Reducing Misallocation through Infrastructure: Evidence from China’s Expressway Expansion

This paper examines whether transportation infrastructure can alleviate regional resource misallocation and promote productivity convergence. Exploiting China’s large-scale expressway expansion between 1998 and 2007, we estimate that expressways nearly halved intercity travel time. Combining this with manufacturing firm records, we find that the resulting decrease in transportation costs significantly narrowed intercity total factor productivity (TFP) gaps within industries, implying an improvement in interregional misallocation. This conclusion remains robust when addressing endogeneity with an instrumental variable derived from a dynamic minimum spanning tree. The effects are stronger in industries that are less resource-dependent, lighter in product weight, more export-oriented, and more geographically dispersed. Expressways also play a key role in reducing the TFP gap between coastal and inland regions by eroding the coastal export advantage, promoting convergence in firms’ export shares, and potentially facilitating the relocation of export industries inland. Our findings suggest that large-scale infrastructure investment is a powerful tool for alleviating spatial misallocation and promoting regional economic integration in developing economies.