How Do Highways Enable Firm Productivity? The Role of Innovation

Transport infrastructure has been found to shape various outcomes of economic organizations by lowering travel costs and improving market access. In this article, we examine the spillover effect of highways on firm-level productivity and introduce innovation as a potential underlying mechanism. We argue that connection to national highways overcomes the localization of knowledge spillover by connecting ideas, information, knowledge, and talent across regions, which further improves firm productivity. Using a manufacturing sample from 1998 to 2007 in the context of China, we find a positive relationship between connection to the highways and firm productivity, and this relationship is mediated by innovation performance. Our results also suggest that such a mediating effect is strengthened when a firm is located in a region with greater market liberalization or intermediary development. Our findings add to the knowledge of economic geography by providing new insights into the interplay between infrastructure and organizational outcomes.