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Rotman Insights Hub | University of Toronto - Rotman School of Management

Can public transportation build small businesses?

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Yue Yu

A robust public transit network comes with obvious benefits — it provides an environmentally friendly way for people to travel quickly from place to place without a car. And, according to new research from Rotman School assistant professor of economics Yue Yu, it can have a strong economic upside as well.

In a paper titled “Geographic Integration and Firm Exports: Evidence from China,” Yu and her co-author INSEAD assistant professor of economics Lin Tian, show that transportation infrastructure plays a pivotal role in promoting communication and collaboration between corporations. Specifically focusing on the Chinese high-speed rail system and its influence on companies exporting goods abroad, the researchers found that the passenger-only train system, having become the world's largest after expansions since 2008, facilitated an increase in the export of goods. This allowed companies to access more markets and enhance the quality of their offerings. Because the high-speed rail expansion included only passenger trains, the researchers were able to separate the impact of face-to-face meetings facilitated by easier transit from other factors, like shipping cost or expanded goods transport lines.

“When these firms are connected by high-speed rail, we find that they experience improvements in export performance,” Yu says.

To parse out the details, the researchers combined company-level geographic and economic data with a map and timeline of the Chinese high-speed rail expansions. Then they created a mathematical model that could predict how a company should perform before and after the expansion, based on their access to peers through the new train system. The model’s predictions are tested using the data and the empirical setting, providing robust evidence for the researchers’ theory that high-speed rail is an economic boon for exporters because of its ability to connect them with each other.

“It turns out that face-to-face interaction is crucial for firms in terms of developing relationships and sharing information and insight about business with each other,” Yu says.

Interestingly, the effect was more pronounced for small businesses. Yu expects this might be explained by the fact that large export companies often dedicate ample personnel and resources towards market research — a privilege that small companies rarely have. Thus, an insightful tip from a peer can make a big impact.

Companies located in remote places also got an especially large boost from access to high-speed rail. Prior to the rail line’s arrival, these businesses tended to be very isolated, which may have made it difficult to get information on export strategies.

The idea that transportation infrastructure supports small businesses stems from the much older theory of agglomeration, which says that businesses within a certain sector benefit from clustering together. This way they can establish mutually beneficial supply routes, foster a specialized labor force and form relationships with their peers.

Yu and Tian's research provides solid evidence for the information sharing that happens when relationships between companies are nurtured. The paper also suggests that the commute length between businesses serves as an excellent proxy for physical proximity when establishing relationships.

“At the end of the day, we show that, if exporters are effectively closer to each other in terms of commuting time, it can benefit their export performance,” Yu says.

Yu and Tian’s findings provide one more piece of evidence for the benefits of public transit infrastructure as prominent Western countries struggle to get railway projects off the ground. In 2023, the Ministry of Transportation in Canada delayed plans to build a high-speed rail line between Toronto and Quebec City by at least a year. Just a couple of months later, the United Kingdom abandoned a plan to connect five major English cities via high-speed rail. These countries may want to take note.

“High speed rail could be especially useful if a country is looking to improve its exports,” Yu says. “If, at the same time, they’re thinking about transportation infrastructure or high-speed rail in particular, that’s one margin where they could benefit.”

Yue Yu is an assistant professor of economics at the University of Toronto Scarborough, with a cross-appointment to the Rotman School of Management.