Inter-firm Network Dynamics of Production during the COVID-19 Pandemic

This paper examines the dynamics of the Japanese production network during the COVID-19 pandemic. We utilize a panel dataset of approximately 1.8 million firms spanning from 2015 to 2023 and document that firms largely maintained existing inter-firm relationships during the early stages of the pandemic, often before severing ties in subsequent periods. Moreover, new link formation did not recover at a commensurate pace, resulting a net contraction of the production network. Furthermore, we identify a shift in the geographical distance between transacted firms. Firms increasingly dropped local partners but added distant partners. Notably, changes in network dynamics and geographical distance were driven by firms with high ICT intensity and those located in core prefectures.