Executive Education

How transportation infrastructure affects the economy and ultimately your business

Business meeting

As CEO or as a high level executive, it is important to understand how changes in the business and political environment around you affect your enterprise.  This is especially true when large scale investments in infrastructure take place as these changes can directly or indirectly impact your business.

Being prepared for those changes is important, not only to protect your business from potentially harmful results, but more importantly, to be able to take advantage of those opportunities for business growth and advancement.  One of the most fundamental infrastructures that can affect an extremely broad range of business sectors is transportation.

Governments routinely commit substantial portions of their budgets to constructing and maintaining transportation infrastructure. Examples of such projects are the Interstate Highway System in the United States and the National Trunk Highway System in China.

Both are exceptional achievements of engineering, but projects like these also come with an exceptionally high price tag and their economic benefits are not always readily obvious.

Dave Donaldson, associate professor of economics at Stanford University, has conducted research that indicates that the economic benefits of transportation infrastructure investment can be exceptionally significant, much more so than originally thought.

To measure and quantify these benefits, he reviewed two of the most ambitious transportation projects in history: The construction of the enormous railway system in India by the British between 1870 and 1930, and the expansion of the railway in the United States between 1870 and 1890.

Donaldson’s analysis of these two historically significant endeavours resulted in three key findings:

The railway infrastructure reduced the cost of trade.  It is difficult to measure the true and absolute cost of trade in any meaningful way as users of a transportation method don’t usually record the full cost of a journey.  However, Donaldson concluded that in both the Indian and the American cases, trade via rail was significantly less expensive than roads and provided for a denser transportation corridor than waterways.

This allowed remote areas to trade cheaply with the rest of the country and the rest of the world.  The cost of goods shipped by rail in India was often up to eight times cheaper than via roadways.

The railway increased the volume of goods shipped.  The railway reduced shipping costs, but did it also affect the amount of trade that was being conducted?  Donaldson’s findings were that in both cases, the volume of shipped goods increased dramatically, and thus so did trade.

The economic benefits vastly outweigh the construction costs.  Economic benefits arise from many sources.  The immediate economic benefits come from the building of the infrastructure itself.

Its construction, for example, stimulated the economy because of the need for steel, rail cable for electricity and telecommunications and building materials for related infrastructure.  In determining the economic effects over the long term, Donaldson used the gravity model to isolate possible positive or negative spill-over effects that may skew the results. 

In his own words, “The historical railroad projects in India and the U.S. demonstrate sizable economic benefits. In both cases, benefits were substantially larger than the project construction costs.”

These are only two historical case studies, and extrapolating from them to a full understanding of the results of modern-day investments in transportation cannot be done without great care.   However, these lessons from history teach us not to underestimate the economic benefits of such investments.  Companies that have made the most of transportation infrastructure and taken it into serious account in their development have proven to be among the most successful enterprises in the world.

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Aimee Lee Webber
Editorial Aide/Reporter at The CEOWORLD magazine. Nationally Syndicated Advice Columnist. Generally prefer dogs to humans. Loves dragons. New Yorker.