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1. Introduction
The role of infrastructure in stimulating output, efficiency and productivity growth and reducing production cost has received increasing attention from policy makers in emerging Asia. The fastest-growing economies in the region, such as China and Vietnam, are investing around 10 percent of gross domestic product (GDP) on infrastructure. Another rapidly growing economy in the region, India, is trying to increase its investment in infrastructure from 4 to 7-8 percent of its GDP ([44] Planning Commission, 2006). Despite the increasing investment in the sector, the demand-supply gap remains wide in these countries, which is a matter of great concern for the policy makers. In the recent years, in India, infrastructure development has become a core of the government policy and taken over a large part of overall development expenditure.
In the theoretical literature, infrastructure is modeled as an important source which could generate external economies (e.g. [46] Romer, 1986; [36] Lucas, 1988; [7] Barro and Sala-i-Martin, 1995; [2] Anwar, 1995). If expenditure on public capital has positive productive impact and thus causes cost savings for firms then the implications for policy decision concerning infrastructure may be great. However, empirical findings on this issue are inconsistent and often contrary to each other. An early contribution to the empirical debate is by [3] Aschauer (1989), who examined the elasticity of output with respect to public capital stock. He finds a strong and positive relationship between infrastructure and output. Giving a new dimension to the debate, [38] Nadiri and Mamuneas (1994) examined the role of public infrastructure on 12 two-digit industries of USA. They find that the magnitude of impact varies across industries and public infrastructure does not contribute much to the productivity. Extending the debate further on the same country, [53] Zegeye (2000) examined the impact of public infrastructure capital on the productivity of the manufacturing sector for a sample of over 1,500 counties and 50 US states, by using the translog production function approach. His study concluded that though infrastructure has an impact on output, its influence on productivity is considerably small. For Spain, [43] Pereira and Roca-Sagales (2001) investigated the role of infrastructure on private sector productivity. Their findings suggested that 1 percent increase in public capital leads to 0.055 percent increase in private...