The Corporate Digital Divide: Determinants of Internet Adoption

The diffusion of Internet technology among firms is widely considered to be one of the primary factors behind the rapid economic growth of the 1990s. However, little systematic study has examined the variation in firm decisions to adopt the Internet. I explore the sources of this variation by examining Internet adoption decisions in a very large sample of organizations in the finance and services sector in 1998.

I show how prior information technology (IT) investments and workplace organization decisions affect the returns to adopting simple and complex Internet technologies. I show that recent investments in client/server (C/S) networking applications have competing effects on the likelihood of Internet adoption. Such investments can slow adoption by acting as a short-run substitute or by creating “switching costs.” Geographic dispersion of employees is complementary with Internet adoption, suggesting that Internet technology lowered internal coordination costs. Increases in organization size and external pressure also increase the likelihood of adoption.