2. Answers Emerging from the Literature Review (Page 1 of 4)

2.1 Introduction

The freight industry affects the functioning and growth of an economy both directly and indirectly. The freight industry's direct contribution to the competitiveness and economic development of an economy is derived from improvements in the productivity of the freight industry itself. Freight transportation improvements, resulting in lower transportation cost for users, indirectly contribute to higher industry productivity. Moreover, additional productivity gains for firms accrue from the newly opened opportunities through substitution between the basic logistical inputs – transportation, inventories and facilities.

Transportation infrastructure improvements affect freight transportation characteristics that lead to improvements in the level of service for particular shipments. That is, expected travel time and travel time variance for these shipments are reduced. Greater reliance on improved transportation services allows firms to adjust warehouse and inventory requirements, and reduce their costs, which leads to productivity gains. Moreover, the net amount by which firms are able to reduce their logistical costs constitutes additional benefits. These benefits are above and beyond the conventional benefit of having an infrastructure improvement.

2.1.1 Criteria for Literature Selection

The criteria for selecting pertinent literature was based on the functional classification of the public policy impacts on freight and industry productivity developed in Working Paper #1. This functional classification mainly reflects the causality between various public policies and their impacts on productivity.

A public policy may affect productivity directly or indirectly. A direct effect exists when public policy can lead to productivity gains by changing the institutional environment, competitive conditions, tax system, trade regulations, standards, administrative and informational services provided by governmental institutions and other. Public policy may also affect the attributes of the transportation system that influence most productivity – infrastructure changes and technology improvements. Thus, such a public policy leads indirectly to productivity gains. In addition, public policy effects on productivity are considered in a broader context – economy-wide effects, direct effects on freight and other industries, and indirect (logistics restructuring, network, externalities) effects. Moreover, public policy impacts on productivity should be considered at different levels of aggregation nationally and internationally – aggregate economy, industry and sector level, and firm level.

In summary, the literature included in this project's database is chosen according to the criteria and principles described below.

Type of public policy affecting productivity
- Investment and financing policies (Federal and State funding for highway programs, transit projects, R&D, safety, Intelligent Transportation Systems, etc.)
- Regulation/deregulation and institutional changes affecting intramodal and intermodal transportation services, industry structure and competitiveness, trade patterns.
- Assistance at national and international level; administrative and informational services, facilitation, standardization and compatibility.
Type of effect on productivity
- Economy wide and macroeconomic effects.
- Directs effects on freight industry and other industries.
- Indirect (logistics restructuring, network, and externality) effects.
Level of aggregation of the study
- National or international.
- Aggregate economy, industry and sector level, and firm level.

2.1.2 Definitions

A set of definitions is provided below to provide a specific meaning to some terms that are used throughout this paper.

2.1.2.1 Highway Investment

The term "highway investment" is defined broadly to include a range of investments leading to capacity expansion, research and development expenditure, and introduction of communication and information technologies, such as ITS.

2.1.2.2 Industry Productivity

Industry productivity is defined as the ratio of outputs to inputs measured in dollar terms. Increased productivity means either that (1) with the same quantity of inputs, larger quantities of outputs can be produced, or (2) that a given level of outputs can be achieved using less inputs.

Improvements in the transportation system – either through transportation infrastructure improvements, policy changes or technological advances – enable industrial firms to realize short-term productivity gains due to lower operating costs. Moreover, changes in the transportation system make beneficial substitution between the basic logistical inputs: transportation services, inventories and facilities. These substitutions can result in more efficient configurations of inputs, hence productivity gains.

2.1.2.3 Freight Productivity

Freight productivity is defined as the ratio of freight outputs (freight carriage services) to inputs measured in dollar terms. Increased productivity leads to a lower unit costs of carrying freight.

2.1.2.4 Intermodal Freight

The term "intermodal freight" is defined to mean the coordinated and sequential use of two or more modes of transport where a single party assumes the responsibility for the completion of the transportation service.

2.1.3 Four Main Questions Arising from the Literature Review

Four main questions arise from the literature review regarding the qualitative nature and quantitative magnitude of the relationship between the highway investments, or more broadly investments in public capital, freight, and industrial productivity:

Has the relationship between highway investment and freight productivity been discerned at macro and micro-level?
Has the relationship between highway investment and industrial productivity been discerned at macro and micro-level?
In what sectors has this productivity effect been most pronounced?
What is the nature of productivity effect: direct effect (time savings, etc.), logistics restructuring, network effect, externalities effect?

The next sections will attempt to answer these questions, individually, based on existing research findings.

2.2 Has the Relationship between Highway Investment and Freight Productivity Been Discerned at Macro and Micro-level?

2.2.1 Classification of Literature Findings

A summary classification of literature findings related to Question A on highway investment and freight productivity is presented in Table 1. It should be noted that the other types of public policy related to productivity are not discussed in this paper in order to make the exposition more focused.

Table 1: Classification of Literature Findings Related to Question A: "Has The Relationship between Highway Investment and Freight Productivity Been Discerned at Macro and Micro-level?"
	Direct Investigations	Indirect Investigations
Number of Citations	* 2 [59], [93]	4 [7], [27], [44], [94]
Percent of Total Citations	2	4
Range of Quantitative Findings	Benefits of highway investments in truck cost savings alone can justify between one-third and one half of the Federal-aid highway system between 1950 and 1973. Terminal inefficiencies that can be readily absorbed in long-haul freight moves – 900 to 1200 miles – cannot be absorb in short haul markets.	The aggregate transportation services sector contributed in average 8.3 percent to national productivity gains. The largest portion of productivity growth, however, comes from increased labor productivity. Intermodal freight operations produce only about one fifth of the VMT that would be generated by trucking industry.
Nature of Qualitative Findings	Growth of highway investment between 1950 and 1973 had a strong positive effect on productivity in trucking. After 1970 the benefits of additional highway investments were close to normal. Terminal congestion is found to be a factor in short-haul markets, in which lengthy delays can eliminate the cost benefits of intermodal movements of freight.	Effective transportation network delivers benefits beyond the immediate benefits of improved transportation services. Nontraditional strategies, such as providing reserved capacity for trucks, may have significant productivity impacts. The current and potential benefits from intermodal freight operations have significant implications for the overall efficiency of the transportation system.

* Numbers in square brackets give citation number in Appendix 1.

2.2.2 Review of Literature Findings

Several studies address the issue of measuring the direct efficiency gains experienced by freight industry as a result of highway investments. The DRI/McGraw-Hill (1994) study addresses the issue of measuring comparative efficiency gains experienced by individual transportation modes as a result of highway investment. This study finds that both railroad and motor freight posted among the highest direct productivity gains of any sector in the economy from 1963 to 1991. While motor freight experienced the largest portion of growth from increased labor productivity, the contribution of highway investment to productivity growth was still significant. Furthermore, the statistical results obtained by Keeler and Ying (1988) point out that the benefits of highway investments are large enough to justify between 33 percent and 50 percent of the cost of the Federal-aid highway system. The study considered the period from 1950 to 1973 and estimated the benefits on the basis of the direct cost savings to trucking alone. It appears, however, that the marginal benefits to the freight industry of additional highway investments after 1970 were close to normal.

Trowbridge and al. (1996) offer an interesting micro-level perspective to the trucking industry. This study considers the productivity impacts that would result from providing "reserved capacity" for trucks rather than restricting them. Such a strategy for trucks would lead to substantial travel time savings for both the trucking industry and passenger vehicles. However, surveys of the general public showed considerable resistance to reserved-capacity strategies for trucks.

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