Efficiency, Comparative Advantage, and Production Fragmentation

Infrastructure influences not only absolute advantage, but also comparative advantage. Patterns of specialization and trade are partly determined by infrastructure service quality. Limitations in factor endowments may be mitigated by infrastructure services, also affecting the dynamics of comparative advantage, as services may be either complements or substitutes for physical inputs.

As infrastructure expanded in East Asia, trade costs fell and altered countries' comparative advantages, enabling greater fragmentation of production supply chains and intraregional trade in parts and components. The subsequent economic integration is markedly higher than in other developing regions (Table 1 [ PDF 41.2KB | 1 page ]).

When the production process is increasingly fragmented and dispersed, infrastructure services that ensure timeliness and reliability of delivery become even more critical. Again, East Asia's performance is better than other developing regions (Table 2 [ PDF 41.3KB | 1 page ]).

Tham et al. (forthcoming) show that foreign firms are interested in Malaysia as a key link in global supply chains due to its locational advantages, which, in turn, are closely linked to its infrastructure quality. Amiti and Javorcik (2008) find that market and supplier access are the most important factors affecting foreign investment, with an effect on location choice about four times as great as production costs. For foreign investors in the PRC, access to markets and suppliers within the province of entry matters more than access to the rest of the country.

Seaport competitiveness may suffer from inadequate channel depth, shortage of berths, and limited cargo handling equipment, storage and transit areas. It may also suffer from limitations in soft infrastructure, such as labor skills, regulation, bureaucracy, and other factors affecting capacity utilization. Improvements in infrastructure service efficiency can lead to cost savings equivalent to those accruing from moving production to locations thousands of kilometers closer to trading partners. They can also serve to attract foreign direct investment.

When growth is very rapid, congestion may result as traffic growth outpaces capacity. This is occurring in the PRC, where six percent of the world's rail lines struggle to move one fourth of the world's rail freight and only two percent of the country's highway network is made up by expressways. Port congestion has been rising, most notably at Shanghai, as physical infrastructure is overloaded and collaboration is lacking among different stakeholders to achieve greater port efficiency (Ma and Zhang, forthcoming). For South Asia, De (forthcoming b) finds that inland transport accounts for 88 percent of overall trade transportation costs. Land border crossings are overcrowded and complex requirements in cross-border trade raise possibilities for corruption and informal trade. Policy reform to reduce border delays and monetary costs could increase competitiveness substantially.

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