Eindhoven University of Technology MASTER The impact of very high capacity braodband availability on entrepreneurship in regions evidence from the Netherlands de Heij, C. Award date: 2019 Link to publication Disclaimer This document contains a student thesis (bachelor's or master's), as authored by a student at Eindhoven University of Technology. Student theses are made available in the TU/e repository upon obtaining the required degree. The grade received is not published on the document as presented in the repository. The required complexity or quality of research of student theses may vary by program, and the required minimum study period may vary in duration. General rights Copyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights. • Users may download and print one copy of any publication from the public portal for the purpose of private study or research. • You may not further distribute the material or use it for any profit-making activity or commercial gain
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Eindhoven University of Technology
MASTER
The impact of very high capacity braodband availability on entrepreneurship in regionsevidence from the Netherlands
de Heij, C.
Award date:2019
Link to publication
DisclaimerThis document contains a student thesis (bachelor's or master's), as authored by a student at Eindhoven University of Technology. Studenttheses are made available in the TU/e repository upon obtaining the required degree. The grade received is not published on the documentas presented in the repository. The required complexity or quality of research of student theses may vary by program, and the requiredminimum study period may vary in duration.
General rightsCopyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright ownersand it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights.
• Users may download and print one copy of any publication from the public portal for the purpose of private study or research. • You may not further distribute the material or use it for any profit-making activity or commercial gain
3.1. Data ............................................................................................................................................. 26
3.1.1. Dependent variables: Entrepreneurial activity and Entrepreneurial success .................... 26
3.1.2. Policy variable: Broadband availability data ....................................................................... 27
3.1.3. Other variables: regional level economic data ................................................................... 28
Note: rob = robust standard errors *p<0.1**p<0.05***p<0.01
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5. Discussion
5.1. Most important findings
The literature review in chapter 2 showed that there exists a general consensus in the literature based on
anecdotal and empirical evidence suggesting that broadband internet positively impacts
entrepreneurship in regions. However, there have been significant improvements of broadband internet
in terms of capacity speed in the last decades. At the same time, there is a lack of studies investigating
the impact of these improvements, especially outside of the United States. It is however important to
understand the effects of these improvements on the economy. From a scientific perspective, but
especially from a policy perspective. Policymakers should be able to base their decisions regarding the
broadband infrastructure on sound empirical evidence pointing towards the effects. To help close the gap
and provide empirical evidence, this research was therefore designed to investigate the effect of very high
capacity broadband on entrepreneurial activity and entrepreneurial success in regions of the Netherlands.
The results support the expectancy of the first hypothesis, indicating that the availability of very high
capacity broadband for businesses is an important positive regional determinant of entrepreneurial
activity. The LSDV model showed a significant effect suggesting that a 10% increase in very high capacity
broadband availability for businesses results two years later in 0.45 new independent firm entries per
1.000 business establishments. Very high capacity broadband availability enables new levels of advanced
use of the internet through activities such as big data analytics, cloud services, and intensive ICT
applications (Phippen & Lacohée, 2016; Ross & Blumenstein, 2015). This can facilitate more
entrepreneurial activity in regions in two ways. First, the advanced use within businesses can result in new
entrepreneurial opportunities originating in the region that can be exploited by potential entrepreneurs
that become aware of these new possibilities. Second, the new levels of advanced use also offer many
benefits for SME’s, like decreased costs of firm activities and increased levels of performance based on
advanced use (Phippen & Lacohée, 2016). When entrepreneurs are aware of the increased importance of
ICT for businesses, then it can influence their location decisions in favor of areas with very high capacity
broadband over locations without very high capacity broadband.
