Structural change

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.

Aschauer (1989) and Munnell (1990) estimated an elasticity of national private sector output to public sector investment of between 0.31 and 0.39, but lower for transport investment alone. This means that for every 1% increase in public investment, private sector productivity increases on average by 0.3%.

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.

More recently, 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.

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.