The impacts of port infrastructure and logistics performance on economic growth: the mediating role of seaborne trade

Although many studies have justified investment into transport facilities as a stimulator of economic growth of a country or region, most of the economic impact studies concerning seaborne trade have focused on a particular seaport or a region and a clear picture of how seaborne trade benefits the world economies remains elusive. In the context of the Port of Liverpool, Kinsey (1981) argued that the impact of ports on the local economy was declining, with a decreased number of jobs directly dependent on the port at that time. British ports were no longer major employers and the industrial inter-related complexities no longer existed, further reducing the impact of ports on the local economy (Gripaios and Gripaios, 1995). Two relatively recent studies, one in the context of South Korea (Jung, 2011) and another in the context of China (Deng et al., 2013), have also argued that ports are having declining effects on economy. In particular, Jung (2011) identified that from 1990 to 2008, South Korea experienced 87.5% decrease in the direct port employment creation effect per billion Korean won. Despite no significant impact of seaborne trade on economic growth, Deng et al. (2013) revealed significant positive association between regional economy and value added activity at Chinese ports. The reasons for such association could be that Deng et al. (2013) included total volume of imports and exports in the value-added activity construct, which is actually part of the port demand (i.e. seaborne trade) construct.

The benefits of investing in transport infrastructure are not limited to travel-time saving (Banister and Berechman, 2001). Lakshmanan (2011) showed that improved freight services lead to growing trade, followed by improved labor supply and technical diffusion. Some port impact studies in the context of the USA (Yochum and Agarwal, 1987), European countries (Bottasso et al., 2013; Bottasso et al., 2014; Ferrari et al., 2010), China (Shan et al., 2014) and South Africa (Chang et al., 2014) have observed significant impact of port activity on regional/national economies. Yochum and Agarwal (1987) concluded that some firms located in Hampton, USA, would experience a severe economic penalty due to a shortage of ports. Bottasso et al. (2013) analysed the impact of ports on local employment, using a sample of 560 regions located in 10 West European countries. They found that every million tons of net port throughput would create about 400–600 jobs in the region. Furthermore, Bottasso et al. (2014) found that every 10% increase in port throughput can generate a 6–20% increase in the GDP of the regions and can have a spillover effect on neighbouring regions in the range of 5–18%. In the context of China, Shan et al. (2014) found that 1% increase in port cargo throughput can increase GDP per capita growth by 7.6%, and the port throughput of a country has a positive impact on neighbouring economies. Similarly, Chang et al. (2014) revealed that the South African economy could suffer a 17% loss due to a single unit shortage in port activity.

A summary of selected port impact studies since the 1980s is presented in Appendix A. Most of these studies employed either input–output analysis or regression analysis, and focused only on a particular port of a country or region. What is lacking is that, none of those studies considered port infrastructure quality and logistics performance but focused solely on port throughputs. Therefore, the present study examines the wider economic benefits of port infrastructure quality, logistics performance and seaborne trade through analysis of national-level data of 91 countries.

In this paper, the approach used to estimate economic impact of port infrastructure quality is based on the neo-classical economic perspective of transport infrastructures proposed by Lakshmanan (2011). We have assumed that investments into port infrastructure are exogenous, which improve the quality of port infrastructure (QPI). Better QPI (such as modern technologies and equipment) would help improve the logistics performance (LP) of a country (that is, greater reliability, less damage, ability to track and trace shipments, timeliness of delivery etc.). Improved QPI and LP would increase the local and global accessibility of a country, including opportunities to expand markets worldwide. The realisation of those opportunities can be expressed in the form of a country’s total international trade (herein, seaborne trade). Gains from trade can be characterised by improved labor supply, expanded production, diffusion of innovation, competitive pressures, economic restructuring, etc., leading to total factor productivity and GDP growth (Lakshmanan, 2011). To sum up, Fig. 1 presents the conceptual framework of this study.

Conceptual Framework

First, we examine the effects of QPI on LP, seaborne trade (ST) and national economy (NE) based on the conceptual framework in Fig. 1. We then look at the effects of LP on ST and NE, and then the effect of ST on NE is examined. Finally, the indirect (or mediated) effects of QPI on NE via LP, QPI on NE via ST, and QPI on NE via LP and ST are investigated.

Competition among countries is an everlasting phenomenon. In the game of becoming better than each other and attaining competitive advantage, access to resources and new markets; governments around the world are making intensive investments into different developmental projects. Such projects also include the development of new ports or expansion of existing ones. Nowadays, the role of ports is not limited to cargo handling but also includes the provision of better logistics services to meet the growing demands of global supply chains. “Logistics performance refers to cost, time, and complexity in accomplishing import and export activities” (Hausman et al., 2013, p. 236). Advanced technologies facilitate better logistics performance through reengineering transport routes, scale, modes or frequencies (Helling and Poister, 2000). Along with technology and service quality, Song and Panayides (2008) highlighted the importance of value-added activities at ports by means of diverse logistics services to attain competitive advantage. The ability of a country to offer diverse logistics services is partly driven by the quality of physical infrastructures such as road, rail, and ports (Subramanian and Arnold, 2001). Physical infrastructure is an important determinant of transport cost (i.e. a component of logistics performance), particularly for landlocked countries (Limao and Venables, 2001). Also, innovations in containerisation and intermodal transport have been part of major changes in global logistics over the past 20 years (Memedovic et al., 2008). Thus, it can be hypothesised that:

H1 (a): The quality of port infrastructure has a positive effect on logistics performance.

