Absent functional credit markets, firms in low-income countries often rely on building long-term business relationships with suppliers and customers so that they can access credit, better prices, or other benefits that rely on trust built through repeat transactions. Tightly linked firm networks may enable firms to engage in risk-sharing and recover more easily from shocks, particularly idiosyncratic shocks. However, if covariate shocks occur (such as seasonal price and demand shocks), suppliers may reduce the number of benefits provided to downstream firms in their supply chain network and increase the likelihood that firms exit the market. This might occur up and down a supply chain between buyers and sellers linked by transactions or across sectors with firms that are linked as neighbours. Thus this study will address the research question: How do firm networks affect individual firms' ability to cope with shocks and changes in competition? It will generate evidence linking firm networks with market structure by exploring how shocks affect market participants in Tanzania’s Kagera region.
The researcher will build a novel dataset by conducting a high-frequency bi-monthly survey of firms in rural and urban areas, to collect information about changes in entry, exit, input and output prices, inventory choices and investment, and credit provision. The survey will involve 900 firms in 30 communities. The sample will be drawn from a firm census of 9,800 firm from 100 urban and rural communities collected in September 2022, which reports demographic information about firm owners, firm age, number of employees, detailed sector information, and location. The survey timing and sampling will be built around a general equilibrium framework designed to reflect interactions of market participants along small business supply chains. At baseline, a subset of firms will also be asked to do a detailed network survey using aggregate relational data following the method of Breza et al (2021), with the goal of constructing measures of network structure and firm centrality within networks.
This new panel dataset presents a unique opportunity to learn about new firm creation and exit at a large scale. Kagera region has several features that make such lessons particularly policy-relevant. It is relatively isolated from the commercial centre of Dar es Salaam, and has many households which engage in fishing, coffee production, and subsistence cereal production. Policymakers concerned with stable labour markets and how rural households move out of subsistence production will be eager to learn about how small firms (operated by households) cope with shocks that force them to exit the market. It may help pinpoint policy supports or financial products that could help small firms cope with shocks – such as loans or insurance products. Similarly, as Kagera is the main border region with Uganda and sits on Lake Victoria, its proximity to Uganda may also provide interesting lessons about frictions in cross-border trade.
