The importance of firm networks: Methods and evidence from transaction-level administrative data

How does the success or failure of one firm depend on its business linkages to other firms? Questions about firm-to-firm economic interactions are largely open because reliable and representative micro-data on firm transactions is hard to come by. We can shine some light on this problem by relying on a novel administrative data set of firm-to-firm transactions in Ecuador. This research is split in three sub-projects.

• In sub-project 1, we analyze how a firm-level demand shock spills over to other firms along their production chain. While the literature has studied some forms of firm-specific production spillovers before, they are mostly focused on effects in firms in the same geographic region, instead of effects through production linkages.
• In sub-project 2 we study how the macroeconomic fluctuations of the whole economy are shaped by characteristics of the network of firm linkages. A recent strand of the literature is concerned with the way random firm-specific shocks can be propagated through systemically important firms, and from there have aggregate impact. So far, research has focused on sectoral analysis, but we can take this question to a true firm-level dataset.
• In sub-project 3 we assess whether the literature’s current understanding of internationally trading firms might be biased due to the inability to observe transactions between importing and exporting firms and domestic firms.

Our methodology is as follows:

•  Sub-project 1 draws on public procurement, which we believe can be plausibly interpreted as a demand shock. We will then follow these demand shocks from the original firm to its partners.
•  In sub-project 2, we generalize an existing economic model that describes the relationship between the network structure of the firm-to-firm transactions in an economy and the extent to which shocks to individual firms are magnified or dissipated. Then, we use the data from Ecuador to calibrate the model and generate predictions.
•  In Sub-project 3 we will build two different measures of indirect international trading through intermediaries that specialize in foreign trade.

The findings of this project will contribute to development in several ways:

• First, understanding firm growth is key for the elaboration of successful development strategies. Sub-project 1 can be helpful in identifying firms that are likely to generate especially large multipliers in response to a given policy.
• Second, volatility and uncertainty are harmful for investment and growth. Sub-project 2 will provide inputs to policy seeking to manage macroeconomic stability, based on the country’s economic network.
• Finally, sub-project 3 can have important implications for the degree of international integration of a country and the impacts of tariffs and other policies through indirect importing and exporting