It is widely believed that the diffusion of the commercial internet has led to a reduction in communication costs that has the potential to reshape the geographical variance in economic activity. One line of reasoning that has received particular attention speculates that lower communication costs disproportionately benefit economic actors in low density, economically isolated locations by enabling them to plug into economic activity in other locations. Such models lead to the conclusion that the diffusion of information technology (IT) will lead to a convergence of economic activity across locations. This view has been espoused in books such as Cairncross’s (1997) The Death of Distance and Friedman’s (2005) The World is Flat. However, both recent theoretical models and a variety of empirical evidence have argued that the link between IT diffusion and economic activity is more nuanced. For example, IT investments in business often require complementary inputs that are disproportionately found in cities, and may benefit from traditional Marshallian externalities. Second, most communication is local, so if IT-enabled communication channels complement existing channels, then IT-enabled channels may reinforce existing communication links and patterns of economic activity. Further, IT-enabled communication channels are less rich than other channels such as face-to-face communication, and so may be less effective at conveying certain kinds of ‘tacit’ knowledge; as a result, regular face-to-face interactions may be required even when IT-enabled communication is used.
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