Can Internet Development Mitigate the Problem of Resource Misallocation? Evidence from China

The long-standing sloppy economic growth model that has led to resource misallocation between regions and industries has caused China's economic development to enter a period of decelerated growth even though it has soared to the top class of the global economy. The issue of resource misallocation in China has been examined in previous studies, but less focus has been placed on whether resource misallocation has spatial spillover effect and the internet's involvement in it. To fill in the gaps in the literature, this study uses data from China's inter-provincial panel from 2010 to 2019 to measure four aspects of internet development: software and information technology services, key internet indicators, service capacity of the telecommunication industry, and the communication capacity of the telecommunication industry. This is done by using a multi-factor estimation method to approximate the actual real-world situation. With an appropriate selection of spatial matrix and threshold variables, a non-dynamic panel threshold model is built to empirically investigate the impact of internet development on resource mismatch. There are several significant findings in this study. First, internet development in China differs and correlates spatially. Second, as internet development advances, there is a significant negative impact on resource misallocation within the region itself and spillover effect to other regions. Third, there is regional variation in how resource misallocation is affected by internet development. Fourth, the connection between internet development and resource misallocation is threshold-dependent on the level of governmental support. To overcome the resource bottleneck and achieve coordinated development, we suggest that local governments should step up their support for the development of internet infrastructure, and underdeveloped regions should fully utilize the spillover effect of internet resources from developed regions.Jel Classification: R11; R15; C31 Purpose: This paper investigates whether internet development can mitigate resource misallocation in China. Methods: Using provincial panel data from China and a multi-factor estimation method to construct a comprehensive index for internet development, we apply the gravity model to test the interregional interaction and the spatial Durbin model to examine the impact of internet development on resource misallocation. The threshold effect of government support is also being tested. Conclusions: First, internet development in China differs and correlates spatially. Second, as internet development advances, there is a significant negative impact on resource misallocation within the region itself and spillover effect to other regions. Third, there is regional variation in how resource misallocation is affected by internet development. Fourth, the connection between internet development and resource misallocation is threshold-dependent on the level of governmental support. Implications: To overcome the resource bottleneck and achieve coordinated development, we suggest that local governments should step up their support for the development of internet infrastructure, and underdeveloped regions should fully utilize the spillover effect of internet resources from developed regions.