Using a newly constructed panel dataset on electronic commerce by Taiwanese manufacturing firms during 1999, 2000 and 2002; this paper explores the impact of electronic commerce adoption on total factor productivity taking into consideration network externalities. Besides the general specification of the e-commerce adoption function, we consider the network externality and the endogeneity of e-commerce adoption. We also evaluate the difference in productivity improvement splitting the data into small and medium, and large firms, and high-tech, and traditional firms. Empirical results show that: (1) the firms with higher intra-industry network externalities and more automatic investment are more likely to adopt e-commerce; (2) the adoption of e-commerce has a positive and significant influence on productivity improvement, particularly for high-tech and large firms.