The Digitalization – Economic Growth Relationship in Developing Countries and the Role of Governance

Abstract

Digital technology is emerging as one of the suitable solutions to help developing economies catch up with advanced economies in the context of globalization. Progress in digital technology promotes economic growth in developing economies because it reduces transaction costs in economic activities and improves workers’ skills and knowledge. Meanwhile, governance is the primary cause of economic growth. Therefore, this study raises a research question of whether governance significantly contributes to the digitalization – economic growth relationship in developing countries or not. For the answer, the study uses the difference GMM Arellano-Bond estimators to empirically examine the effects of digitalization, governance, and their interaction on economic growth for a group of 35 developing countries from 2006 to 2019. Then, the study applies the FE-IV estimator to check the robustness of estimates. The results indicate that digitalization and governance boost economic growth while their interaction hinders it. Furthermore, trade openness also increases economic growth. These findings suggest some crucial policy implications that governments in developing countries should establish appropriate conditions to promote digital technology so that citizens can peacefully express their views on government policies and regulations, which contributes to the economic development of the country.