Transportation, Innovation and Growth

• Economics

This paper develops a tractable multi-industry model of endogenous growth with innovation in both manufacturing and transportation. When the per-unit cost of shipping goods is exogenous, the sales amplification of manufacturing productivity improvements is weak and growth eventually ceases. When firms allocate R&D resourcesto innovation in transportation, endogenous growth occurs because cost-reducing innovation in production and in transportation reinforce each other in a virtuous circle. Policies or frictions that raise per-unit transportation costs - such as cumulative regulation, infrastructure bottlenecks, or fuel price pressures - dampen the translation of productivity gains in the factory into aggregate growth. Conversely, lower per-unit transportation costs generate both level and growth effects by strengthening the ability of firms to turn process innovations into a larger volume of sales. More broadly, the results suggest that understanding growth requires treating production and distribution as an integrated system.