A Pseudo-Panel Approach to Estimating Dynamic Effects of Road Infrastructure Provision on Firm Performance in a Developing Country Context

We construct a pseudo-panel of Colombian firms based on the Colombian Annual Manufacturing Survey to study the effects of transportation infrastructure on firm performance in a developing country. Our findings report an output elasticity with respect to road infrastructure of 0.132 to 0.146 across the specifications, which confirms our initial hypothesis that roads are an important driver for private sector output growth. The fact that our results are larger than those reported in the literature for developed countries could suggest that the role of transportation infrastructure is relatively more important for the economy of developing countries. Furthermore, our findings reveal that there exists a time lag with which firms’ productions react to changes in the road stock. We interpret these findings as firms requiring time to adjust their production processes to road improvements of at least a year. We furthermore identify that the effect of road infrastructure is particularly large for those manufacturing industries that are capital-intensive and produce heavy goods. Further robustness tests reveal that our results are not driven by the possibility of agglomeration economies or the chosen measurement of transportation infrastructure. We additionally provide Monte Carlo simulations to provide support for the validity of pseudo-panels in the context of firm-level data.