The impact of road infrastructure on economic circulation: Market expansion and input cost saving

Abstract

This paper aims at investigating the role of road infrastructure in implementing the “dual circulation” strategy recently launched by China, where increasing domestic consumption is the core. Although earlier studies examined the road-trade cost nexus, few analyzed the effects of road on the costs of output delivery and input sourcing. We first develop a theoretical model, predicting that road development can help reduce both of these costs. The predictions are then confirmed via model estimations using data from China. In turn, cost reduction in output delivery is found to help firms expand market and cost reduction in input sourcing helps firms lower product prices, leading to rises in domestic consumption. Particularly, road development is more beneficial to Non-SOEs, firms with lower export intensity, higher weight-to-value ratio, or higher transportation inputs, and areas with less market distortion. Thus, it can be concluded that road development is conducive to China's “dual circulation” strategy.