Is Compact Infrastructure Development Business Friendly?

One issue emerging in the debate over infrastructure investment is whether compact development–land development in higher density areas–will discourage business formation and job creation. The concern is that central cities are not business friendly and policies that restrict infrastructure development on the urban periphery will discourage business investment by forcing businesses to locate in less economically hospitable environments. The emphasis on directing infrastructure to existing areas and away from low-density suburban areas is a hallmark of climate change and Smart Growth legislation.

University of California at Berkeley planners Karen Chapple and Carrie Makarewicz have examined this relationship using firm formation, expansion, and location data for California in the most recent (Spring 2010) issue of Access magazine. Their conclusion is that most compact development does not discourage business formation or investment because most firms locate and expand in central cities anyway. They conclude:

There is little doubt that expanding firms prefer to be near transportation infrastructure, but the recent history of California shows that firms can expand and stay close to infrastructure without leaving dense, already-populated areas. The businesses that have contributed to the majority of growth within the last 15 years have not been expanding on the urban periphery in search of new, undeveloped sites with little infrastructure and no highway. Rather they seek sites with existing major infrastructure that has been in place long enough to attract other city amenities, an ample labor force, and appropriate housing for their workers. In short, businesses can’t expand without access to infrastructure, but businesses can get access to infrastructure without migrating to the periphery. Our analysis suggests that if anything, firms would like to see more (and more varied) housing options in areas that are already-developed. If this is the case, then by encouraging infill development SB 375 [California’s climate change legislation] could very well help, not hinder, California’s economic growth.

The essence of Chapple and Makarewicz’s argument is that while infrastructure investments, such as access to highways, are important to business location, other benefits to higher density locations such as housing stock and work force offset any negative effects. This makes sense as far as it goes, but it ignores how the performance of the transportation network effects business investment decisions, productivity, and job creation (something Adrian Moore and I discuss in chapters 2-3 of our book Mobility First.)

One of the benefits of expanding road networks, particularly through limited-access highways, in the latter half of the 20th century was the ability to improve the performance of the network, giving businesses greater access to locations and workers more access to employment. To the extent infrastructure investments are focused on the wrong projects, and reduce access through lower systemwide performance and greater travel times, policies that force transportation investments into higher higher cost and more difficult to serve areas could reduce economic competitiveness.

Chapple and Markarewicz’s study focuses on the redistributive effects of business investment within an urban region (or metropolitan area). The effects of a poorly performing transportation network will be in a lack of regional competitiveness, not whether businesses locate from one city to another within a urbanized area. These regional competitive effects are explored in depth by David Hartgen and M. Gregory Fields in their study Gridlock and Growth a study for Reason Foundation in 2009. Given that the goals of most land use and transportation provisions of climate change legislation will have the effect of lengthening commutes and increasing traffic congestion, urban economic competitiveness is likely to suffer. The overall level of business activity will fall even if more businesses are located in the higher density regions.

So, when it comes to the analysis of infrastructure investment’s impact on economic competitiveness, I think Chapple and Markarewicz are measuring the wrong thing. We need to focus on growing the overall economic pie at the urban level, not redistributing an increasingly shrinking pie. Thus, focusing investment in higher density areas without commensurate investments to maintain mobility and access will reduce economic competitiveness and the dynamism of the local economy.

Samuel R. Staley, Ph.D. is a senior research fellow at Reason Foundation and managing director of the DeVoe L. Moore Center at Florida State University in Tallahassee where he teaches graduate and undergraduate courses in urban planning, regulation, and urban economics. Prior to joining Florida State, Staley was director of urban growth and land-use policy for Reason Foundation where he helped establish its urban policy program in 1997.