Modern Economy, 2015, 4, 209-213 http://dx.doi.org/10.4436/me.2013.43A435 Published Online March 2015 (http://www.scirp.org/journal/me) Changes in the global economy after the Internet revolution Nawar Al-Saadi University of Bucharest Email: dr.nawar30@gmail.com Received December 30, 2014; revised January 30, 2015; accepted February 19, 2015 ABSTRACT This paper investigates the impact of internet on economic growth and this impact during the recession. The data are drawn from World Bank in a panel of 201 countries from 1988 to 2010. Results from an OLS model reveal that a 10 percentage point increase in internet penetration rate raises real GDP per capita by 0.57 to 0.63 percentage points. Dur- ing the recession relative to expansion, the coefficient of internet reduces but it still remains statistically positive. This suggests that internet provides a way to solve the problem of economic recession. Our results are robust to the inclusion of time and country fixed effects. Keywords: Internet; Economic Growth; Recession 1. Introduction In macroeconomics, the recession refers to the period of stagnation or negative growth in an economy’s gross domestic product (GDP). In order to get rid of the reces- sion, many economists suggest policies of stimulating aggregate demand following Keynes’s macroeconomics theory or some other monetary policies. However, in ad- dition to these policies, internet may play a useful role in leading the growth of economy or productivity which is evident in the literature but rarely studied on the topic of recession. Accordingly, this paper investigates the rela- tionship between internet and economic growth and fur- ther examines it, especially during the recession. Our examination suggests that internet provides stimulus to economic growth and hence solves the problem of eco- nomic recession. This paper uses data from World Bank in a panel of 201 countries from 1998 to 2010 with 1226 observations. Following Czernich et al., (2011) [1], a macroeconomic production function with constant returns to scale is built up. In addition to traditional inputs, we add internet pene- tration rate and an interaction term between it and a re- cession dummy. These added variables enable us to ex- amine the impact of internet on economic growth as well as the impact during the recession. We also create mod- els specific to economy expansion as well as to economy recession. The remainder of this article is organized as follows. Section 2 reviews related literature on internet and economic growth. Section 3 introduces theoretical and empirical framework and explains data and variables. Section 4 summarizes empirical results. Section 5 con- cludes and proposes suggestions. 2. Literature on Internet and Economic Growth Internet positively impacts the economy since it spreads information, stimulates innovation, builds up network, fosters business, deepens capital, improves labor market, strengthens market competition, and helps firms to profit from emerging markets. Therefore, internet may help to fight against economic downturn. We review the litera- ture mentioning the causality between internet and eco- nomic growth as follows. Internet facilitates access to information and reduces search costs. Firms adopting internet are able to commu- nicate better, faster and at lower costs. This reduces in-ternal as well as external transaction costs and thus low-ers production costs and enhances productivity and gen-erates economic growth (Harris, 1998) [2]. Spread or spill-over of knowledge across firms, regions, and countries provides a channel by which information technology in general results in significant productivity growth. This is because that the development of information technolo-gies fundamentally improves the processing of informa-tion and hence promotes economic growth. Internet can be regarded as one of the information technologies and a truly general purpose technology (GPT) which is defined as technologies characterized by pervasiveness, inherent potential for technical improvements, and innovation com-plementarities. GPT can lead to externalities as knowl-edge spillovers (Bresnahan and Trajtenberg, 1995) [3]. In this respect, internet facilitates the spatial distribution of large batches of information that previously had to be collocated (Bloom et al., 2011) [4]. It also fosters cheaper information dissemination which enhances the adoption Copyright © 2015 SciRes. ME