The 2SLSDV model did not show a significant effect. However, the Hausman specification test did not
show significance, indicating no sign of endogeneity between the variables. If the instrument is valid, then
this favors the LSDV model over the 2SLSDV model. This is in line with Mccoy and others (2016), that
already argued that the total number of establishments suffers more from endogeneity than the start-up
rate. The result also relied on a two year lag of broadband availability, further validating that the
relationship did not suffer from reverse causality. When there does not exist endogeneity then the LSDV
model is expected to be a better predictor than the 2SLSDV model, because it has higher levels of
statistical power (Semademi et al., 2014). This result is in line with other research that found a positive
effect of very high capacity broadband availability, but they looked at broadband availability for
households instead of businesses and the total number of business establishments in counties in the US
as proxy of entrepreneurial activity instead of new firm entry (Lapointe, 2015).
The results also support the expectancy of the second hypothesis, indicating that the availability of very
high capacity broadband for businesses is an important positive regional determinant of entrepreneurial
success. The LSDV model showed a significant effect suggesting that a 10% increase in very high capacity
43
broadband availability for businesses results two years later in 0.15 fast growing businesses per 1.000
business establishments. Very high capacity broadband enables new levels of advanced use of the
internet. This can facilitate entrepreneurial success in the region, because it has the potential to help
entrepreneurs survive and grow. Access to very high capacity broadband provides SME’s with a set of
powerful tools to work faster, more efficiently and also differently.
Again, the results of the 2SLSDV model did not show significance. However, the same arguments in favor
of the LSDV model apply here. The Hausman specification test on endogeneity was not significant and
broadband availability is measured with a two year lag. To our knowledge there has not been prior
research linking very high capacity broadband availability with entrepreneurial success.
This research also takes the heterogeneous effect of broadband availability into account, by looking at
subsets of regions with different urbanity levels. The results show that there does indeed exist
heterogeneity across different regions when it comes to the effect of very high capacity broadband
availability for businesses on entrepreneurial activity. Only regions that are moderately urban and regions
that are not urban showed slight significance (p<0.1), indicating that a 10% increase in very high capacity
broadband availability for businesses in those regions results two year later in 0.65 new independent firm
entries per 1.000 business establishments and 0.94 new independent firm entries per 1.000 business
establishments respectively. This is in line with other research that found that rural regions benefit from
broadband and that those regions closer to urban regions benefited more than very remote urban regions,
indicating that regions with a moderate urbanity level benefit the most from broadband infrastructure
(Kim & Orazem, 2016). For entrepreneurial success the results show slight significance (p<0.1) for strongly
urban and moderately urban regions, indicating that a 10% increase results two years later in 0.21 fast
growing firms per 1.000 business establishments and 0.18 fast growing firms per 1.000 business
establishments respectively.
Although not part of the scope of this study, it is worth mentioning that compared to a standard OLS many
of the control variables expected to be important regional determinants of entrepreneurial activity and
entrepreneurial success were not significant in the LSDV models with municipality and year fixed effects.
This research also encountered an unanticipated finding. The variable university presence showed a
statistically significant negative effect of university presence on the number of fast growing firms per
1.000 establishments, while the literature suggests that there should be a positive effect. However, the
subsamples show that this effect is only found in moderately urban regions, while the strongly urban and
very strongly urban regions show a positive effect, although not significant. The slightly urban and no
urban regions did not have a single university present. This variable is most likely stable over time, so the
effect of the presence of a university is captured by the municipality fixed effect. It is therefore possible
that the effect of very few newly established universities in a specific area is captured with this variable.
This could be an explanation for the unanticipated finding.
The findings of this thesis are an important step towards closing the gap that exists in the literature on
the importance of broadband capacity speed. To our knowledge there does not exist another study that
looks at the impact of very high capacity broadband availability on entrepreneurial activity and
entrepreneurial success with the proxies of entrepreneurship that were used. The other two benefits are
that this study looks directly at broadband availability for businesses instead of the usual household
availability and that this study looks at areas outside of the United States, where most research on
broadband availability is conducted.
