The innovation effects of transportation infrastructure: Evidence from highways in China

Whether the improvement of transportation infrastructure could enhance the innovation output of firms has attracted attention worldwide. However, evidence from the micro firm level, especially in developing countries, are still scarce. This paper takes the construction of highways in China as a quasi-natural experiment and demonstrate that transportation infrastructure significantly facilitates the innovation output of local firms. Further analysis demonstrates that the innovation effect has three channels: reducing labor wage distortion, easing firm financing constraints, and promoting knowledge spillover. Among them, the key channel is the knowledge spillover effect, especially that from downstream of the value chain. The heterogeneity analysis shows that highway expansion has larger effect on the innovation output of domestic invested firms (including state-owned and private firms), large-scale firms, and knowledge-intensive firms.