The Mechanics of Internet Growth:

A Developing-Country Perspective
Amitava Dutta and Rahul Roy

ABSTRACT: The uneven diffusion of the Internet across countries reinforces social and
economic inequalities. Correlation studies associate its uneven diffusion with such factors
as competition, telephone infrastructure, literacy, economic development, access charges,
and network reliability, but they do not reveal the mechanics of Internet diffusion because
it is the interplay of different factors, not any factor in isolation, that generates diffusion
behavior. This paper uses the system dynamics (SD) methodology to develop a causal
model of Internet diffusion in a developing country. The SD methodology was selected
because its basic construct, the feedback loop, is well suited to represent the mechanics
driving dynamic processes. The proposed causal model is validated using Internet sub-
scriber data from India. The technique of dominant loop analysis identifies the feedback
loops that have the most influence on diffusion behavior. The model can be used to evalu-
ate diffusion patterns resulting from different policy alternatives intended to foster Internet
diffusion in developing countries.

KEY WORDS AND PHRASES: development policies, economic development, Internet

diffusion, system dynamics.

The uneven nature of Internet diffusion across nations is well documented

[21]. The disparity has the potential to reinforce social and economic inequali-
ties [40] and is of particular concern for developing countries [20, 29]. But
chronic infrastructure deficiencies, low literacy levels, insufficient experience
with technology, and inadequate regulatory structures produce complex in-
teractions that make it difficult to understand how the Internet diffuses in this
context [31]. Correlation studies associate Internet diffusion with a variety of
technical and social factors but do not reveal the interplay among them that
generates diffusion behavior. Without understanding this mechanic, it is diffi-
cult to develop policies intended to accelerate Internet diffusion within a de-
veloping country.
Therefore, in this paper, we develop a causal model of Internet diffusion from
a developing-country perspective, using the system dynamics (SD) methodol-
ogy. The choice of developing countries as a context is motivated by the ur-
gency of improving their Internet infrastructure and to understand how social
and economic conditions affect such efforts. We use India as a specific example
because the factors affecting Internet diffusion in India are typical of many
other developing countries. SD was selected as the methodology because its
basic construct, the feedback loop, is very well suited to represent the mechan-
ics of dynamic processes. The model makes at least two important contribu-
tions. It provides insights into the mechanics of diffusion that cannot be obtained
with correlation analyses and descriptive statistics, and it is an effective com-
putational vehicle for assessing how the Internet might diffuse under different
policy alternatives and environmental conditions. Both of these contributions

International Journal of Electronic Commerce / Winter 2004–5, Vol. 9, No. 2, pp. 143–165.
Copyright © 2005 M.E. Sharpe, Inc. All rights reserved.
1086-4415/2005 $9.50 + 0.00.
144 AMITAVA DUTTA AND RAHUL ROY

are obviously relevant for countries engaged in developing policies and pro-
grams to expedite technology diffusion.

Literature Review

The unit of analysis in the study is a country as a whole. The study begins,
therefore, with a review of the literature addressing country-level Internet
diffusion, to take stock of the current understanding of this specific context.
Findings from the more general diffusion or technology-acceptance literature
will be reviewed subsequently in connection with the development of the
causal model [39, 42]. In a related sequence of studies, the authors have iden-
tified six dimensions of Internet diffusion: connectivity infrastructure, organi-
zational infrastructure, sophistication of use, pervasiveness, geographic
dispersion, and sectoral absorption [15, 45, 46].1 These dimensions will help
to structure the review.
The statistics on Internet diffusion are plentiful [33]. The studies in this
area do not attempt to analyze why the Internet diffuses as it does, but they
document patterns of diffusion. Two of these are worthy of note here:
• Internet connectivity levels have been growing substantially, espe-
cially over the past few years [30].
• The rate and magnitude of Internet diffusion vary appreciably, even
among developing countries [21].
The studies also put forward, mostly without empirical testing, the factors
that might explain the observed diffusion patterns. These include competi-
tion in the telecommunications sector, economic development, literacy, tele-
phony infrastructure levels, and network access prices [4].
A second category of research uses correlational analysis to more rigor-
ously analyze the association between Internet diffusion and these drivers.
When combined with case study findings about technology adoption (e.g.,
[20]), these studies reveal more about the mechanics of Internet diffusion. Press
found a strong correlation between the United Nations Development Program’s
human development index (HDI) and Internet connectivity [33]. Kelly and
Petrazzini included access price and language in addition to the factors in-
cluded in the HDI [23]. Pairwise correlation tests between the variables and
Internet connectivity confirmed their influence. Hargittai’s study underscores
the shortcomings of pairwise analysis [17]. It found that a country’s economic
wealth is significantly correlated with its Internet connectivity, and adding a
variable for human capital improves model fit. However, the addition of a
regulatory policy variable removes the effects of human capital, even as model
fit improves. Robison and Crenshaw found a strong correlation between
Internet connectivity and education, size of the service sector, political open-
ness, and level of development [38]. The interactions between some of these
variables also had an impact. They concluded that Internet growth is “not in
fact a simple linear function of economic and political development, but rather
has been driven by complex interactions. . . . Uncovering some of these struc-
tural preconditions and determinants of Internet diffusion provides a first step
 INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 145