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This research therefore uniquely contributes to both the broadband internet literature and literature on
regional determinants of entrepreneurship, by suggesting that very high capacity broadband availability
for businesses is an important regional determinant of both entrepreneurial activity and entrepreneurial
success. The presence of very high capacity broadband in a region may be able to influence an
entrepreneurs decision to start a new venture there, because advanced use of the internet has the
potential to bring new entrepreneurial opportunities to the region that can be exploited by potential
entrepreneurs and advanced use offers many benefits to SME’s and can therefore influence the location
decisions of an entrepreneur in favor of areas with very high capacity broadband. The presence of very
high capacity broadband might also help new firms and SME’s survive and grow, because new levels of
advanced use of the internet offers them a set of powerful tools to work faster, more efficiently and
differently. However, the effects are not very large, this could be explained due to the fact that many firm
activities are already satisfied by participation use and do not require advanced use. It could also be
explained by considering delayed adoption and the development of complementary digital awareness and
digital literacy skills. Mack & Faggion (2013) studied the productivity benefits of broadband and found
that time is an important dimension for productivity impacts to be realized by new technologies. Humans
need to adjust to new routines and protocols. This could also be the case for entrepreneurial benefits of
very high capacity broadband. Potential entrepreneurs might need time to adjust. Mack and others (2017)
already suggested that especially inexperienced entrepreneurs often lack the digital awareness necessary
to recognize opportunities and effectively make use of the internet, let alone make use of new very high
capacity internet. To really benefit potential entrepreneurs need to adopt very high capacity internet and
develop digital awareness and literacy skills. A final reason could lie in the adjustment of the business
markets to very high capacity broadband. On the broadband market fiber connections mostly offer speeds
up to 1 Gbps (OECD, 2015). Devices are often not (yet) capable of handling such high speeds and therefore
could potentially limit entrepreneurial activity and entrepreneurial success, although the infrastructure is
there. This research also suggests that there exists heterogeneity to the impact of very high capacity
broadband availability across space. Areas with different urbanity levels showed differences in effects and
significance. This heterogeneity across space is also shown in previous research on broadband availability
with lower capacity speeds (Kolko, 2012; Mack et al., 2011).
This is important information, especially for policy makers, because it provides them with the empirical
evidence on which they can base their policy decisions regarding broadband. This research in the
Netherlands points out that the targets of the European Union towards a gigabit society can make sense
for an economic perspective, because of the suggested positive relationship with entrepreneurial activity
and entrepreneurial success. It further points out that is important to consider the urbanity level of the
areas that they plan to provide with very high capacity broadband, because the effects can differ
accordingly. However, it is also important for policy makers to keep in mind that improving the availability
of very high capacity broadband in regions does in itself not offer economic gains to the region. To be able
to benefit the new broadband needs to be adopted and to really benefit it also requires the potential
entrepreneur or small business owner to have sufficient complementary digital awareness and digital
literacy skills. Studies have evaluated establishment adoption of ICT and found that firm size plays a key
part between the presence of In-house IT support (Forman & Goldfarb, 2005; Gibbs & Tanner, 1997).
Many small businesses are unaware of the advantages of utilizing ICT compared to the bigger companies
and are therefore less likely to adopt (Center for an Urban Future, 2004). This also seems to be the case
for entrepreneurs, research suggests that especially inexperienced entrepreneurs lack the digital
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awareness and digital literacy skills that are necessary to effectively makes use of the internet (Mack et
al., 2017).
5.2. Limitations
It is important to mention, that the results of this study should be taken lightly, because they definitely
do not prove causality. Without causality, suggesting policy recommendations remains difficult.
Establishing causality requires the construction of a valid counterfactual. In our case this means what
would have happened to a municipality if the very high capacity broadband increase was not deployed.
