Structural change

How transport can promote trade, affect businesses’ long term location decisions and the economic fabric of cities and regions

Key Summary

62% of British firms agree that the UK's transport infrastructure inhibits inward investment in their region

The transformational impact of transport investment

There is no doubt that transport investment can improve economic efficiency through journey time savings (see section on welfare effects) and may also lead to an additional step change in city region productivity through agglomeration effects.

But transport can also make a substantial long term contribution towards changing an economy’s structural fabric by enabling new industries to develop through technological change, by influencing the location and behaviour of producers and consumers and by fostering trade (Lakshmanan, 2011 ).

Porter (1990) has argued that modern companies are attracted to those cities that offer not only cheaper factor inputs, but also a high quality environment, access to a qualified labour force and the benefits from business agglomeration, all of which urban transport investment can significantly contribute to.

This view has been echoed in the work of Richard Florida (2003)  on the rise of highly productive cities where he argues that it is the concentration of highly qualified labour, and the ability to draw in greater numbers of people, that explains the success of modern cities rather than classical factors such as access to natural resources and to inter-urban transport networks. Although reality is more complex than that, there is some evidence from the UK (Morris, 2010) that the largest cities have been spear-heading the growth in knowledge intensive sectors.

The link between transport and inter-regional trade

At a macro level, trade takes place when inter-regional transport costs decrease by an amount equal to the price difference of a certain good or service between regions (Rietveld and Nijkamp, 2000). Falling transportation costs may equally allow some economic activities to move to lower growth regions (HMT, 2001).

At a micro level, internal transport costs can make a city or region incrementally more attractive to investors relative to its competitors by lowering production costs (see section on Welfare Effects) but also by enabling certain areas of the economy to develop and flourish. In that way, transport can alter the balance of competitive advantage between cities and regions (Porter, 1990; McQuaid et al., 2004; SACTRA, 1999).

Lakshmanan (2011) lists a number of historical examples where transport, mainly focusing on large scale rail investment, has been demonstrated to make a decisive contribution to the long term economic development of entire countries, including the US, India, Brazil, Russia, Spain, Argentina and Mexico. For example, Summerhill (2005) shows that rail investment in Brazil led to an influx of labour and capital with spin-off effects across the economy, which significantly increased productivity and specialization through second round effects.

How does transport affect firms’ location and investment decisions?

There is no doubt that transport infrastructure has a direct impact on firms’ strategic decisions. The British Chambers of Commerce (2008) transport survey has found that:

  • 62% of businesses agree that transport infrastructure inhibits inward investment in their region, with the figure rising to 69% for firms with 50+ employees.
  • 40% of respondents feel transport infrastructure hinders the expansion of their business.
  • 59% of firms claim UK infrastructure had a major influence on their choice of location. The figure was highest in London at 69%.
  • Only 18% of firms said the UK infrastructure met their needs fully although this has gone up from 10% since 2004.

The EuroCities Monitor (Cushman and Wakefield, 2011) has consistently found the following transport-related factors to rank amongst the top four considerations driving international firms’ choice of city location:

  • Easy access to markets, customers and clients;
  • Availability of qualified staff;
  • Transport links with other cities and internationally.

Evidence on the direct impact of transport investment on land use development

Analysis of the land use impact of San Francisco’s BART system (Banister and Berechman, 2000) suggests that it has served to reinforce the dominance of the centre of San Francisco in terms of employment, especially for high value added services.

Ten years on from the construction of the first French high speed rail (TGV) line, the area surrounding Lyon’s central station of Part-Dieu had seen more than a 40% increase in available office space. Overall, this small area concentrated around 60% of all new development across the city. Banister and Berechman (2000) argue that this was due not only to good inter-urban rail links but, more importantly, to excellent local accessibility. Indeed, the two nearby stations of Le Creusot and Macon saw much less development in comparison as a result of the construction of the TGV.

Looking at the Japanese Shinkansen network, Sands (1993) also found new high speed rail stations to have consistently higher population and employment growth than elsewhere.

But is there any evidence that transport investment actually increases economic output?

A number of authors have attempted to empirically estimate the relationship between public sector investment (in particular on transport infrastructure) and national economic output.