toward providing a theoretical and empirical sociology of this ‘third techno-

logical revolution.’” This observation underscores the dearth of studies of the
mechanics of diffusion in the literature.
A few studies attempt to explain Internet diffusion based on assumptions
about underlying causal mechanisms. The model of Bitnet growth is an ex-
ample [16]. Rai, Ravichandran, and Samaddar estimated three different mod-
els of Internet growth in the United States [34]. The first two, the logistic model
and the Gompertz model, are based on contagion effects from diffusion of
innovation theory, which posits that nonadopters are likely to imitate adopt-
ers over time through communication [39]. These two models had poorer pre-
dictive validity than the third, the exponential model. Because the exponential
model is memoryless, while the logistic and Gompertz models assume the
mechanics of contagion, Rai, Ravichandran, and Samaddar inferred that con-
tagion alone cannot explain Internet growth. They surmised that their models
“ignore external factors such as government policy and sponsorship, . . . and
technological developments” [34].
The preceding review shows that the current understanding of Internet
diffusion consists of (1) a rich collection of descriptive statistics on the spatial
and temporal diffusion patterns in different countries; (2) identification of tech-
nology and social drivers of Internet diffusion based on correlation analysis;
and (3) identification of contagion as a basic mechanism underlying diffu-
sion, verified by statistical estimation of S-shaped growth curves based on
that assumption. Differences in Internet diffusion across different countries
can be explained ex post. However, this is not an adequate basis for policy-
making, because the behavior of a physical, technical, or social system cannot
be changed through policy interventions unless the intervention is grounded
in a thorough understanding of how the behavior in question is generated. In
the area of Internet diffusion, the diffusion pattern and the drivers are known,
but not how the former is generated from the latter. The discussion in this
paper responds to this need by constructing and validating a causal model of
Internet diffusion that explains how Internet diffusion occurs and provides a
computational basis to support policy analysis.

Modeling the Mechanics of Diffusion

The basic causal mechanism for the model is contagion, so named because it
is not unlike the way an infectious disease spreads [39]. Contagion is a suit-
able mechanism for at least two reasons. First, it has been applied to diverse
innovations, none involving Internet diffusion, and has been able to repro-
duce the observed diffusion behavior.2 This robustness suggests that conta-
gion may be applicable to Internet diffusion as well. Second, the statistical
goodness of fit of the logistic and Gompertz models, both of which are based
on contagion, is further evidence that the mechanism would be appropriate
for the purposes of the present study [34].
Nonetheless, contagion has limitations in capturing the mechanics of
Internet diffusion. To see why, consider a common expression for the mecha-
nism [39]:
146 AMITAVA DUTTA AND RAHUL ROY

dx(t)/dt = (a + bx(t))*(N – x(t))

where x(t) is the number of adopters at time t, N represents market size (i.e.,
the initial number of potential adopters), and a and b are coefficients of inno-
vation and imitation, respectively.
Parameters a and b are constants, as is the market size N. Solving for x(t)
results in the familiar S-shaped diffusion curve. In reality, however, these pa-
rameters change because of feedback effects arising from the environment
within which Internet diffusion occurs in developing countries. Such feed-
back effects are common in physical and social systems [36]. In short, the road
map for modeling the mechanics of Internet diffusion consists of enhancing
the contagion mechanism with feedback effects from known sociotechnical
factors identified earlier in the literature review.

System Dynamics

There are different ways to model processes that have social dimensions [24].
The system dynamics (SD) method was selected for several reasons [9, 13, 47].
It has been used successfully to model processes in areas as diverse as envi-
ronmental policy, technology management, and organizational change [36],
and it can synthesize individual cause–effect relations into an overall causal
structure. SD models can be simulated to study “what-if” scenarios. The basic
premise of SD is that system structure causes system behavior. The major struc-
tural building block is the feedback loop. Behavior results from the interac-
tions of the feedback loops in the system. Developing an SD model consists of
developing its feedback loop structure and validating it by comparing simu-
lated with observed behavior.

Causal Microstructure of Internet Growth

Using the standard SD symbols, Figure 1 shows the feedback model of Internet
diffusion. In SD parlance, Figure 1 is a causal loop diagram (CLD). A positive
(negative) link polarity indicates that, other variables remaining constant,3 cause
and effect change in the same (opposite) direction. A double bar on a link
indicates a delayed effect. A sequence of links ending back at the originating
cause creates a causal loop. An even (odd) number of negative links in a loop
results in a positive (negative) feedback loop. A positive (negative) feedback
loop reinforces (counteracts) change in any variable in the loop. To validate a
loop, one must justify (a) its microstructure (i.e., the individual causal links)
and (b) its macrostructure (the feedback structure resulting from these links
collectively). The first part will now be addressed by associating individual
links with known characteristics of Internet diffusion in developing countries.
In Figure 1, the causal loop diagram for contagion can be identified by
locating the variables shown in large italic font and their connecting links.
There is one positive loop, WOM+: Adoption Rate ⇒ Internet Users ⇒ Adoption
Rate, and one negative loop, PUS-: Potential Users ⇒ Adoption Rate ⇒ Potential
 INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 147

Figure 1. Feedback Loop Structure for Internet Growth

Users. The acronyms stand for “word of mouth” and “potential users,” re-
spectively. A CLD is simply a visual representation of causal structure, which
in SD is actually a system of difference equations involving stock and flow
variables. To show this correspondence, the stock-flow structure correspond-
ing to the contagion mechanism is shown in Figure 2, and the equivalent col-
lection of difference equations is shown in Figure 3. Simulating this system
results in the well-known S-shaped diffusion curve shown in Figure 4. This
supports the WOM+ and PUS+ feedback loop structure that was developed
for the contagion mechanism. Having shown the correspondence between
CLDs and the difference equations structure, the microstructure of the model
is justified using only the CLD of Figure 1.
As for the effects of feedback on the basic contagion mechanism, these vari-
ables have been grouped for convenience into two categories based on the
literature review mentioned earlier in this paper. The first category, which lies
immediately outside the contagion mechanism in Figure 1, with variables
shown in narrow bold font, identifies attributes, as experienced by users, that
influence contagion through feedback. The variable sectoral absorption, adapted
from the paper by Wolcott et al. [46], reflects the extent to which different
sectors of a developing economy have adopted the Internet. Higher sectoral
absorption means adoption across a broader spectrum of activities. Sophistica-
tion of transactions represents the average complexity of Internet transactions,
and Network performance is an aggregate variable that includes such indicators
as transmission speed, capacity, and reliability.
Proceeding now to justify the causal links, value of infrastructure has three
inbound positive links. Network externality justifies the positive link from
148 AMITAVA DUTTA AND RAHUL ROY

