Digitalization and economic growth in Mexico: an analysis using dynamic panel models (2015-2023)

Digitalization and economic growth in Mexico: an analysis using dynamic panel models (2015-2023) Javier G. Rodríguez-Ruiz a a Universidad Nacional Autónoma de México (UNAM)-Instituto de Investigaciones Económicas, México. Postdoctoral fellowship completed thanks to the UNAM Postdoctoral Fellowship Program. Email address: Date received: February 21, 2025. Date of acceptance: July 1, 2025. Abstract This study aims to investigate the causal relationship between digitalization and economic growth in Mexico by constructing a Digital Economy and Society Index (DESI) at the state level from 2015 to 2023. The results suggest that a 1% increase in the DESI boosts total GDP by 0.058%. This effect is double in states with greater economic progress, reaching 0.134%. The results also suggest that greater technological infrastructure, closing the digital divide and developing digital skills are imperative for Mexico to be among the world’s top ten economies. Additionally, these factors influence the reduction of heterogeneous state patterns of digitalization through the implementation of public policies on digital matters. Keywords: panel models; economic growth; digitalization index; digital divide; Mexico. 1. INTRODUCTION Today's digital world permeates societies and economies around the world to varying degrees. Its economic importance is undeniable. In Mexico, the gross censal added value of e-commerce contributed 5.9% to GDP in 2022 (INEGI, 2023a), while the telecommunications subsector grew at an average annual rate of 9% between 2015 and 2023 (INEGI, 2023e), well above the average annual growth rate, close to 1%. Developed countries perform better globally, with e-commerce value growing at average annual rates of between 8% and 10% in countries such as Germany, South Korea and the United States (OECD, 2024). In recent decades, specialized literature on the relationship between digitalization variables and economic growth has grown. One World Bank (WB) study (Qiang et al., 2009) found that telecommunications variables positively impact on economic growth. Katz's (2009) analysis validated its positive transversal effect on developed and Latin American (LA) countries through employment, investment, innovation, productivity and economic development. Other studies for Latin American countries have also validated the multiplier effects of technological infrastructure on economic performance (Alderete, 2017; Katz et al., 2023; Zaballos and López-Rivas, 2012). For example, Rabanal (2024) affirms that there is evidence of the technology productivity paradox (Solow, 1987) in his analysis of 12 Latin American countries. Regarding Mexico, the literature measuring the causal relationship between telecommunications variables and economic growth is scarce. Some studies have been identified, such as that by Jiménez et al. (2014) with data from 1991 to 2010, which found a positive effect of the variables of mobile phone users and the number of computers on GDP using the Global Innovation Index (GII).1 A subsector study by Díaz et al. (2018) revealed that level of education, information and communication technology (ICT) skills and the availability of ICT infrastructure in companies are important determinants of labor productivity in Mexico. Meanwhile, González (2020) estimated that the effect of broadband internet increased GDP by 0.13% for the period from 2013 to 2018. It is important to note the context of this research: i) there is a positive relationship between digitalization variables and economic growth; ii) a greater effect is observed in countries with high levels of economic progress, linked to variables such as human capital, exports, foreign direct investment and public investment (Pradhan et al., 2018); iii) the use of individual telecommunications variables or composite digitalization indices has become popular (CMD, 2024; ITU, 2024a; Milošević et al., 2018); and iv) the analyses are intended for countries. This paper goes a step further by constructing a robust digitalization index for the 32 states of Mexico for the period 2015-2023. This index includes socioeconomic variables, ICT assets in homes and ICT skills, in line with international digital development indices (EC, 2024; ITU, 2024b; Jyoti and Singh, 2023; Katz, 2009). The main objective of the research is to measure the impact of a Digital Economy and Society Index (DESI) on Mexico's economic growth. Dynamic panel regression models are employed, and the impact of digitalization is differentiated according to the states’ economic levels. The paper is structured as follows: the second section details the conceptual aspects of the relationship between economic growth and technical progress related to digitalization. It then discusses the use of digitalization variables and indices in relation to economic growth. The fourth section details methodological aspects of the DESI and the econometric model specifications. The fifth section presents the econometric modeling and results. This is followed by a discussion and implications. The final section contains the conclusions and annexes. 2. ECONOMIC GROWTH AND THE DIGITAL ECONOMY: CONCEPTUAL ASPECTS Schumpeter (1942) was one of the first to recognize innovation and investment in knowledge and technical progress as sources of economic growth and industrial transformation, capable of maintaining and reproducing the capitalist system. Meanwhile, neoclassical economic theory (Solow, 1956; Swan, 1956) assumes that economic growth is explained by improvements in productivity and technology rather than directly by the accumulation of physical or human capital. Endogenous growth theorists (Aghion and Howitt, 1998 and 2008) argue that technical progress can boost economic growth through innovation and knowledge, thus overcoming diminishing returns on capital. The works of Katz and Koutroumpis (2013)2 and Pradhan et al. (2014) posit that technological or telecommunications infrastructure variables embody technical progress and generate increasing returns to scale. Technological progress, digitalization, and the Internet are embodied in countless commercial activities, streamlining government services and connecting suppliers with consumers of goods and services. Tapscott (1996) defines the digital economy as a combination of networks, knowledge, intelligence and creativity for creating wealth and social development. In the opinion of Kling and Lamb (2000, p. 17), “it focuses on goods and services whose development, production, sale or provision depend critically on digital technologies […]". The OECD (2020), meanwhile, defines it as involving technologies, digital infrastructure, digital services and data used by three main agents: producers, consumers and the government. Meanwhile, Bukht and Heeks (2017) speak of a digital economy ecosystem that connects individuals, businesses, devices and society as a whole. Therefore, the concept of the digital economy encompasses aspects of (...truncated)