In their seminal work, Aschauer (1989) and Munnell (1990) estimated an elasticity of national private sector output to public sector investment of between 0.31 and 0.39. This means that for every 1% increase in public investment, private sector productivity increases on average by at least 0.3%. Although there has been a significant amount of debate over the years regarding the validity of these studies, more recent work has largely confirmed the positive and significant correlation between economic growth and public sector investment:

  • Nadiri and Mamuneas (1996) found very high rates of return on highway capital investment, even exceeding the return on private capital in the 1960s and 1970s at the time when the first motorways were introduced.
  • Demetriades and Mamuneas (2000) and Pereira (2001) found output elasticities to public capital investment of between 0.143 and 1.03 from an analysis of 12 OECD countries.
  • Egert, Kozluk and Sutherland (2009) found an average output elasticity to public capital investment of between 0.23 and 0.30. The authors found a higher value for transport investment relative to other types of public capital.
  • Gemmell, Kneller and Sanz (2009) found an output elasticity of 0.16 in relation to government spending on transport and communications, which the authors found to be the most effective type of government expenditure.
  • Bom and Ligthart (2011) found an average output elasticity to public investment of 0.15, based on a meta-analysis of 67 studies carried out between 1983 and 2008.

Overall, the link between infrastructure investment and economic growth appears to be robust across methodologies and time periods. Indeed, this is the conclusion reached by Torrisi (2009) in a recent review of four different methodological approaches.

In the UK, a recent study (MVA 2009) found a very strong and positive correlation between suburban and regional rail demand and economic output, with a 1% increase in GVA leading to a 2% increase in rail demand into large cities. While this is not proof of causality it does suggest that city centre public transport accessibility has played a role in the significant transformation from manufacturing centres to service hubs amongst English cities over the past two decades.

Empirical evidence from the Netherlands (den Hartog et al 1986) suggests that there is a causal relationship between large scale public infrastructure investment and subsequent “spin-off” private investment over a period of up to 5 years.

In a Dutch survey of firms that had recently relocated (Bruinsma, 1990), over a third of respondents stated that transport infrastructure had been an important or very important factor. Based on this research, it was estimated that for every $325,000 invested in transport infrastructure one permanent job had been created. This is in addition to the 6 temporary jobs (i.e.: 6 person-year) created in the construction industry and through related multiplier effects (Rietveld and Nijkamp, 2000). This appears relatively consistent with the statistical studies cited above.
 

Key Reads

  1. Cushman and Wakefield (2011) European Cities Monitor

    Each year this survey provides an overview of the perceptions that corporate occupiers have about cities across Europe and their relative attractiveness based on a range of factors, including  transport infrastructure.

  2. Banister and Berechman (2000) Transport Investment and Economic Development

    A major concern of all decision makers has been to ensure that there are clear benefits from transport investment proposals. The travel time savings are clear, but the wider economic developments have presented enormous difficulty in terms of both theoretical arguments and empirical evidence. This book reviews the history of the debate and argues that the agenda has changed.

  3. Lakshmanan (2011) The broader consequences of transport infrastructure investments

    This paper aims to highlight the wider economic benefits of transport infrastructure from the observed role of railroads and waterways in economic development and to identify the multiple causal mechanisms which link transport and economic growth.

  4. DfT (2004) Transport and City Competitiveness - literature review

    A DfT/ODPM commissioned literature review of existing research and evidence regarding the role of transport in city competitiveness

  5. British Chambers of Commerce (2008) The Congestion Question: A Business Transport Survey

    This survey of businesses seeks to understand the perceived impact of the current transport infrastructure on business, in terms of business costs, lost opportunities, decisions on business growth and location. It also looks to establish opinion on possible solutions to transport problems and issues of sustainability.

Further Reading

  1. British Chambers of Commerce (2004) Transport Survey

  2. Bruinsma (1990), Infrastructuur en werkgelegenheid (Infrastructure and employment), The Hague:Organisatie voor Strategisch Arbeidsmarkonderzoek (OSA)

  3. Gemmell, Kneller and Sanz (2009) The composition of government expenditure and economic growth: some evidence from OECD countries

    This paper is contained within Barrios, Pench and Schaechter (eds.) (2009) 'The quality of public finances and economic growth: Proceedings to the annual Workshop on public finances (Brussels, 28 November 2008)'.

  4. Nadiri, Ishaq and Mamuneas (1996) Constitution of Highway Capital to Industry and National Productivity Groups. Report prepared for FHWA, Office of Policy Development (see reference in http://www.fhwa.dot.gov/policy/otps/macro.htm)

  5. Pereira (2001) Public investment and private sector performance - international evidence. Public Finance Management 12 (1) 3-25.

  6. Porter (1990) The Competitive Advantage of Nations, London: Macmillan

  7. Rietveld and Nijkamp (2000) 'Transport Infrastructure and Regional Development' in Polak andHeertje (eds.) Analytical Transport Economics, Edward Elgar.

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