A view that is widely held, and which Ofcom shares, is that there is likely to be a significant relationship between broadband investment (and penetration) and economic growth. Given the potential importance of such a relationship to the economy, Ofcom wished to establish whether, and if so to what extent such a relationship was supported by statistical evidence. For this reason, Ofcom asked Dr Pantelis Koutroumpis of Oxford University to provide a summary of existing work. He found that there was evidence of a causal, positive relationship between broadband investment and growth (i.e. that investment in broadband caused economic growth). However, the evidence was somewhat out of date. He also noted that there was little evidence about the relationship between broadband speeds and economic growth. In order to fill the gaps in the evidence base, Ofcom asked Dr Koutroumpis to update some previous work that he had completed in 2009 in this area and to enhance his methodology to incorporate broadband speed into the analysis.
The work carried out by Dr Koutroumpis on behalf of Ofcom suggests that investment in broadband has had significant benefits to the UK economy. He analysed 35 OECD countries over a 15-year period (2002-2016) and his findings confirmed a positive relationship between broadband investment and economic growth. He found that the increase in broadband adoption over the 15 year period led to an increase in GDP of 0.3% per annum on average across the 35 OECD countries. For the UK, the increase in GDP was 0.37% per annum, which meant a cumulative increase of around 5.3% over the period.
In addition, the paper also found a strong positive relationship between broadband speed and economic growth. The contribution of broadband speed improvements to UK GDP was higher than the average for the OECD: the UK’s average increase of around 0.1% per annum over the period compares with the OECD average of around 0.08% per annum. Taken together, the impact on UK GDP of broadband investment and speed improvements was on average 0.47% per annum. The cumulative total was an addition of around 6.7% to UK GDP as a result of improvements in broadband networks over the period.
The paper also finds that over the period in question there were diminishing returns to adoption. For example, increasing adoption from 10 to 20 connections per 100 people had a greater impact on GDP compared to an increase from 20 to 30 connections per 100 people. Increasing speeds had similar effects on GDP i.e. there was a relationship between speed and GDP but there were diminishing returns – e.g. an increase in speed from 1Mbps to 2Mbps would have had a greater impact than an increase of 2Mbps to 3Mbps. However, there is evidence that the speed threshold at which the GDP effects start to tail off is increasing over time as new technologies emerge that can exploit greater speeds.
This work is important in establishing an empirical basis for how broadband has impacted on the UK economy. This helps to inform Ofcom’s strategy, which is to continue to encourage broadband investment, improving coverage and speed. Ofcom highlighted in its 2016 Digital Communications Review the need for more broadband investment to enable higher speeds and that this is needed to keep the UK at the forefront of digital connectivity globally.
When assessing the findings as an input to policy development, it is important to note that the study is backward looking and is not a predictor of the future. This is particularly relevant to the findings on the impact of increased speeds, where the nature of the relationship may be expected to evolve over time. There is some evidence of that already in the rise in the level of the threshold speed at which GDP effects tail off. This is to be expected, because broadband is an enabling technology that fosters the development of other technologies.
The overarching message given by the research appears to be that there will continue to be economic benefits from broadband investment to the UK in the future, in terms of availability, take-up and speed.