US affiliates, infrastructure and growth: A simultaneous investigation of critical mass

A structural model of a small open economy is developed that demonstrates how the impacts of infrastructure on GDP, factor productivity, and multinational industrial location can be decomposed into direct and indirect general equilibrium effects. The model is then estimated on a panel of 28 countries and it is found that schools and telecommunications have a positive and significant direct effect on domestic growth and that there are greater marginal returns for countries with higher investment levels; a result that is suggestive of a critical mass story. However, once spurious correlation of firm location and the indirect effects through wages and multinational activity are accounted for, the total effects of telecommunications and schools on growth are found to be higher than direct estimates would suggest. The results reveal important implications for understanding the channels through which infrastructure influences growth.