Measuring the Impacts of Freight Transportation Improvements on the Economy and Competitiveness

Appendix B. Relevant Economic Literature

This section provides an overview of the economic literature related to freight transportation and the economic impact on the economy. Some relevant concepts and how these have been operationalized in research are discussed. There is vast literature on this topic. The review below is not an exhaustive examination of all the relevant studies; rather it seeks to discuss some of the most relevant work in the field related to examining freight transportation, cost and competitiveness.

Historical Importance of Freight Transportation to the National Economy

U.S. economic development has historically been shaped by freight transportation improvements. In the early 1800s, investment in canal infrastructure, such as the Erie Canal, opened up new production areas for grain in the interior of the U.S. Beginning in the 1830s, railroads began to play a more important role in the transportation of commodities. Throughout the 1800s, a whole economy of agricultural, mining and manufacturing firms grew up around expanding railroad networks. Studies of the market access impacts of railroads and waterways have found large economic impacts on GNP. (Donaldson & Horbek, 2013)

Beginning in the 1950s, investment in the interstate highway system served to promote additional growth by more closely linking regional markets together with accessible and reliable truck transport. The impact of investments in the highway system was studied in the early 1990s by David Aschauer and Alicia Munnel who examined the impact on the economy of all public capital. They were followed by a number of studies focused on highway transportation (Nadiri and Mamuneas, 1996; Madrick, 1996; Sturm et al., 1997; Weisbrod, Vary and Treyz, 2001; FHWA/ICF Consulting, 2002). Nadiri's work traced the impact on business costs of highway investment; he found high returns, especially in the period when the Interstate was becoming an extensive network. All of these studies were concerned with the whole economy.

One limitation of these studies was that they sought to study the link between industry productivity and levels of highway inventory, but they did not capture actual accessibility improvements. Research by Eberts on establishment-level localized productivity effects sought to address this concern by employing measures of highway accessibility (Eberts, 1997). Studies have identified non-linearity in the relationship of measures of transportation accessibility to firm productivity (Melo, 2012).

Regional and Industry Studies

There have been many studies specific to particular industries or regions that have addressed the impact of transportation infrastructure on industrial location. These studies have sought to examine firm-level decision making processes to determine what factors were important in location decisions. Location studies have employed both surveys of individual businesses, as well as aggregate data to examine location decisions. These studies have focused on a number of different areas, including manufacturing (Bartik, 1985; Walker and Greenstreet, 1991), small business startups (Bartik, 1989), and high technology (Toft and Mahmassani, 1984). The Regional Economic Models Inc. (REMI) model has been utilized in a number of research projects to estimate the effects of transportation on the cost competitiveness of local businesses (Treyz, 1992). The statewide impacts of transportation on business location decisions have been examined with REMI in States including Wisconsin, Indiana, and Iowa.

The literature on economic geography contains numerous relevant research approaches to the study of industry location decisions. Interregional trade and economic geography modeling utilizes estimates of transportation cost and accessibility to differential inputs as the basis for explaining wide differences in regional productivity (Krugman, 1995). Studies have shown that degradation of the transportation system can reduce the productivity benefits and scale economies associated with industry agglomeration.

Containerization and other improvements in freight transportation have continued to lower barriers to trade internationally. The globalization of supply chains has served to lower production costs. It has opened new supply and consumer markets for U.S. businesses across the world (Levinson, Marc, 2006). Throughout history, each advance in transportation technology has created new markets for businesses, spurring economic opportunities, competition, job creation and economic growth.

Freight Transportation as a Foundation for Markets and Productivity Growth

In general, transportation improvements provide the foundation for new markets. At the most basic level, freight transportation allows production and consumption to occur at different locations. Transportation is necessary for economic specialization. Freight transportation allows firms to specialize in producing the products for which they are best suited and to trade with firms to obtain products that can be made more efficiently by others. Economic specialization allows firms to increase their productive capacity, allowing for increases in real income without using additional resources. Access to new supplier markets is an important benefit of highway investments. Studies of the economic efficiency benefits of greater access to diverse inputs were examined in work by Krugman (1991) and Fujita et al (2001).

In a broader context, by allowing businesses to purchase and sell products in a larger geographical area, improved freight transportation allows firms and regions to engage in economic activities for which they have a comparative advantage. Improvements in the existing freight transportation system allow firms to make incremental improvements in accessing larger markets and this creates economic value through incremental improvements in opportunities for specialization. Simply put, enhancements to the freight transportation system can unlock opportunities for productivity improvements and economic growth at the regional, national and international levels.

The contributions of freight infrastructure to productivity are critical to the performance of the economy. Another way to think about the importance of freight infrastructure improvements is to consider their impact on the delivered cost of products and services produced by firms in the economy. Because transportation serves as an input into every other sector of the economy, efficient transportation infrastructure investments can have an impact that ripples throughout the economy. Reduced transportation costs allow firms to deliver more products and services for the same price.

Efficient investments in freight transportation infrastructure have the greatest impacts on those sectors that are most reliant on freight transport, such as manufacturing industries.

As noted above, economists have attempted to measure the benefits of freight transportation investments at the national level using data on investment in infrastructure and private sector productivity growth. Macroeconomic studies completed by economists Ishaq Nadiri, Theofanis Mamuneas and others have shown a strong relationship between infrastructure investment and economic growth. Returns to investment in highway infrastructure were highest during the 1950s and 1960s. Following the completion of the interstate network in the late 1960s, returns to investment have fallen to levels similar to private investment.