This outcome is however fundamentally unobservable, therefore we tried to rebuild it by comparing
municipalities with higher and lower very high capacity broadband availability over a longer period of
years. However, there are obviously differences between those municipalities and thus differences
between the ‘control group’ and the ‘treatment group’. This research is then not proving causality, but
does create a strong case for the likelihood of causality. Stronger then prior research that only relied on
cross sectional rather than time series data or research that did not properly try to reconstruct the
counterfactual. The use of a two year lagged policy variable also guards against the possibility of reverse
causality, where it is not the availability that results in entrepreneurship, but the other way around. This
concern of this type of endogeneity is mention often in the broadband literature (Gaasbeck, 2008; Kolko,
2012; Minges, 2016), the use of a lagged variable in combination with dependent variables that are less
prone to suffer hereof, largely seem to deal with this issue. However, it is still possible that there exist
other variables that are not included in this study that cause both to decrease or increase simultaneously.
The use of time and unit fixed effects can only deal with this issue to some extent.
Another important factor mentioned often in the broadband availability literature is that next to
heterogeneity across space, there exists heterogeneity across industries (Kolko, 2012; Mack et al., 2011).
Prior research suggest that the impact of broadband availability differs significantly across industries, with
much more importance in the high tech and knowledge intensive industries. It is likely that this is also the
case, and possibly even more prominent with very high capacity broadband, because the advantages of
very fast internet can differ considerably between industries. Unfortunately due to data limitations it was
not possible to take this heterogeneity into account in this study, resulting in an important limitation.
Another limitation of this study lies in the proposed need for spatial econometrics mentioned in prior
research (Bhat et al., 2014; Mack, 2014; Mack et al., 2011). Mack and others (2011) suggest that it is
important to take spatial autocorrelation into account when measuring the local impact of broadband
availability. In this study we did not find a possibility of controlling for spatial autocorrelation with models
of spatial lag and spatial error, because the policy variable is lagged for two years. Spatial econometric
models only worked without lagged variables. There is the possibility that this might have led to some
bias on the results, although we did control for serial correlation and cross sectional dependence possibly
mitigating some of the bias.
The rollout is considered a good proxy of broadband availability, but it does not take into account the
advertised bandwidth and realized speeds. These are known to vary considerably (Kolko, 2012). Even
though this is difficult to control for, it does result in a limitation of this study.
The control variable university presence does not seem to be the best proxy of regional knowledge
creation in this research, possibly because of the small amount of universities present in the Netherlands.
46
It is possible that this is different in samples with more universities, but in this study it might have been
better to consider another proxy.
The final limitation lies in the generalizability of the results, or to what extent can the results be replicated
in regions and areas of other countries. This study only looked at regions in the Netherlands and the results
might be different in regions of other countries.
5.3. Future research
More research should focus on closing the broadband evolution gap. Next to entrepreneurship there are
many more economic growth outcomes to consider when it comes to the impact of very high capacity
broadband. For example, employment and productivity. More research is also necessary on the impact of
entrepreneurship in regions, because this is one of the first studies to do so and this study has its
limitations. Although prior research has made progress, proving causality remains an issue in the
broadband internet literature. It is therefore important that future research keeps looking for the best
way to deal with endogeneity, also when it comes to the impact of entrepreneurship. This research can
only show correlation and make a suggestion towards causality. This is already relevant for both literature
and policy, but ultimately far from ideal.
It is also important for future research to take heterogeneity across industries into account. This possibly
provides an even better understanding of the impact of very high capacity broadband to entrepreneurial
activity and entrepreneurial success. It is probable that certain industries benefit much more from very
high capacity broadband than other industries.
Spatial econometrics can provide a better way of modeling the impact of broadband availability,
something this research was unable to do. Future research can make use of a spatial lag and a spatial error
model to makes sure that the results are not biased by spatial autocorrelation.
Research on the relationship between very high capacity broadband and entrepreneurship should also be
repeated in different geographical areas. This might show different results and can give insight into the
generalizability of this study. What works in the Netherlands does not necessarily work in other countries
or geographical areas, because every geographical area has its own characteristics that might influence
results.
In this research we only took fixed broadband into account, while in the future it might also be interesting
to look at the impact of mobile broadband for entrepreneurship and businesses. The capacity speed of
mobile internet has not been sufficient for many businesses in the past, but with the advancements
towards 5G mobile internet this may seriously change. If the capacity speed is sufficient to be a good
substitute over fixed broadband then mobile internet certainly has one big advantage over fixed
broadband for policymakers. There is no digging involved, so especially in remote areas and difficult
terrain this could prove to be a much better option in the future.
