Market potential and firm-level productivity in Spain

The literature has documented a large degree of heterogeneity across firms in terms of productivity. In this article, I focus on market potential as a source of differences in productivity across Spanish manufacturing firms. Market potential is conditioned by the existing transport infrastructure. Transport infrastructure investment improves accessibility to input and output markets and thus increases market potential. Market potential is measured by travel time through the real transport network and takes into account the immense improvements that have taken place in Spain over the last decades. The results show a significant positive effect of market potential on firm-level productivity, which is robust to various estimation methods. This indicates an important mechanism of how road infrastructure improvements can generate wider economic impacts.