Figure 2. Stock Flow Structure of Contagion

Figure 3. Difference Equations for Contagion Mechanism

Internet Users (e.g., [5]). Similarly, an increase in network performance increases

the value of the infrastructure. The inbound positive link from sectoral absorp-
tion is based on the observation that the usefulness of the Internet to individu-
als and organizations increases as it is deployed more broadly across different
sectors of an economy [4]. However, this value has to be perceived, and hu-
man perception involves delays [36]. Thus, there is a delayed link from value
of infrastructure to perceived value of infrastructure, depicted by the double bars
across the link. The two positive links from perceived value of infrastructure to
the imitation and innovation coefficients completes the feedback to the conta-
gion parameters.
A larger number of Internet users results in greater network load, degrading
performance, as does a higher level of sophistication of transaction. This justi-
fies the two negative links into infrastructure performance from sophistication of
transactions and Internet users, respectively. The links result in negative feed-
back that counteracts diffusion. Access price frequently includes dial-up usage
charges levied by the phone company, in addition to charges by the Internet
service provider [31]. Hence, there is a positive link from Phone Price to Access
Price. Availability of access reflects the fact that Internet access in most develop-
ing countries is limited and uneven, constraining the number of users [14].
 INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 149

Figure 4. Simulation of Contagion Difference Equations

As Internet users increases, fixed costs are spread over a larger population,
decreasing access price and justifying the negative link between these two vari-
ables [26]. There is a negative link from access price to imitation coefficient but
not to innovation coefficient, because innovators are less sensitive to price than
imitators. Internet diffusion levels in developing countries are still very low,
and access prices are significant relative to income levels [22]. Therefore, the
pool of potential users is not the entire population, but it includes those who
can afford the service and have service available in their geographic area. So
when access price drops, the pool of potential users increases, justifying the nega-
tive link between the two. The positive link from availability of access to poten-
tial users can be explained in a similar manner.
The sequence of positive links from sectoral absorption to the coefficients of
innovation and imitation was justified earlier. As Internet users increases, differ-
ent sectors can rationalize the adoption of Internet technology, leading to greater
sectoral absorption (e.g., [3]). This justifies a positive link from Internet users back
to sectoral absorption and completes a positive feedback loop. The two positive
links from time to sectoral absorption and sophistication of transactions reflect learn-
ing effects as users gain experience with the Internet (e.g., [37]).
A second category of variables that affect contagion, shown in italics in
Figure 1, involves Internet infrastructure. The link from infrastructure capacity
to infrastructure performance has positive polarity, because an increase in ca-
pacity improves performance. The positive link from access price to expected
financial performance follows from the fact that higher prices increase revenues.
An increase in infrastructure capacity means higher costs that depress expected
financial performance, resulting in a negative link between the two. The posi-
tive link from expected financial performance to infrastructure expansion is based
on the capital-intensive nature of infrastructure expansion, and the observa-
tion that it occurs only under favorable financial expectations [44]. For devel-
oping countries, it is also necessary to capture the entry of new service
providers, the two major determinants being the regulatory structure and the
financial attractiveness of the sector [11]. Thus, there are two inbound links to
150 AMITAVA DUTTA AND RAHUL ROY

number of providers, both with positive polarity, from expected financial perfor-
mance and regulatory infrastructure for competition. Increased competition is
widely held to be irreversible [43], so there is a positive link from time to regu-
latory infrastructure for competition.
Because increased competition drives prices down [4], there is a negative
link from number of providers to access price. In developing countries, new ser-
vice providers usually own their installed capacity [20]. Their bringing in of
additional capacity explains the positive link to infrastructure enhancement. The
positive link to availability of access is justified because new entrants build out
infrastructure, making service available over a wider area.
This concludes the justification of the model’s microstructure based on the
correspondences between individual causal links and the known characteris-
tics of Internet diffusion in developing countries. Unlike correlational studies,
the model captures how diffusion actually occurs by structurally represent-
ing the causation process. This can enable policy-makers to see the process by
which a policy action will result in the intended impact and to estimate the
magnitude of its impact.

Replicating Observed Diffusion Pattern in India

Now that its microstructure has been justified, the second stage in validating
the model is to test its macrostructure. This is accomplished by testing the
model’s ability to replicate observed diffusion patterns, also referred to as
replication of reference mode behavior [9]. For the present model, the refer-
ence mode variable is Internet users. Reporting agencies typically document
the number of Internet hosts, subscribers, and telephones lines [30]. The dif-
ference between these measures and the actual number of users can be sub-
stantial in developing countries, where many users may share one subscription
or a host. Recognizing the limitations of the data, number of subscribers was
selected from the reported measures as the proxy for Internet users. There is
evidence that the ratio of Internet subscribers to users has been reasonably
stable for some time in many developing countries (e.g., [25]). This implies
that the proxy measure would suffice for validation purposes, because the
behavior of the two variables would differ by only a scale factor.
The CLD of Figure 1 was converted to an equivalent stock-flow model,
which was then fitted to Internet subscriber data from India for the period
1996–2001 [10]. Observed and simulated behavior are compared in Figure 5.
Table 1 reports goodness of fit using the commonly used Theil’s inequality
coefficient [32]. The coefficient U is scaled to lie between zero and one.4 U can
be separated into three components, Um, Us, and Uc, called the bias, variance,
and covariance proportions, respectively. In practice, fit is considered good if
the first two components are below 0.2 [32]. The low values for U in the two
columns, 3.7 percent and 7.8 percent, respectively, suggest that the model is
able to reasonably well replicate the observed number of subscribers as well
as the subscriber growth rate. The small value of Um in both columns indicates
that the model is not biased in replicating observed behavior. Similarly, the
low value of Us in both columns indicates that the variance of simulated val-
 INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 151

Figure 5. Actual and Simulated Subscriber Growth Pattern

Number of Quarterly subscriber

subscribers growth rate

Inequality coefficient: U 0.037 0.078

Percentage inequality: Bias Um 0.085 0.052
Percentage inequality: Variance Us 0.151 0.012
Percentage inequality: Covariance Uc 0.764 0.936

Table 1. Goodness of Fit: Theil Inequality Coefficient.

ues is comparable, within statistical error, to the variance of observed values.