Finally, future research should also look at adoption instead of availability and if possible take advertised
and realized broadband speeds into account. Availability is thought of as a good proxy, but it is not without
its own limitations. It is therefore also important to look at adoption, because this might show different
results.
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6. Conclusion
To answer the research question that started this research:
‘To what extent is the availability of very high capacity broadband for businesses an important regional
determinant of Entrepreneurship in the Netherlands?
It was necessary to first get a clear picture of the rollout of very high capacity broadband for businesses
in the Netherlands. The results showed that between 2011, where the rollout of fiber broadband roughly
started to take off, up to 2017 where it roughly started to slow down again, that the rollout in the
Netherlands was very heterogeneous across municipalities. Kolko (2010) already showed that this was
also the case for broadband with lower capacity speeds and predicted that if would be more prominent
with higher broadband capacity speeds. This led to a good opportunity to measure if these differences
actually had an important impact on entrepreneurship in different regions measured as the amount of
entrepreneurial activity and entrepreneurial success. This is an important step towards filling up the gap
in the literature that exists on the impact of broadband with higher capacity speeds.
Does very high capacity broadband for businesses then matter for entrepreneurship? The results of this
study suggest that it does. With a two year lagged broadband availability policy variable we found a
positive significant effect on the number of new firms and the number of fast growing firms in a region.
With a 10% increase 0.45 new independent firm entries per 1.000 business establishments and 0.15 fast
growing businesses per 1.000 business establishments. The results also show that the effect is
heterogeneous across space with different impacts on municipalities with different urbanity levels.
This suggests that the availability of very high capacity broadband internet is an important regional
determinant of entrepreneurship. This can be explained by the following mechanism. The presence of
very high capacity broadband enables new levels of advanced use of the internet. This can facilitate
entrepreneurial activity in two ways. First, it can offer new entrepreneurial opportunities in the region
that can be exploited by potential entrepreneurs. Second, the firm benefits of new levels of advanced use
can influence an entrepreneurs decision to locate in areas with very high capacity broadband over areas
without very high capacity broadband. The presence of very high capacity broadband can also facilitate
entrepreneurial success in the region, because it can help entrepreneurs survive and grow. Access
provides SME’s with a set of powerful tools that can be utilized to work faster, more efficiently and
differently. The effects are however modest and also seem to depend on the urbanity level of the region.
This can help policymakers make more informed decisions on rollout strategies and decide whether the
benefits outperform the costs. However, it is also important for them to keep in mind that entrepreneurs
also need to adopt the very high capacity broadband and that is also necessary for the potential
entrepreneur or small business owner to have sufficient complementary digital awareness and digital
literacy skills, something that they often lack according to research (Mack et al., 2017).
This study does have its limitations, it does not prove causality, but makes a strong case for the possibility
of causation and it was not able to look at the differences across industries. Future research is needed,
nevertheless this study provides a good first step in untangling the impact that very high capacity
broadband can have on the economy. So far, it looks like it makes a difference on entrepreneurship in
regions.
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8. Appendix
8.1. VIF test for multicollinearity
VIF is smaller than 5 for every variable, so there are no concerns of multicollinearity
Table 8-1: VIF test to check for multicollinearity of the variables
FttO % (2 year lag) Employment Establishments Pop mutation Household Income Unemployment % University_dum1
1.092 1.271 1.339 1.235 2.240 2.101 1.207
8.2. First stage of the 2SLSDV model
Table 8-2: First stage of the 2SLSDV model with percentage Fiber to all fixed objects as instrumental variable
Dependent variable:
FttO % (2 year lag) Entry (p. 1000 est.) Fast growing (p. 1000 est.)
First stage 2SLSDV model 2SLSDV (robust) 2SLSDV model 2SLSDV (robust)