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This Is an Open Access Document Downloaded from ORCA, Cardiff University's Institutional Repository View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Online Research @ Cardiff This is an Open Access document downloaded from ORCA, Cardiff University's institutional repository: http://orca.cf.ac.uk/68458/ This is the author’s version of a work that was submitted to / accepted for publication. Citation for final published version: Duran-Fernandez, Roberto and Santos, Georgina 2014. Road infrastructure spillovers on the manufacturing sector in Mexico. Research in Transportation Economics 46 , pp. 17-29. 10.1016/j.retrec.2014.09.002 file Publishers page: http://dx.doi.org/10.1016/j.retrec.2014.09.002 <http://dx.doi.org/10.1016/j.retrec.2014.09.002> Please note: Changes made as a result of publishing processes such as copy-editing, formatting and page numbers may not be reflected in this version. For the definitive version of this publication, please refer to the published source. You are advised to consult the publisher’s version if you wish to cite this paper. This version is being made available in accordance with publisher policies. See http://orca.cf.ac.uk/policies.html for usage policies. Copyright and moral rights for publications made available in ORCA are retained by the copyright holders. The definitive, peer-reviewed and edited version of this article is published and can be cited as Duran-Fernandez, R. and G. Santos (2014), ‘Road Infrastructure Spillovers on the Manufacturing Sector in Mexico’, Research in Transportation Economics, Vol. 46, pp. 17-29. DOI: 10.1016/j.retrec.2014.09.002 Road Infrastructure Spillovers on the Manufacturing Sector in Mexico Roberto Duran-Fernandez1* and Georgina Santos2 1Transport Studies Unit, University of Oxford, UK Tel: +52 (55) 5249 5060 E-mail address: [email protected] *Corresponding author 2School of Planning and Geography, Cardiff University, UK, and Transport Studies Unit, University of Oxford, UK Tel: +44 (0) 29 208 74462 E-mail address: [email protected] ABSTRACT This paper investigates the effects of road infrastructure on industrial activity in Mexico from a quantitative perspective. It addresses three main issues. First, it investigates the existence of a relationship between road infrastructure and the industrial average product of labour. Second, it studies the determinants of such a relationship and quantifies the magnitude of the impact of road infrastructure on the average product of labour. Third, it analyses the spatial effects of road infrastructure in Mexico. The findings can be summarised as follows. First, road infrastructure has a positive and significant effect on the industrial average product of labour. However, not all the elements (roads or groups of roads) of the road system have the same effect. Second, we find that the actual magnitude of the effects of accessibility on the average product of labour depends on the physical attributes of the roads, as well as the peculiarities of the road network. Finally, we show that the regional gaps in the average product of labour across the country can be partially attributed to differences in infrastructure endowments. From a methodological perspective, the main 1 contribution of this paper is the development of a comprehensive methodology for the analysis of some of the benefits of road infrastructure in Mexico. This methodology can be applied as a tool in the planning, implementation, and evaluation of actual infrastructure policy in this country. Key words: road infrastructure, industrial activity, average product of labour, road infrastructure spatial effects, accessibility, attraction-accessibility measures, regional production function, Mexican manufacturing sector JEL codes: R11, R12, R3, R4, R42, R53, N66 1 INTRODUCTION This paper investigates the impact of road infrastructure on industrial activity in Mexico. It addresses three issues. First, it investigates the existence of a relationship between road infrastructure and the industrial production, second, it studies the determinants of such a relationship, and third it analyses its causality nature. The paper estimates a regional production function that includes, as determinants, some metrics of the value of road infrastructure. These metrics are based on a set of attraction-accessibility measures (AMs) for Mexico. The analysis uses data of the manufacturing sector from the National Economic Censuses (NECs, Institute of Statistics, Geography, and Information, INEGI 2004). The results of this paper can be summarised in the following points: First, road infrastructure has a positive and significant effect on industrial production in Mexico. However, not all the elements (roads or groups of roads) of the road system have the same effect. Second, the actual magnitude of the effects of accessibility on industrial product depends on the physical attributes of the roads, as well as the peculiarities of the road network. Finally, we show that the regional gaps in per worker industrial product across the country can be partially attributed to differences in infrastructure endowments. 2 The paper is organised as follows: Section 2 presents a brief literature review, Section 3 introduces the empirical approach taken in this study, Section 4 describes the data, Section 5 presents the empirical analysis, Section 6 discusses the results, Section 7 focuses on a causality analysis, Section 8 estimates the magnitude and elasticities of the effects that are identified, and Section 9 concludes. 2 LITERATURE REVIEW Aschauer (1989) started a debate in the literature about the effects of public infrastructure on economic activity. The empirical strategy that it follows consists of estimating an aggregate production function of the US economy that includes public capital as an argument. This methodology is known in the literature as the ‘production function approach’. Aschauer (1989) finds a positive and significant effect of public infrastructure on production, raising several questions that initiated a boom in the study of the effects of public infrastructure on the economy. Although, from a theoretical point of view, few authors would doubt that infrastructure has impacts on production, the magnitudes of the estimated effect in that paper have been questioned. Serious attempts to review Aschauer’s work focus on the estimation of aggregate production functions at state level in the US, such as Evans et. al. (1994), Garcia-Mila (1996), Hotz-Eakin (1994), and Kelejian et. al. (1997). These papers follow the same empirical strategy using aggregate production data of the 48 contiguous states in the US. These studies tend to generate smaller estimates, and thus solve some of the econometric problems found in Aschauer (1989). However, they fail to estimate robust results in the sense that they are significantly sensitive to the econometric specification and estimation technique. The analysis of local level data and the incorporation of explicit spillover effects across regions give an important insight on the cause of the divergence between the results presented 3 above. Boarnet (1996) presents an empirical extension of a two-city location model to analyse the spillover effects of transport infrastructure at local level. Using disaggregate information at county level for California, he finds that transport infrastructure has positive and significant effects on output, however he also identifies negative spillovers making the direction of the aggregate effect ambiguous. The linkage between economic activity and transport infrastructure has not been fully studied for the Mexican case and the literature only presents a limited number of examples. The literature for Mexico has followed the international mainstream, focusing on the estimation of aggregate production-functions and industry specific cost-functions. Castañeda et. al. (2000) use data of the manufacturing sector to estimate a production function at national level and find a positive and significant effect of public infrastructure. Ramírez (2004) estimates an aggregate production function using a VAR model and finds similar results. Feldstein et. al. (1995) and Shah (1998) on the other hand, estimate a national level cost-function, and find negligible effects of transport infrastructure on the economy. Costa-i-Font et. al. (2005), Looney et. al. (1980) and Fuentes et. al. (2003) find evidence of positive and significant effects of public infrastructure investment using different econometric techniques. Another methodology that has been used consists of using a neo-classical production function to derive an empirical expression in order to estimate the parameters of an out-of-equilibrium production function. This is useful for analysing the dynamics of the effect of public capital, and determining the convergence rate of the economy, conditional on infrastructure stock. Chiquiar (2003), Fuentes et. al. (2003), and Mallick et. al. (1994) follow this approach and find significant and positive effects of infrastructure on economic activity. The main problem that these studies face is the lack of primary data on public infrastructure stock. They estimate the value of this variable using indicators, which most of the time are not reliable. The problem is particularly important for state or municipal level analysis since 4 available data does not allow the calculation of disaggregate figures for infrastructure stock. For solving this problem, authors have used physical measures as proxies for the value of public infrastructure such as length of the road and rail systems
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