Finally, the value of Uc in the two columns indicates high covariance between
the observed and simulated values. In view of these findings, the behavior of
the causal model is a reasonable replication of observed diffusion behavior in
the Indian context. Because the model was based on developing-country char-
acteristics generally and not just on the Indian context, these findings suggest
that the model’s microstructure is applicable to other developing countries.

Causal Macrostructure

Humans are adept at identifying individual causal effects but have limited
ability to deduce the behavior of interacting causal effects [8]. In the preced-
ing section, the model microstructure was established by justifying its indi-
vidual causal links. The validated model will now be revisited to identify its
macrostructure (i.e., the pattern of feedback loops present within the model).
152 AMITAVA DUTTA AND RAHUL ROY

This underlying feedback structure has to be identified if one is to understand

behavior and affect it through policy actions. In practice, only a few loops
dominate a model’s behavior [35]. To obtain a parsimonious understanding
of causal mechanics, it is necessary to know which loops in Figure 1 will have
the most impact on behavior. Loop-dominance analysis is used for this pur-
pose. This technique is discussed in detail in the literature [12, 35]. Only an
overview is offered here.

Analysis of Loop Dominance

Loop-dominance analysis identifies which feedback loops dominate the dy-

namic behavior of a system over some period of time under given structural
and parametric conditions. The method used here is the one suggested by
Ford [12]. It is based on the premise that a system variable x, during an appro-
priately defined time interval, demonstrates one of three “atomic behaviors”:
• Linear growth (or decay): the absolute value of the rate of change
remains constant over time, and the variable moves away from its
initial value at a constant rate (δ(|δx/δt|)/δt = 0).
• Exponential growth (or decay): the absolute value of the rate of
change increases over time, and the variable moves away from its
initial value at a higher rate over time (δ(|δx/δt|)/δt > 0).
• Logarithmic growth (or decay): the absolute value of the rate of
change decreases over time, and the variable moves away from its
initial value at a slower rate over time (δ(|δx/δt|)/δt < 0), asymp-
totically reaching a steady state value.
Observed behavior can be reconstructed using combinations of these three
atomic behaviors. Therefore, if a feedback loop dominates the behavior of a
variable over a given interval, deactivating it should cause its atomic behav-
ioral pattern to change. To illustrate the method, consider the variable Internet
users. The loop being tested for dominance is “word of mouth” (WOM+). Fig-
ures 6 and 7 show the atomic behavior of Internet users. The pattern changes
are visually dramatized by mapping the positive, negative, and zero values of
δ(|δx/δt|)/δt to 1 (exponential), –1 (logarithmic), and 0 (linear), respectively.
Figure 6 shows a base run with all loops active, while Figure 7 is the run
with the WOM+ loop deactivated. Note the difference in atomic behavior. A
comparison of the “loop-on/loop-off” atomic behaviors leads to the conclu-
sion that the WOM+ loop is dominant during the first eight quarters.

Feedback Loops

Several feedback loops from Figure 1 were tested for dominance, guided by
the literature review earlier in this paper, where significant variables and plau-
sible causal mechanisms were noted. Based on common substructure or ef-
fects, these loops are clustered into groups for easy reference.
 INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 153

Figure 6. Atomic Behavior of Internet Users—Base Run

Figure 7. Atomic Behavior—WOM Loop Deactivated

154 AMITAVA DUTTA AND RAHUL ROY

Figure 8. Feedback Effects of Infrastructure on Contagion

Group 1: Basic Contagion

• WOM+ (word of mouth): Internet users ⇒ adoption rate ⇒ Internet users.

• PUS- (potential user): potential users ⇒ adoption rate ⇒ potential users.
These two loops were discussed above, and their causal structure was high-
lighted in Figure 1.

Group 2: Infrastructure Constraints

• UIM- (Internet user–infrastructure–imitation): Internet users ⇒

infrastructure performance ⇒ value of infrastructure ⇒ perceived value of
infrastructure ⇒ imitation coefficient ⇒ adoption rate ⇒ Internet users.
• UIN- (Internet user–infrastructure–innovation): Internet users ⇒
infrastructure performance ⇒ value of infrastructure ⇒ perceived value of
infrastructure ⇒ innovation coefficient ⇒ adoption rate ⇒ Internet users.
• TIM- (transaction–infrastructure–imitation): Internet users ⇒ sectoral
absorption ⇒ sophistication of transactions ⇒ infrastructure performance ⇒
value of infrastructure ⇒ perceived value of infrastructure ⇒ imitation
coefficient ⇒ adoption rate ⇒ Internet users.
• TIN- (transaction–infrastructure–innovation): Internet users ⇒ sectoral
absorption ⇒ sophistication of transactions ⇒ infrastructure performance ⇒
value of infrastructure ⇒ perceived value of infrastructure ⇒ innovation
coefficient ⇒ adoption rate ⇒ Internet users.
All four loops have negative polarity, as seen in Figure 8, reflecting their
constraining influence on Internet diffusion. The first two reflect the mechan-
ics by which infrastructure performance is directly affected by more users
joining the network. The latter two loops reflect secondary effects in that more
 INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 155

Figure 9. Feedback Effects of Access Price on the Contagion Mechanism

users increases sectoral absorption, which imposes a further load on the net-
work. In developing countries, government operators often do not expand
infrastructure in a timely manner, so the effects of these negative loops can be
quite pronounced. This is one reason why these countries are reforming their
telecommunications sector to spur private investment in infrastructure [22].
These causal loops are shown in Figure 8.

