Numerous empirical studies at different levels of aggregation demonstrate the important role of information and communication technologies (ICT) for economic performance. As general purpose technologies ICT enable firms to reshape their business processes and to improve their products and services. Firms' innovation activity in turn increases labour productivity thereby entailing growth and competitiveness. Policy makers and industry representatives denote the availability of an efficient broadband Internet infrastructure to be essential in order to reap the potential benefits of ICT. This paper provides empirical evidence on the causal impact of broadband Internet on firm performance using a sample of German manufacturing and services _rms. Firm performance is measured in terms of labour productivity and realised product and process innovation. The analysis refers to the early phase of DSL expansion in Germany from 2001 to 2003, when roughly 60 percent of the German firms already used broadband Internet. Identification relies on instrumental variable estimation taking advantage of information on the availability of DSL broadband at the postal code level. The results show that broadband Internet has no impact on firms' labour productivity whereas it exhibits a positive and significant impact on their innovation activity. Thus, firms that used broadband Internet in the early phase of DSL expansion where more likely to reshape their business processes and to bring new or improved products and services to the market.

Keywords

labour productivity, innovation, broadband Internet