovation Foundation.

Federal Communications Commission (FCC). 2019. “2019 Broadband Deployment Report.” GN Docket No. 18-238. Washington, DC: Federal Communications Commission.

Humphreys, B.E. 2019. “Demand for Broadband in Rural Areas: Implications for Universal Access.” Congressional Research Service Report R46108. Washington, DC: Congressional Research Service.

Kandilov, I.T., and M. Renkow. 2019. “The Impacts of the USDA Broadband Loan and Grant Programs: Moving toward Estimating a Rate of Return.” Economic Inquiry 58(3):1129–1145.

Kim, Y., and P.F. Orazem. 2016. “Broadband Internet and New Firm Location Decisions in Rural Areas.” American Journal of Agricultural Economics 99(1):285–302.

Stauffer, A., K. de Wit, A. Read, and D. Kitson. 2020. “How States Are Expanding Broadband Access.” Pew Charitable Trusts.

Suggested citation:

Chen, Y., L. Ma, and P. Orazem. 2020. "Does Rural Broadband Expansion Encourage Firm Entry?" Agricultural Policy Review, Spring 2020. Center for Agricultural and Rural Development, Iowa State University. Available at www.card.iastate.edu/ag_policy_review/article/?a=110.