Geography and Firm Performance in the Japanese Production Network

Author Name Andrew B. BERNARD (Tuck School of Business at Dartmouth, CEPR & NBER) /Andreas MOXNES (Dartmouth College, CEPR & NBER) /SAITO Yukiko (Senior Fellow, RIETI)
Creation Date/NO. June 2014 14-E-034
Research Project Inter-organizational and Inter-inventors Geographical Proximity and Networks
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Firms operate in complex supplier-customer networks that potentially range over long distances. However, the effects of supplier networks and supplier location on firm performance are largely unknown. This paper characterizes the domestic production network in Japan using detailed buyer-supplier data on over 950,000 firms. Beyond describing the characteristics of the Japanese production network, the paper examines the geographic features of the network links. Greater geographic distance plays an important role in reducing the probability of buyer-seller relations between pairs of firms. For a given firm, greater distance is associated with better performance measures of suppliers and customers. Geography, the density, and the quality of network connections are strongly correlated with downstream (customer) firm performance. Labor productivity, credit score, and size of a downstream firm are positively correlated with features of its upstream supply base including the number of suppliers and their average performance. In addition, geographic proximity of a firm's suppliers is associated with improved firm performance. The paper also provides the first evidence on the relationship between supplier network connections and downstream firm outcomes. Firm performance is better when its suppliers have more suppliers of their own. However, firm performance is lower when its suppliers are connected to more downstream customers.