Roads: from trade liberalization to firm productivity

Abstract

We examine the complementary role of road infrastructure in determining the impact of a reduction in input tariffs on firm productivity. We combine newly constructed geo-spatial data from Ethiopia on road improvements under the Ethiopian Road Sector Development Program with detailed establishment level data on manufacturing firms. To explore the impact of roads, we construct a measure of market access capturing the intensity of possible road connections between the town in which a firm is located and other intranational markets. Road improvements under the program give us rich spatial and time variation in market access. We find strong complementarity between roads and input tariff liberalization. A reduction in the input tariff is associated with a larger increase in firm productivity in areas with better market access. Our study highlights the role of roads in shaping the effects of trade liberalization on firms.