Effects of diversification strategies on investment in railway business: The case of private railway companies in Japan

Abstract

Operating deficits and the increasing subsidies given to public transport are the main topics of discussion for both policymakers and scholars in the transportation sector. As a solution to these issues, the participation of private transport operators and creation of other sources of income than simply providing transportation services have been discussed in recent years. In Japan, private railway companies are the main providers of railway services, especially in urban areas. Although most such private railway companies provide adequate services and operate at a surplus, they receive no subsidies to cover their operating deficits and maintenance costs. Further, the most remarkable feature of private railway companies in Japan is their widely deployed diversification strategy, even into areas barely related to the transportation business, by using physical or tangible assets. This study investigates how the diversification strategies of private railway companies in Japan influence the railway business, focusing on the relationship between diversification and investment in transportation and the use of internal capital by diversified private railway companies. We review the research findings on investment and estimate quantitative models to examine the effect of diversification on transportation investment, based on the internal capital market theory discussed in the corporate finance literature. We find that investment in the railway business is influenced by diversification in terms of capital resource allocation. Internal capital is likely to be utilised for investment in not only the transportation business, but also diversified businesses. We conclude that this result is driven by the expected limitations of growth and profitability, as well as the financial support schemes available to transportation businesses.