Internet and telecommunication technologies have changed the way people communicate and do business across the globe. This technology revolution has been visible not only in high income countries, but also in developing and lower income countries. It has impacted business transactions between these groups of countries. This dissertation studies the effect of the Internet on bilateral trade. A few studies have looked at the impact of the Internet on bilateral trade. This study offers a novel analysis of its interactions with the institutional underpinnings of trade by examining the effects of Internet use on trade in industries that require varying degrees of relationship-specific investments. Industries can be categorized by their level of dependence on investments that are relationship-specific. A higher dependence on relationship-specific investments is generally associated with higher levels of risk in the transaction process. Countries with more stable and differentiated institutional arrangements are generally capable of better contract enforcement, and have often been the preferred trading partner in such industries. This study analyzes whether Internet use impacts industries with a higher need for institutional arrangements differently from those that have a smaller need for these institutional arrangements. Internet is able provide access to different kinds of information (verbal and visual) almost instantly, and this plays a role in reducing transaction costs (traditionally managed through the use of institutional arrangements between two countries). The underlying conceptual framework of this study takes into account the affordances of the technology based on past literature. The effect of these affordances or features on coordination costs, information costs and productivity costs is analyzed to develop the hypothesis for this study. The adopted approach analyzes the impact of internet use on institutional intensive sectors by understanding the relationship of these different technological affordances on transaction and production costs in an industry.A pooled OLS estimation and panel data estimation using gravity specifications of international trade was performed on 25 industries and for 72 countries between the time periods 2002 to 2010. The findings indicate that higher Internet use by the exporting country has a positive impact on trade with the US in sectors that require higher institutional arrangements. This has important policy implications because countries with relatively poorer institutional arrangements can now benefit from the use of Internet, as the technology is able to reduce transaction and information costs to some degree. It also implies that the use of Internet or broadband could reduce the need for stronger institutional arrangements in industries with relationship-specific investments. The findings from this study also suggest that industries with low institutional intensities are positively impacted by the use of the Internet because of its effect on productivity particularly in markets that are highly competitive in nature. The underlying cause and reason for impact on industries with a lower need for institutional arrangements is a little more ambiguous because of multiple factors that can influence the outcome including the nature of the industry (competitive or not) and the existence of other potential importers in the market.
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