The Importance of Firm Networks: Methods and Evidence from Transaction-Level Administrative Data

This project seeks to understand if constraints on firm productivity in low-income countries are due to the interactions among firms and sectors in a developing economy.

Thriving firms in a thriving private sector are a necessary condition for economic growth and poverty reduction. But what are the constraints on firm productivity in low-income countries (LICs) that have so evidently hindered growth? One idea seeks an answer to this question in the interactions among firms and sectors in a developing economy. The design of industrial policy in developing countries hinges delicately on potential external economies of scale (lower costs for a firm generated by the economic interactions of a firm network) that may or may not be generated by other firms. Research on these ideas has always been limited by a fundamental lack of data on firm-to-firm interconnections. However, newly available data derived from Ecuadorian VAT records now allows tracking of all transactions within the entire network of formal-sector firms in the country

The researchers will utilize these data to explore several related aspects of how firm network structure affects growth and development. Their data will allow them to trace out network relationships, identifying client and supplier firms at any degree of distance. They then plan to estimate the direct effect of demand shocks as well as spillover effects (i.e. positive or negative economic effects experienced in a context brought about by an economic occurrence in a seemingly unrelated context) in the network by exploiting variation in procurement contracts: projects are often awarded randomly within a set of qualified bidders in Ecuador. The effects of firm shocks on aggregate output can likewise be estimated with this real-world data. Most importantly, the researchers hope to link foreign and domestic trading relationships, allowing them to shed light – for the first time – on the phenomenon of indirect exporting and importing.

Ecuador is a small, dollarized economy that depends heavily on commodity prices and foreign investment. Given that there is no monetary policy available to counteract the effects of external shocks, assessing the vulnerability of the economy to shocks and their corresponding spillover effects is a first order concern for the Ecuadorian government. Many LICs around the world are currently in the process of starting to collect large-scale transaction-level data or to digitize and operationalize such collected data. They could therefore benefit directly from lessons learned in Ecuador.