Market Potential, Road Accessibility, and Firm Births: Evidence From 20 Years of Road Investment

ABSTRACT This paper investigates the causal effects of road accessibility, measured by market potential, on firm births in Portuguese municipalities between 1991 and 2016, a period marked by significant road improvements. We address the endogeneity of market potential by employing instrumental variables within Poisson Pseudo‐maximum Likelihood estimates with fixed effects, which we refer to as “non‐local time‐variant historical instruments.” Our estimated elasticities for firm births range from 1.6 to 1.9 for the 1‐year interval and 1.2–1.3 for the 5‐year interval. Additionally, we find a greater positive effect on firm births when excluding the metropolitan areas of Lisbon and Porto, which is indicative evidence of a heterogeneous spatial effect. We also find that the impact of the enlarged market potential is heterogeneous across sectors. Our results are robust to changes in model specification and the usage of alternative measures of the instruments.