Group 3: Price Effects

• PIU+ (price–imitation–Internet users): access price ⇒ imitation

coefficient ⇒ adoption rate ⇒ Internet users ⇒ access price.
• PPU+ (price–potential users–Internet users): access price ⇒ potential
users ⇒ adoption rate ⇒ Internet users ⇒ access price.
• PFP+ (price–financial performance–potential users): access price ⇒
potential users ⇒ adoption rate ⇒ Internet users ⇒ expected financial
performance ⇒ number of providers ⇒ access price.
• PFI+ (price–financial performance–imitation): access price ⇒ imitation
coefficient ⇒ adoption rate ⇒ Internet users ⇒ expected financial perfor-
mance ⇒ number of providers ⇒ access price.
These four loops, shown in Figure 9, specify the mechanics by which price
affects diffusion. PPU+ says that as access price drops, services become afford-
able for a larger population, increasing the number of potential users, leading
to an increase in the number of Internet users and a further decrease in price.
PIU+ posits that price drops will also increase Internet diffusion by raising the
imitation coefficient, because imitators are price sensitive. The two remaining
156 AMITAVA DUTTA AND RAHUL ROY

positive loops, PFP+ and PFI+, result from the fact that an increase in potential
users improves financial outlook for the sector, attracting more service pro-
viders. The increased competition drives prices down, fueling further growth
in the customer base.
The rationale for the following three loops was discussed earlier. They rep-
resent the mechanics by which sectoral absorption enhances contagion, the
impact of positive network externalities, and the mechanics by which spatial
availability of access improves. The loops can be traced in Figure 1.
• SAB+ (sectoral absorption): Internet users ⇒ sectoral absorption ⇒ value
of infrastructure ⇒ imitation coefficient ⇒ adoption rate ⇒ Internet users.
• NEX+ (network externality): Internet users ⇒ value of infrastructure ⇒
imitation coefficient ⇒ adoption rate ⇒ Internet users.
• PAP+ (providers–access–potential users): Internet users ⇒ expected
financial performance ⇒ number of providers ⇒ availability of access ⇒
potential users ⇒ adoption rate ⇒ Internet users.

Loop-Dominance Tests

The results of the loop-dominance tests are summarized in Table 2. The letter
D indicates that the loop corresponding to the column dominated (as defined
above) the behavior of the variable Internet users during the time period corre-
sponding to the row. As noted earlier, WOM+ and PUS- drive contagion. Thus,
the dominance patterns in the first two columns of Table 2 confirm its impor-
tance as the basic causal mechanism. Table 2 shows that other feedback loops
also exhibit dominance, confirming the claim that in addition to contagion,
the developing-country context plays an important role in shaping the me-
chanics of diffusion.
The dominance of UIM- confirms the detrimental impact of the infrastruc-
ture shortage so prevalent in developing countries, and the pattern is consis-
tent with chronological developments in India [22]. From 1994 to 1998 with a
government monopoly provider, prices were high, capacity expansion was
minimal, and service quality was poor. Shortly after deregulation in 1998, com-
petitors started installing capacity. Since the simulation starts from 1996, the
stoppage of dominance by the UIM- loop in quarter 14 is consistent with this
chronology. The absence of dominance by UIM- after quarter 14 does not im-
ply that diffusion is no longer constrained by capacity. Capacity shortage con-
tinues [1], but, as will be seen shortly, other positive feedback loops counteract
this effect, so that UIM- is no longer dominant. The lack of dominance by UIN-
(innovators) when viewed in conjunction with the dominance of UIM- (imita-
tors) confirms the earlier assertion that imitators are more sensitive to net-
work performance issues than innovators. The absence of dominance by either
TIM- or TIN- suggests that the delays in each of these loops, Internet users ⇒
sectoral absorption ⇒ sophistication of transactions, are enough to diminish their
feedback effects to the point where they do not significantly affect behavior.
The next two positive loops in Table 2, NEX+ and SAB+ can both induce
growth. Their dominance starts around quarter 5, which translates to about
 Contagion Infrastructure Price effects

Quarter PUS- WOM+ UIM- UIN- TIM- TIN- NEX+ SAB+ PPU+ PIU+ PFP+ PFI+ PAP+

0 D
1 D
2 D
3 D
4 D
5 D D

INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE

6 D D D
7 D D D
8 D D
9 D D
10 D D
11 D D
12 D D
13 D
14 D
15 D D
16 D D
17 D D
18 D D D
19 D D
20 D D

Table 2. Analysis of Loop Dominance in Causal Model of Diffusion.

Notes: PUS-: Potential Users; WOM+: Word of Mouth; UIM-: User–Infrastructure–Imitation; UIN-: User–Infrastructure–Innovation; TIM-: Transaction–Infrastructure–Imitation; TIN-: Transac-
tion–Infrastructure–Innovation; NEX+: Network Externality; SAB+: Sectoral Absorption; PPU+: Price–Potential User–Internet User; PIU+: Price–Imitation–Internet User; PFP+: Price–Financial

