Release of medium-to-long term outlook on respective agenda based
on the analysis of pending macroeconomic issues

Urban, Rural and Regional Economics

Policy Study

Effects of Transportation Infrastructure Investment on Manufacturing Productivity

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SUMMARY Do large-scale financial investments in transportation infrastructure have positive effects on regional development such as inducement of firms to relocate to a new region? Do transportation infrastructures affect productivity of nearby firms, besides spatial changes in the distribution of economic activities? Does such productivity increase come at the expense of others endowed with underdeveloped transportation infrastructure? Is the increased productivity resulting from large-scale investment in transportation infrastructure durable? The first question has already been answered by Kim⋅Ahn (2009) in their previous study concerning West Coast Expressway in which they demonstrated that increased accessibility from large-scale transportation infrastructure opening, was indeed a significant determinant in location decisions for new manufacturing firms. However, the answer to the second question has still remained a question mark, despite its significance in formulating effective regional development policies. In this regard, this study attempts to follow up the previous works of Kim⋅Ahn (2009). It takes West Coast Expressway as a research subject and examines the impacts of large-scale transportation infrastructure supply on total factor productivity growth in individual manufacturing firms from a period of 1997 to 2003. Key findings of the analysis are as follows.

First, in all cases, the distance from the highway interchange to the location of firms is found to have a statistically negative effect on the productivity growth rate of manufacturing firms: the longer the distance is, the lower the productivity growth becomes. This implies that the accessibility to the expressway has contributed to productivity increase of individual firms. Second, separate analysis of newly located firms and existing firms reveals that the opening of West Coast Expressway has improved the "accessibility effect" for newly located firms by a huge margin of 50 percent compared to that of existing firms. This indirectly suggests the presence of a selection effect between new transportation infrastructure and productivity and a potential negative repercussions to neighboring regions. Third, the rapid decrease in the size of the negative effects of the productivity growth rate regarding distance to the expressway interchange in the third year from its initial opening implies that the effect of new transportation infrastructure may not be long-lasting.

Policy implications drawn from above findings are as follows. First, building expressways could bring positive effects on the productivity growth in manufacturing firms and requires a certain level of investment for those that are determined feasible by prudent socio-economic cost-benefit analysis, as there appears to be a positive correlation between expressway construction and balanced national development. Second, careful considerations need to be made in order to minimize negative effects when deciding on new transportation infrastructure, considering that local authorities compete for large-scale transportation infrastructure which are essentially government-funded and that providing one region with new transportation infrastructure could bring negative repercussions on economic activities in other regions. Third, decisions on future investment should be made after careful considerations and emphasis should be placed also on managing the demand side of new transportation infrastructure as well as the supply side in order to maintain the effect of productivity growth at a certain level. This is due to the fact new transportation infrastructure effect could be transient as demonstrated by preceding study.
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