Digital Connectivity and Labor Productivity in Emerging Economies: The Moderating Roles of Human Capital and ICT Capability

The contribution of digital connectivity to productivity could also depend on the human and technological capacity to utilize the digital technological infrastructure, and this is a growing concern. The study explores the association between digital connectivity and labour productivity and assesses whether human capital and ICT capability strengthen this relationship in the six developing Asian economies in this study (namely Pakistan, India, Malaysia, the Philippines, Thailand and Indonesia) during 2005-2024. Labour productivity is calculated as GDP per labour, and digital connectivity is operationalized through using the number of fixed internet broadband subscriptions per 100 populations. Other factors that are also incorporate in the econometric framework are foreign direct investment, gross capital formation, and inflation. To control for the possibility of cross-country dependence and for the possible differential response of countries, the analysis is conducted using fixed-effects estimation with Driscoll–Kraay standard errors and a sensitivity assessment of the Common Correlated Effects Mean Group (CCE-MG) estimation. The baseline findings imply a positive and significant association between digital connectivity and worker productivity. Moreover, the interaction effects imply that this relationship is strengthened by higher levels of human capital and ICT capability, and that the productivity improvements from having broadband connectivity are higher the stronger the complementary levels of human and technological capabilities. The CCE-MG estimates, nevertheless, do not lead to statistically significant direct and interaction effects, suggesting that the base relations are affected by unobserved shared latent factors and inter-country heterogeneity. The conclusions are accordingly a warning against thinking of broadband expansion as a standalone solution for productivity improvements. Policies designed to enhance the productivity-enhancing outcomes of digital technological infrastructure for developing economies should involve investing in connectivity, along with improving education, digital skills, ICT capability, and technological development, allowing for variations in the country-specific economic conditions.