157
Performance–Potential User; PFI+: Price–Financial Performance–Internet User; PAP+: Price-Access–Potential User.
158 AMITAVA DUTTA AND RAHUL ROY

three years after the introduction of Internet service in 1994. Some of this de-
lay can be attributed to the time taken by potential users to perceive positive
network externalities [49]. It is also partly attributable to the observed pat-
terns of sectoral absorption in India. Internet usage in India consists mainly of
news, entertainment, and e-mail [6], and deployment of Internet applications
by the finance, manufacturing, and public sectors has been slow. In retrospect,
deregulation of Internet service in India should have been accompanied by
policies to facilitate sectoral absorption, but it was not [7].
Another aspect of NEX+ and SAB+ is that their dominance ceases after two
or three quarters, reappearing only much later in quarters 19 and 20. This
prolonged absence reconfirms the detrimental impact of infrastructure short-
age. Note that the disappearance of dominance by NEX+ and SAB+ coincides
with the appearance of dominance by UIM-. Only after the dominance of UIM-
eases in quarter 15 do we witness the reemergence of NEX+ and SAB+. The
tussle between these opposing causal mechanisms is clearly evident in their
dominance pattern.
Of the four price-related loops in Table 2, neither PIU+ nor PFI+ shows evi-
dence of dominance, but the other two, PPU+ and PFP+, do so during the latter
quarters. Inspection of their causal links shows that (1) PIU+ and PFI+ include
imitation coefficient but exclude potential users, and (2) PPU+ and PFP+ include
potential users but exclude imitation coefficient. As PPU+ and PFP+ exhibit domi-
nance but not PIU+ and PFI+, one may conclude that Internet diffusion in In-
dia was increased primarily by price drops that made the Internet affordable
for a larger population, and not by intensifying word-of-mouth effects. This is
consistent with the demographics of urban areas in India, where literacy rates
and awareness of the Internet are high, but income levels keep the Internet
out of reach of many [18].
Table 2 shows that PAP+, for all practical purposes, did not exhibit domi-
nance over the entire simulation (1996–2001). This is consistent with the fact
that Internet deployment in India consisted mainly of setting up the backbone
network and server/router infrastructure [1]. From the end-user’s perspec-
tive, availability of access was determined by the availability of a local dial-
up number for a service provider. Because new service providers concentrated
on metropolitan markets [45], the availability of service did not change sig-
nificantly during the time frame in question, explaining the lack of dominance
by PAP+ in the simulation.
In summary, loop-dominance analysis has provided insights into the
mechanisms driving Internet diffusion in India. Because the model structure
is not specific to India, these insights may well apply to other developing
countries. The analysis shows how a shortage of network infrastructure re-
strains Internet diffusion even when access prices drop. It shows how poli-
cies intended to spur diffusion by deregulating Internet service provision
were counteracted, unintentionally perhaps, by a lack of incentives to en-
courage adoption of Internet-based applications in organizations. Finally, the
spatial availability of Internet service has not improved enough to signifi-
cantly affect Internet diffusion. Causal insights of this kind are useful not
only in explaining observed behavior, but also in formulating policy to ex-
pand Internet diffusion.
 INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 159

Figure 10. Projected Behavior of Internet Users and Internet Users

Growth Rate

Model-Based Policy Analysis

Because SD models can be simulated, the model presented here can be used
to generate future patterns of Internet diffusion under different policy or en-
vironmental assumptions. More important, it is possible to deduce the “why”
through loop-dominance analysis. In other words, for each policy alternative,
the model not only suggests “what” the outcome is likely to be but also “why.”
This understanding provides a stronger foundation for choosing among alter-
natives. To illustrate, consider the following example.
A baseline scenario is set up by simulating the validated model beyond
quarter 20 out to the thirty-sixth quarter, January 2005. The projection horizon
is intentionally kept short—four years—to ensure that the assumptions un-
derlying the model structure remain relatively unchanged. The baseline be-
havior of Internet users and user growth rate is shown in Figure 10.
The baseline run predicts that if policies and parameters remain unchanged
from what they were in 2001, diffusion would saturate at around 3.5 million
after 2002. This is consistent with the slowdown in the Indian Internet sub-
scriber market predicted around 2001 [28]. Examination of the atomic behav-
ior of Internet users, shown in Figure 11, reveals that the saturation is caused
by dominance of the PUS- feedback loop after quarter 20. Although availabil-
ity has improved since 1994, and Internet charges have fallen dramatically,
users have not seen significant cost reductions because telephone dial-up
charges remain high. As shown by the causal model, this prevents the pool of
potential users from growing quickly. Therefore, contagion (i.e., WOM+) drains
160 AMITAVA DUTTA AND RAHUL ROY

Figure 11. Projected Atomic Behavior Type

the pool of potential users faster than the rate at which the pool grows because
of falling prices. This has to lead to the dominance of PUS- because of a lack of
potential users. To avoid stagnation, policy action needs to be directed to-
ward increasing the pool of potential users more rapidly. Given that the pre-
dicted stagnation is occurring at 0.5 percent of the middle-class population,
there are certainly enough customers.
An obvious choice is to reduce phone price through appropriate policy ac-
tions. However, the sensitivity analysis results in Figure 12 show that this will
be a difficult path. A 20 percent drop in phone price hardly increased saturation
level beyond the baseline case, but price drops of 40 percent and 60 percent
resulted in increases of 4 percent and 25 percent, respectively. In other words,
significant drops in phone price will be needed to appreciably increase the level
of diffusion. Given that basic telephony is a monopoly operation in many de-
veloping countries, this may be hard to achieve financially and politically.
That is why cable TV is under consideration as an alternative access medium
[19]. In short, understanding the “why” behind alternative outcomes is useful
in crafting effective policy actions, and the causal model helps in this respect.

Conclusion

The literature on Internet diffusion is dominated by descriptive statistics and

correlation studies that do not identify the mechanics of diffusion. The re-
search summarized in this paper constructs and validates a causal model of
Internet diffusion. It makes a conceptual contribution in that the Internet dif-
 INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 161