In the same vein, investments in physical infrastructure creates a better business environment and improves transport efficiency, which facilitates export growth (Portugal-Perez and Wilson, 2012). Yeo et al. (2008) found that quality of port service, logistics costs, regional connectivity, hinterland condition and port accessibility, contributes significantly to a port’s competitiveness. Similarly, Notteboom et al. (1997) stated that a combination of infrastructure quality, hinterland accessibility and productivity plays a vital role in strengthening a port’s competitive position. Gordon et al. (2005) added that a combination of port facilities, including sufficient investment, supportive government policies, excellence in operation and information technology, can help a port attain sustainable competitiveness, which will produce higher seaborne trade compared to the less competitive ports. Thus, it can be hypothesised that:

H1 (b): The quality of port infrastructure has a positive effect on seaborne trade.

Lakshmanan (2011) proposed that investment into transport facilities improves logistics ability and reduces freight costs. Wilmsmeier and Hoffmann (2008) estimated the role of liner shipping connectivity (LSC) and port infrastructure in determining freight rates in the Caribbean. They found that a one-standard-deviation increase in LSC implies an expected reduction of USD 287 in freight rate, and that a one-standard-deviation increase in port infrastructure for an importing country implies an expected reduction of USD 225 in freight rate. Furthermore, Sánchez et al. (2003) found that freight costs are lower in efficient ports after controlling for distance, liner service availability, type of product and insurance costs. Also, an increase in port efficiency from the 25th to the 75th percentile is expected to reduce shipping costs by 12% (Clark et al., 2004). Quality of infrastructure and transport costs are important for export-led economic growth (Limao and Venables, 2001). Thus, it can be derived that efficient ports have better quality infrastructure and logistics performance than inefficient ones. Additionally, an efficient port system with enhanced logistic abilities is a key determinant of foreign direct investment into a country (Panayides et al., 2015). On the other hand, inefficient ports reduce national and international trade and affect economic growth adversely (Clark et al., 2004). Also, the role of ports in the internationalisation process of business firms was highlighted by Ellis (2011). Thus, the following hypotheses could be derived from the above arguments:

H1 (c): The quality of port infrastructure has a positive effect on national economy.

H1 (d): The quality of port infrastructure has a positive effect on national economy mediated through logistics performance.

H1 (e): The quality of port infrastructure has a positive effect on national economy mediated through seaborne trade.

H1 (f): The quality of port infrastructure has a positive effect on national economy mediated through logistics performance and seaborne trade.

A country’s logistics performance plays a vital role in facilitating transportation of goods to the international market. “Inefficient logistics services impede trade by imposing an extra cost in terms of time as well as money” (Korinek and Sourdin, 2011, p. 2). Limao and Venables (2001) found a significant negative association between transport cost and international trade. Long customs clearance time adversely affects firms’ total factor productivity (Subramanian et al., 2005). Meanwhile, a better business environment comprising quality logistics services is associated with better export performance (Portugal-Perez and Wilson, 2012). Also, better accessibility of freight increases logistics employment (van den Heuvel et al., 2014). Overall, firms in countries with better logistics performance have higher probability of exporting to international markets and attracting foreign direct investments (Hausman et al., 2013). Thus, logistics development has a positive impact on regional economic growth (Chu, 2012; Lean et al., 2014; Li et al., 2017; Lun et al., 2016). Coto-Millán et al. (2013) found that a 1% increase in logistic performance index can increase the world economic growth by between 1.1–3.4%. Therefore, we propose the following hypotheses:

H2 (a): Logistics performance has a positive effect on seaborne trade.

H2 (b): Logistics performance has a positive effect on national economy.

H2 (c): Logistics performance has a positive effect on national economy mediated through seaborne trade.

Ports are the hub and node of networks for all kinds of waterborne transport and link countries with rest of the world; thus, they promote transportation and distribution in the cheapest way. Ports are more than just an infrastructure that facilitates international trade; they also determine freight transport costs and help companies access international markets (Clark et al., 2004). Although the most visible economic contribution of ports was employment in the port, this has declined dramatically since the inception of containerisation, although ports still contribute significantly to the overall economy in rather less visible forms. In this present era of globalisation, products are usually produced far away from consumer markets, and raw materials for a single product are often sourced from several different countries. Also, vertical specialisation has increased dramatically over the last two decades; that is, different parts of the production function of a product are performed in different countries (Hummels et al., 2001). This would have not been possible without the support of efficient maritime transport. Overall, the contribution of maritime transport nowadays is invisible to ordinary people, but spread over different industries and institutions to such an extent that it can hardly be measured accurately. Helling (1997) outlined how a dollar’s worth of water transportation is spread over 10 different but interrelated business categories. Sleeper (2012) found that GDP is positively proportionate to the number of worldwide recognised ports in a country. In an analysis of 120 port regions from 13 European countries, Bottasso et al. (2014) revealed that ports increase the GDP of regions in which they are located, and also influence neighbouring regions' GDP positively. Park and Seo’s (2016) investigation of South Korean port regions found that the container throughput of a port has a positive effect on regional economic growth. Thus, we hypothesise that:

H3: Seaborne trade has a positive effect on national economy.