Information technology and regional development -global village or rural backwater?

The study discusses information and communication technology (ICT) and regional development. It first presents a case study of a small multinational company (Vik-Sandvik) producing naval architecture and ship design in an international market. The company's headquarter is in Fitjar, a rural community with about 3000 inhabitants, and it has affiliates in Iceland, Poland and China. The case study illustrates the business opportunities that new ICT bring to rural areas. However, the Vik-Sandvik case appears to be exceptional. In order to analyze the impact of ICT on rural development, a two-region model is adopted to a stylized urban-rural setting and numerical simulations are presented. Diffusion of information technology is modeled as a reduction in the cost of transmitting digitized producer services over geographical distances. The simulations suggest that the skills premium in rural areas drops sharply as the cost of transmitting information falls. The income distribution within rural areas becomes more equal, but since skilled workers in rural areas also fall behind skilled workers in urban areas, the likely outcome is that skilled and professional people will move to the cities. When the cost of transmitting information falls below a critical level, the impact on the skills premium and the wage gap between urban and rural areas is reversed. A possible interpretation of the results is that the ICT development so far has contributed to urbanization, but broadband networks and third generation mobile technology may revitalize rural areas.