Figure 12. Internet User Growth Under Different Drops in Level of

Phone Price

fusion process need no longer be viewed as a black box. By uncovering domi-

nant feedback loops, it offers insights into how appropriate policy actions can
alter the diffusion process in desirable ways. The model shows, for instance,
that the commonly used “build it and they will come” type of supply-side
policy may not have its intended effect of expanding Internet diffusion. In-
centives for capacity expansion need to be balanced by initiatives to enhance
the ability of the user to utilize the capacity in fruitful ways (referred to as
“sectoral absorption” in the model). This can be done through education and
training initiatives [20] and by government taking the lead in implementing
Internet applications that demonstrate the capabilities of this technology to
individuals and organizations. The model also indicates that in order to en-
hance Internet diffusion, the grip of the PUS- negative feedback loop must be
loosened. This can be achieved by increasing the pool of potential users. Based
on the model, one can deduce that this will entail increasing spatial access
and reducing access price, and the latter cannot be achieved until there is
wider competition in basic telephony. In other words, the complex conse-
quences of different policy actions can be reasoned through with greater con-
fidence using the causal model. The model makes a practical as well as a
conceptual contribution, because with appropriate calibration, it can serve as
a decision-support tool for quantifying and analyzing the impact of different
policy alternatives. It has this capability because it is computational in nature
and is based on simulation of a system of differential equations.
Although tested using one developing country, the model structure shown
in Figure 1 is not specific to India and is based on the relevant characteristics
162 AMITAVA DUTTA AND RAHUL ROY

of developing countries in general. Tests with other developing countries are

planned. While the model will have to be recalibrated for different countries,
the mechanics uncovered here can be expected to apply to the local condi-
tions. The basic model can also be adapted for specific environments within
developing countries. For instance, many developing countries want to im-
prove their infrastructure for international communications [48]. Because the
international sector is not subject to the same regulations as the domestic, the
model can be adapted for this more limited problem by modifying the causal
mechanics of infrastructure expansion. In summary, the research summarized
in this paper points to a way that the mechanics of Internet diffusion can be
studied rigorously, and it develops a model that can serve as a baseline for
examining the causation behind the phenomenon of Internet diffusion.

NOTES

1. Briefly, the dimensions are interpreted in [46] as follows: (a) connectivity—

the aggregate number of hosts and phone lines per individual, (b) pervasiveness—
the overall number of Internet users in a country, (c) sectoral absorption—the extent
to which the Internet is adopted by different sectors of an economy (e.g., agricul-
ture, manufacturing, administration, education, health), (d) organizational infra-
structure—the number and robustness of the organizations providing Internet
service, (e) geographic dispersion—the geographic evenness in Internet service
provision, and (f) sophistication of use—the complexity of the transactions executed
by users.
2. The list of applications is too long to enumerate here. Three diverse examples
are diffusion of medical innovation, total quality practices, and activity-based cost
accounting [2, 27, 41].
3. In determining the polarity of a causal link, one must focus on the relation
between the two associated variables and ignore the effects of other variables.
Feedback loops will automatically take care of interactions and chained causal
effects.
4. Coefficient U = SQRT(1/N*Σ(Xs – Xo)2)/(SQRT(1/NΣ Xs2) + SQRT(1/NΣXo2)),
where Xs and Xo are simulated and observed values, respectively. U = Mean square
error/(mean square simulated value + mean square observed value).

REFERENCES

1. Agarwal, P.K. Building India’s Internet backbone. Communications of the

ACM, 42, 6 (1999), 53–58.
2. Ahire, S., and Ravichandran, T. An innovation diffusion model of TQM
implementation. IEEE Trans. Engineering Management, 48, 4 (2001), 445–464.
3. Altinkemer, K. Bundling e-banking services. Communications of the ACM,
44, 6 (2001), 45–47.
4. The network revolution and the developing world. Final Report for
World Bank and Infodev, 2000 (www.infodev.org/projects/internet/
400networkingrevolution/400.pdf).
5. Au, Y.A., and Kauffman, R. Should we wait? Network externalities,
compatibility and electronic billing option. Journal of Management Informa-
tion Systems, 18, 2 (2001), 47–63.
 INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 163

6. India: Feeling the pulse of the Indian user. Business Line, February 13,
2001.
7. India has a lot of catching up to do. Business Line, July 23, 2001.
8. Churchman, C.W. The Systems Approach. New York: Dell, 1968.
9. Coyle, R.G. System Dynamics Modeling: A Practical Approach. London:
Chapman & Hall, 1996.
10. INTERNET—Action time ahead. Dataquest: Indian Edition, July 15, 2000.
11. Doh, J.P. Private investment, entrepreneurial entry, and partner collabo-
ration in emerging markets telecommunications. Business and Society, 41, 3
(2002), 345–352.
12. Ford, D. A behavioral approach to feedback loop dominance analysis.
System Dynamics Review, 15, 1 (1999), 3–36.
13. Forrester, J.W. Industrial Dynamics. Waltham, MA: Pegasus Communica-
tions, 1961.
14. Gasmi, F.; Lafont, J.J.; and Sharkey, W.W. Competition, universal service
and telecommunications policy in developing countries. Information Econom-
ics and Policy, 12, 3 (2002), 221–248.
15. Goodman, S.; Burkhart, G.; Foster, W.; Press, L., Tan, Z.; and Woodard, J.
The Global Diffusion of the Internet Project: An Initial Inductive Study. Mosaic
Group. Fairfax, VA: SAIC, 1998 (http://mosaic.unomaha.edu/GDI1998/
GDI1998.html).
16. Gurbaxani, V. Diffusion of computing networks: The case of Bitnet,
Communications of the ACM, 33, 12 (1990), 65–75.
17. Hargittai, E. Weaving the western Web: Explaining difference in Internet
connectivity among OECD countries, Telecommunications Policy, 23 (1999),
701–718.
18. India urban statistics. Demographics, 2002 (www.indiaurbanstat.com).
19. Internet Service Providers Association of India. Internet services indus-
try: An overview, 2004 (www.ispai.com/overview.html).
20. International Telecommunications Union. Telecommunications develop-
ment sector (Geneva, 2004) (www.itu.int/ITU-D/).
21. International Telecommunications Union. World telecommunication
indicators (Geneva, 2004) (www.itu.int/ITU-D/ict/update/).
22. International Telecommunications Union. Internet diffusion case stud-
ies—by country (Geneva, 2004) (www.itu.int/osg/spu/casestudies/
index.html#internet/).
23. Kelly, T., and Petrazzini, B. What does the Internet mean for develop-
ment? Telecom Interactive Development Symposium, Geneva, September
11, 1997.
24. Liebrand, W.; Nowak, A.; and Hegselman, R. (eds.). Computer Modeling
of Social Processes. London: Sage, 1998.
25. Magar, M. Country report on Internet in Nepal (Nepal Telecommunica-
tions Authority, 2002) (http://133.243.254.3/~nepal/
country%20report%20Nepal.HTML).
26. Maher, M.E. Access costs and entry in the local telecommunications
network: A case for de-averaged rates. International Journal of Industrial
Organization, 17, 4 (1999), 593–609.
164 AMITAVA DUTTA AND RAHUL ROY

