The Effect of Infrastructure Capital on Manufacturing Industries in Israel, 1990-2003

20/05/2008 |  Sharabany Ran
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The Economy and Economic Activity
Ran Sharabany
The study examines the effect of infrastructure capital, consisting mainly of roads, railways, sea and air ports and communications on the productivity of twenty-three manufacturing industries in Israel, based on annual series for the years 1990-2003. A flexible translog cost function was used for the estimation, enabling us to estimate returns to scale. The effect of infrastructure capital on productivity was measured in terms of cost savings (dual) and the rise in output (primal). The effect of infrastructure capital on the demand for factors of production and on the cost structure of each industry was also examined. The cost function and the accompanying cost-share equations were estimated via a seemingly unrelated Zellner iterative regression. The findings indicate rising returns to scale in nearly all the industries. Infrastructure capital was also found to increase productivity of the manufacturing industries and to serve as a substitute for private capital, and to some extent for labor too. Infrastructure capital lowers the share of private capital and increases the share of intermediate inputs in production. Marginal profit and marginal savings from infrastructure capital are positive, and differ from industry to industry. These results are consistent with those of studies carried out in the US, Canada and Australia.
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