“Transport infrastructure investment and inventory reduction: Causal inference from Chinese firms” by Li Zhigang
University of Hong Kong
China has topped other economies in transport infrastructure investments in the past decade (e.g. highway length tripled). At the same time, the annual inventory-sales ratio of Chinese manufacturors has declined from 22 to 13 percent. The causal linkage between these two phenomena is estimated using data covering the population of medium and large firms in China. We find that the highway investment alone may have caused a 30-percent decline of raw material inventories. The implied saving of inventories per dollar of highway spending in China is over 1 cent, comparable to the estimates in the US during the 1980s. This saving is dominated by the spillover effect of highway investment on firms in neighbor provinces. Moreover, entries and exits of firms caused by highway investment may have played a key role in this inventory decline.