27. Malmi, T. Activity-based costing diffusion across organizations: An

exploratory empirical analysis of Finnish firms, Accounting, Organizations
and Society, 24, 8 (1999), 649–672.
28. India underutilizing Net bandwidth. Economic Times, February 15, 2002
(www.nasscom.org/artdisplay.asp?art_id=451/).
29. Nevin, T. Africa’s new challenge: The Yaounde declaration: What it
means for Africa. African Business, 277 (June 2002), 26–27.
30. Network Wizards. Internet domain survey, 2004 (www.isc.org/ds/
hosts.html).
31. Petrazinni, B., and Kibati, M. The Internet in developing countries.
Communications of the ACM, 42, 6 (1999), 31–36.
32. Pindyck, R.S., and Rubinfeld, D.L. Econometric Models and Economic
Forecasts. New York: McGraw-Hill, 1981.
33. Press, L. The state of the Internet: Growth and gaps. Proceedings of INET
2000, International Networking Conference, Yokohama, July 2000
(www.isoc.org/isoc/conferences/inet/00/cdproceedings/8e/8e_4.htm).
34. Rai, A.; Ravichandran, T.; and Samaddar, S. How to anticipate the
Internet’s global diffusion. Communications of the ACM, 41, 10 (1998), 97–104.
35. Richardson, G.P. Loop polarity, loop dominance, and the concept of
dominant polarity. System Dynamics Review, 11, 1 (1995), 67–88.
36. Richardson, G.P. Modelling for Management. Aldershot, UK, and
Brookfield, VT: Dartmouth, 1996.
37. Rits Internet access and effective use by third sector organizations in
Brazil: Final descriptive report. Infodev, Project #412–990914, January 2002.
38. Robison, K.K., and Crenshaw, E.M. Post-industrial transformations and
cyberspace: A cross-national analysis of Internet development. Social
Sciences Research, 31 (2002), 334–363.
39. Rogers, E.M. Diffusion of Innovations. New York: Free Press, 1995.
40. UNDP chief warns G-8 leaders of a widening digital divide. Newsfront,
UNDP Communications Office, 2000 (www.undp.org/dpa/
frontpagearchive/july00/21july00/).
41. Van den Bulte, C., and Lilien, G. Medical innovation revisited: Social
contagion versus marketing effort. American Journal of Sociology, 106, 5
(2001), 1409–1435.
42. Venkatesh,V., and Davis, F. A theoretical extension of the technology
acceptance model: Four longitudinal field studies. Management Science, 46, 2
(2000), 186–204.
43. Wang, G. Regulating network communication in Asia: A different
balancing act? Telecommunications Policy, 23, 3 (1999), 277–287.
44. Warren, P. Uncertain future for Internet as Telecom balance sheets fail to
balance. Knight Ridder Tribune Business News, July 14, 2002.
45. Wolcott, P. Global diffusion of the Internet project, 2000
(www.isqa.unomaha.edu/wolcott/gdi/gdi.html).
46. Wolcott, P.; Press, L.; McHenry, W.; Goodman, S.; and Foster, W. A
framework for assessing the global diffusion of the Internet. Journal of the
Association for Information Systems, 2 (2001), article 6.
47. Wolstenholme, E. System Enquiry: A System Dynamics Approach. New
York: John Wiley, 1990.
 INTERNATIONAL JOURNAL OF ELECTRONIC COMMERCE 165

48. Yarbrough, T.L. Connecting the world: The development of the global
information infrastructure. Federal Communications Law Journal, 53, 2 (2001),
315–341.
49. Zhu, J.J.H., and He, Z. Perceived characteristics, perceived needs, and
perceived popularity: Adoption and use of the Internet in China. Communi-
cation Research, 29, 4 (2002), 466–495.

AMITAVA DUTTA (adutta@gmu.edu) holds the LeRoy Eakin Chair and is professor
of MIS at George Mason University, Fairfax, Virginia. His research has appeared in
Management Science, Journal of Management Information Systems, Information Systems
Research, Operations Research, International Journal of Electronic Commerce, IEEE Transac-
tion on Knowledge and Data Management, Decision Support Systems, and California Man-
agement Review. He serves on the editorial boards of several IS journals and has also
been active in the organizing committees of IS conferences. He received his B. Tech
from IIT and Ph.D. from Purdue University. His research applying systems thinking
and systems dynamics to management problems has appeared in leading journals
and conference proceedings. He also teaches a graduate-level elective course on the
subject. Dr. Dutta is a member of INFORMS, ACM, and IEEE.

RAHUL ROY (Rahul@iimcal.ac.in) is professor of MIS at the Indian Institute of Man-

agement, Calcutta. He has been a visiting scholar with the MIT Operations Research
Center and a visiting professor at the University of Northern Iowa. He obtained his
Ph.D. from the Indian Institute of Technology, Kharagpur. Dr. Roy has published ex-
tensively in the area of systems dynamics, and serves on the editorial board of System
Dynamics: An International Journal of Policy Modeling. He has been a consultant on stra-
tegic information systems projects for the government of India, and has conducted
numerous courses and training sessions to educate senior executives in the art and
science of systems thinking. He is an active member of the System Dynamics Society
of India.