Transport, Infrastructure and Growth: Evidence From Chinese Firms

Abstract

Transportation infrastructure is a way for governments to achieve development goals by connecting peripheral areas to urban centers. This is particularly important in a country like China where income is highly unequally distributed across space. Yet understanding the gains from transportation infrastructure is difficult because the placement and timing of transportation projects are not random. This paper studies the effects of China's National Trunk Highway System (NTHS) on firms in the peripheral regions. I construct a novel data set of completion times of every segment of the highway system and combine it with a comprehensive data set of Chinese manufacturing firms. To address the endogeneity of placement and timing of the highway construction, I develop a novel time-varying instrumental variable based on a civil engineering model of least-cost construction and local completion rates. The IV results show that firms connected in the peripheral regions experience faster growth in output and sales. To understand the mechanism, I study firms' input choices. Highway connection increases the firms' growth in intermediate inputs and capital, while the growth of labor actually declines. This is consistent with a decline in the prices of capital and intermediate inputs due to access to outside markets. Using panel data is crucial for demonstrating these effects. When using methods similar to previous studies, I find null or opposite results.