Prioritising infrastructure investments based on agglomeration externalities: A methodological framework with evidence from Peru

Abstract

The purpose of this research is to propose a methodological framework for strategically prioritising infrastructure investments in areas with significant spatial concentration of economic activity. Such concentration generates agglomeration externalities, positively influencing economic growth and productivity. However, infrastructure investments aimed at reinforcing these externalities often involve equity-efficiency trade-offs, presenting policymakers with challenging resource-allocation decisions. Our framework comprises three sequential stages. The first stage involves identifying geographical patterns of industrial agglomeration through a non-parametric statistical methodology. In the second stage, spatial econometric models are estimated to examine how firm location choices respond to different categories of infrastructure: basic infrastructure (water, sewerage, electricity), accessibility to markets (primarily transport infrastructure), and access to production inputs (education and financial infrastructure). The final stage constructs a typology of high-return areas by integrating the findings from previous stages, aligning infrastructure priorities with industry-specific needs and local infrastructure endowments. Applying this methodology to manufacturing industries in Peru reveals substantial variation in industrial agglomeration patterns, with approximately one-third of industries showing statistically significant clustering. The analysis demonstrates that infrastructure endowments and spatial spillover effects considerably influence firm location decisions. The resulting typology highlights clear infrastructure investment priorities tailored to distinct regional characteristics and agglomeration potentials. The major conclusion drawn is that a systematic, evidence-based methodology enables policymakers to effectively target infrastructure investments, maximising economic returns and mitigating equity-efficiency trade-offs. This approach is particularly valuable in developing countries facing significant infrastructure deficits and resource constraints.