Road investments and inventory reduction: Firm level evidence from China

This study presents new evidence on the causal impact of transport infrastructure on the economy. In China, inventory has declined over recent decades, while the country’s road infrastructure has expanded rapidly. Building on the existing literature, we introduce new approaches, including a quasi-experiment based on differential demand for distant suppliers, to identify the causal relationship between road investments and inventory decline. Examining a large panel data set of Chinese manufacturers from 1998 to 2007, we find one dollar of road spending saves around two cents of inventory costs. This effect is non-trivial but less than that in the United States in the 1970s. Moreover, our estimates also suggest spillover effect from road investments to firms in neighboring provinces.