Broadband Internet and Firm Entry: Evidence from Rural Iowa

The availability of broadband Internet service should have increased firm productivity and lowered firm entry costs. However, validating the broadband effect is complicated by the rapid deployment of broadband Internet service across metropolitan areas, removing meaningful variation in broadband availability. Deployment in rural markets was much more uneven, suggesting that the presence or absence of broadband service may have altered the site selection of firms targeting rural markets. We investigate the effect of broadband availability on firm location decision in rural Iowa. We establish a counterfactual baseline firm entry rate for each zip code area in rural counties by showing how the presence of broadband service in a ZIP code in 2001 affected firm entry in 1990-1992 before Broadband was available. We then measure how the actual presence of broadband service in the same ZIP code affected firm entry in 2000-2002. We show that the difference in estimated probability of entry between the counterfactual baseline and the actual response ten years later is the Difference-in-Differences estimate of the effect of broadband deployment on firm start-ups. We find that broadband availability in a rural ZIP code has a positive and significant effect on firm entry in the ZIP code but only in rural markets adjacent to a metropolitan area or with a larger urban population. Broadband access does not affect new firm entry in more remote rural markets