The contribution of the highway network to national productivity growth has fallen from an extremely large 31 percent in the 1950s to a still substantial 7 percent in the 1980s. The contribution to productivity growth estimates how important the highway network has been to overall growth in technological change and innovation. Even with critical advancements in technologies in all sectors of the economy, the highway network still plays a critical role in stimulating improvements in productivity growth in the economy at large. In short, a significant body of research has concluded that public investment in transportation infrastructure has created large benefits for society.

On a regional basis, a number of factors complicate this story. Studies have found that highways have a differential impact across industries. Some industries grow as a result of reduced transportation costs, while others may shrink as economic activity relocates. Highways affect the geographic allocation of economic activity, raising the level of economic activity in the counties or regions that they pass directly through, but drawing activity away from adjacent counties. (Chandra & Thompson, 2000)

Linkages between Freight Transportation and the Economy

A representation of the linkages between transportation and economic development is shown in the Figure 5. Efficient transportation infrastructure investment affects system performance. Transportation investments increase transportation system capacity, efficiency, reliability and level of service.

Figure 5. Diagram. Impacts of efficient transportation infrastructure investment.

These improvements in the transportation system lead to transportation cost savings and transit time savings, which are captured by traditional benefit cost analyses. Transportation infrastructure investments also result in business expansion, relocation and restructuring in the long-run. Businesses change their operations in response to changes in production costs. The reduced cost of transportation encourages businesses to restructure and use more transportation in the long-run. These business reorganization benefits have been the focus of FHWA's Freight Benefit Cost Study (ICF, HLB, LBG, 2002).

Of central importance to this analysis is that supply chains are not static. Variables such as factory and distribution center locations are constantly changing, and these decisions always reflect current and expected conditions in terms of cost of freight carriage and the relative costs of transportation and of inventory. When evaluating the impacts of reduced cost or improved performance (speed and reliability), it is important to take account of the effect on the supply chain as it is when the improvement occurs and how it is likely to change in response to improved goods movement. The simple table below shows this as first and second-order effects of freight infrastructure investments.

Table 12. First and second order effects of freight infrastructure investment.

First-order effects	Second-order effects
Reduced cost of shipping goods (including reduced damage and increased speed and reliability of trip time)	Higher volumes can be concentrated in fewer facilities with longer moves, so inventories can be reduced.
Firms can ship to farther markets and draw from more distant supply sources	Different inputs, materials or components become feasible. Different production methods are possible and also better goods for same cost.

FHWA conducted a comprehensive literature review and developed an economic framework to evaluate second order benefits (ICF, HLB, LBG, 2002). In addition, FHWA funded the development of a tool to allow policy makers to include second order benefits into traditional BCA (HDR, 2008). The tool works as an add-on to traditional benefit-cost analysis. A different approach is taken to estimating reorganization effects based on the use of the "field of Influence" technique and Ratio Allocation System (RAS)⁵⁶ adjustment of input-output account in a recent freight study (CFIRE, 2012). One can also consider third-order benefits which would include gains from additional reorganization effects such as improved products, new products, or some other change.

Other effects that policymakers may consider could include increases in regional or national employment or increases in income. A number of studies have used input-output models to estimate the impacts of freight transportation improvements on regional economies (CSI, 2005, 2008). One issue associated with these types of studies is that improved freight transportation may change the inter-industry purchasing patterns that are embodied in regional input-out tables. It is thus difficult to capture dynamic changes that may occur in the supply chain over time. There has also been some confusion over how to distinguish between the benefits and costs of freight transportation investments accounted for in traditional BCA studies and the impacts that are accounted for using economic impact analysis. The TREDIS sketch planning tool was developed to provide a framework to evaluate both of these types of impacts. (Alstadt, Weisbrod, 2008) FHWA also provides an economic analysis primer that provides guidance on what types of impacts should be considered in a traditional BCA. (U.S. DOT, 2003)

Research on mode choice may also help to inform economic impact and BCA of freight transportation projects. FHWA is currently conducting research to more fully understand the economics of mode choice. Using the Freight Analysis Framework (FAF), this research is examining the relationship between the types, characteristics and value of commodities moving in different corridors and their sensitivity to mode shifts.  This can be an important issue for planners and policymakers. The value of commodities moving in a corridor may make some corridors more sensitive to mode shifts caused by external price shocks. For example, if there is an increase in the price of fuel, lower value commodities may be more likely to shift from truck to rail. It is important for benefit cost calculations to consider these types of dynamic market effects when forecasting future freight volumes and the benefits of proposed infrastructure improvements that are based on them.

The mode choice decision includes a complex array of factors. The alignment of rail services with buyer supply chain processes and systems can serve as a market barrier for switching between truck and rail services for some. (Norbridge, 2009)

The value of commodities moving in different corridors affects the benefits that can be achieved from improving the infrastructure in these corridors. In general, you would expect that investment in infrastructure for traffic lanes with a higher value of goods would have greater benefits. Agencies often need to determine how to use limited funding and make choices that focus investment. Incorporating the value of freight into benefit cost calculations and performance measurement can be important. This is particularly important for understanding the inventory costs of freight delayed in transit. The Texas A&M Transportation Institute (TTI) recently developed a methodology to incorporate the value of freight into their Urban Mobility Report. (Eisele, Schrank, Bittner, and Larson, 2013)

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