Effects of Business Age and Size on Freight Demand: Decomposition Analysis of Indian Establishments

Abstract

Freight studies have traditionally used business size measures such as employment and gross floor area as predictors of freight generation, giving very limited attention to the effects of an establishment’s age on freight demand. This study uses establishment-based freight survey data collected in seven cities of Kerala, India, to analyze the impacts of the age of an establishment on its freight demand. This is achieved by grouping the establishments into pre-specified classes with relatively homogeneous freight demand pattern. This classification is based on a data-driven a posteriori segmentation of industrial classes. These groups are further divided into sub-groups based on founding year of an establishment. As the business age increases, establishments grow in business size indicators and hence the changes in productivity can be either because of age or because of size or both. It is very important to separate the effects of these two indicators. The Blinder–Oaxaca decomposition method is used in this study to disentangle the effects of size and age on freight production and freight trip production. Age is found to be a fundamental driver of freight demand in younger establishments while the explanatory power of business size variables in explaining freight demand diminishes with age. The study findings illustrate the potential omitted variable bias that can occur when freight demand is estimated using business size indicators, without controlling for the business age differences.