Why Digitalization Pays Off in Developing Economies but Loses Power at the Top

A new study argues that digitalization does not generate the same economic payoff everywhere. In developing countries, stronger network readiness and foreign direct investment can still act as powerful engines of catch-up growth. In advanced economies, however, the gains from additional digital infrastructure appear to weaken sharply once connectivity becomes widespread.

The study, "The Digital Maturity Paradox: The Divergent Impact of Network Readiness and FDI Across Development Tiers," was published in the journal Economies. It was authored by Pahlaj Moolio, Md Jamirul Haque, Kazi Md. Nasir Uddin, Kim Geok Tan and Chia Pao Liew, whose affiliations span universities in Cambodia, Bangladesh and Malaysia.

Using 2023 data for 121 countries, 76 developing and 45 developed, the researchers examine how real GDP per capita growth relates to network readiness, foreign direct investment and trade openness. Their key finding is that its growth effect depends heavily on where a country sits on the development ladder.

The Global South Still Has Room to Leapfrog

For developing economies, the results are striking. Network readiness carries a positive coefficient of 1.106 and is statistically significant at the 1% level, while FDI is also positive and significant. The model explains about 21.9% of the variation in per capita growth after adjustment, modest by macroeconomic standards, but meaningful for a cross-country model built from only three main explanatory variables.

The implication is straightforward: where digital access, infrastructure and productive capital remain scarce, additional investment can still produce sizeable gains. Broadband networks reduce transaction costs. Digital payments widen financial participation. Better connectivity links firms to suppliers, customers and public services. Foreign investment can bring not only capital but also technology, managerial knowledge and access to international markets.

This supports the idea of "leapfrogging," under which developing economies can bypass parts of older, capital-intensive development pathways. Countries do not necessarily need to replicate every stage of industrialization followed by today's rich economies. They may move more rapidly into digitally enabled services, modern logistics, fintech, e-commerce and data-driven production.

However, the finding should not be read as a blanket endorsement of infrastructure spending. Connectivity alone does not guarantee transformation. Its returns depend on electricity reliability, affordability, digital skills, market competition, regulatory capacity and whether local firms can use new networks productively.

For policymakers in the Global South, the lesson is therefore not simply to spend more on technology. It is to build an ecosystem in which technology can raise productivity. It requires combining broadband and mobile infrastructure with digital literacy, interoperable public systems, consumer protection, cybersecurity, innovation finance and support for small and medium-sized enterprises.

Rich Economies Face a Different Digital Challenge

The study finds a very different pattern in advanced economies. In the baseline model, network readiness has a negative coefficient of −0.734 and is only marginally significant at the 10% level. FDI and trade openness are statistically insignificant, while the model's adjusted R-squared is just 1.61%.

At first glance, this might suggest that further digitalization reduces growth in wealthy countries. That would be too strong a conclusion. The more defensible interpretation is that standard measures of network readiness explain very little once economies have already achieved high levels of digital maturity.

The sensitivity analysis reinforces that caution. After Malta and Singapore are removed as influential outliers, the network-readiness coefficient remains negative but loses statistical significance. The adjusted R-squared falls to just 1.03%, meaning that network readiness, FDI and trade explain almost none of the observed differences in growth among developed economies.

This is the study's "digital maturity paradox." Once basic connectivity is universal, adding more of the same infrastructure may no longer generate visible macroeconomic gains. The binding constraints shift. Growth increasingly depends on how effectively firms reorganize production, how quickly workers acquire new skills, how well institutions support experimentation and how successfully economies convert technologies such as artificial intelligence into broad productivity improvements.

Many advanced-economy strategies still treat digital investment as though infrastructure expansion alone will raise growth. The study suggests that the frontier problem is no longer access but application. High-income countries may need to prioritize research commercialization, organizational change, workforce retraining, cybersecurity and the diffusion of AI across ordinary companies, not only leading technology firms. Additional broadband capacity may deliver important social or administrative benefits, but its marginal contribution to aggregate economic growth is likely to be smaller than investments that help businesses and institutions use digital systems more productively.

The study points to a deeper policy divide: developing countries need stronger networks and greater absorptive capacity, while developed countries need to make better use of the networks they already possess.

Trade and FDI Volumes Can Mislead Policymakers

The trade variable is statistically insignificant in both developing and developed groups. The authors argue that gross trade-to-GDP ratios obscure where value is actually created and retained. This matters because governments often present rising trade volumes as evidence of economic upgrading. Yet a country can record high exports and imports while remaining locked into low-value assembly, commodity processing or transit activity. Large flows do not automatically indicate strong domestic value addition, technological learning or wage growth.

A developing economy may become deeply integrated into a global value chain while capturing only a small share of the final product's value. Imported components may be assembled locally and re-exported, producing impressive trade statistics without creating strong domestic technology, design or supplier capabilities.

The same caution applies to FDI. In developing countries, FDI is positively associated with growth, but the quality of investment remains critical. Capital that creates supplier linkages, trains workers and transfers technology can support structural transformation. Capital routed through financial centres, tax structures or asset transactions may have little connection to productive domestic activity.

The study's treatment of Malta and Singapore illustrates the measurement problem. Their unusually large trade and capital flows distort the developed-country model, showing how headline ratios can be dominated by the structure of small financial and maritime hubs rather than broad-based domestic growth.

For development agencies and governments, this creates a strong case for better indicators. Policymakers should look beyond gross trade and FDI totals toward domestic value added, export complexity, technology intensity, local sourcing, workforce development and productivity spillovers.

Investment promotion should also become more selective. The policy objective should not be to maximize capital inflows at any cost, but to attract investment that strengthens domestic capabilities and creates durable links with local firms, universities and workers.

The Policy Message Is Powerful, but the Evidence Has Limits

The study's Chow breakpoint test rejects the assumption that the same growth relationship applies across both development groups, with an F-statistic of 11.91 and a probability below 1%. The finding strengthens the argument against one-size-fits-all development policy. Digital infrastructure, FDI and trade may be highly relevant growth drivers in one context and weak explanations in another. International institutions, investors and governments should therefore design strategies around development stage, institutional capacity and industrial structure.

The evidence nevertheless has important limitations. The analysis uses a single year of cross-sectional data. It cannot establish causality, capture long investment lags or determine whether digital readiness causes growth rather than simply accompanying it.

The model also excludes institutional quality, education, innovation expenditure, macroeconomic stability, competition and economic structure. These factors may be especially important in advanced economies and could help explain why the developed-country model has such low explanatory power.

The authors acknowledge that the research does not identify the precise point at which digital returns begin to flatten. They call for non-linear threshold models, more detailed trade data and stronger treatment of institutions and absorptive capacity.

For the Global South, the opportunity remains substantial: digital infrastructure and productive FDI can still accelerate catch-up, but the gains will depend on whether countries build domestic capabilities rather than simply importing technology. For advanced economies, the next growth frontier lies not in more basic connectivity, but in innovation, organizational reform and the effective deployment of AI.