RIETI Report May 2016

RIETI Policy Symposium "Frontier of Inter-firm Network Analysis: Power of network and geographical friction"

The inter-firm network is becoming increasingly important both politically and academically. Micro level data encourage empirical and quantitative analysis, and a theory is needed to explain the observed facts. The "power of network" should work to improve the productivity of firms, yet there are concerns about its side effects. For the development of the network, what kinds of policies should be performed? What kinds of results can be expected from such policies? In the May issue of the RIETI Report, we present the summary from the symposium "Frontier of Inter-firm Network Analysis: Power of network and geographical friction" where leading researchers in the fields of international trade and spatial economics presented on their latest research from theoretical, empirical, and quantitative aspects.

The symposium featured opening remarks and introduction by former RIETI President and Chief Research Officer Masahisa Fujita. He provided an overview of the state of inter-firm networks with relevant examples in Japan. He concluded by stressing that the problem of concentration in urban areas, which may generate synergy effect in the short run, may induce expansion of common knowledge and prevent innovation in the long run. Fujita suggests enhancing the flow of knowledge and people among diverse organizations, cities, regions, and countries to mitigate this situation.

The symposium featured four presentations. The first presentation "Implications of Inter-firm Networks for Theories of Production and Trade" by Samuel Kortum (James Burrows Moffatt Professor of Economics, Yale University) looked first at international trade, showing that the world has experienced increased gains from trade in the last 20 years. He added that theories of importing behavior have progressed less than those of exporting behavior, though the measure for the gains is based more on importing rather than exporting. He ended by reviewing the relationship between international trade and the firm-to-firm network and posits that the flow of ideas between firms may be more important than the flow of goods. The second presentation "Empirical Evidence of Firm-to-firm Network in Trade and its Implications" by Andrew Bernard (Jack Byrne Professor, Tuck School of Business, Dartmouth College) discussed the importance of looking at this from the customer side. He provided some interesting results from several studies including that manufacturing exporters make everything they export, but that they export more products than they actually produce; most firms have very few partners in a market, but most matches have a well-connected big firm on one side; the majority of connections is formed in the same area, though big firms can find suppliers at greater distances; and as trade costs fall, importers and exporters are able to change their contracts in some products and might benefit at the expense of domestic customers. He believes that the welfare implications of research on the network are enormous. Following this was the presentation "Trade, Sectoral Linkages, and Labor Market Dynamics: Quantitative implications" by Lorenzo Caliendo (Associate Professor of Economics, Yale University) which looked at fluctuations in aggregate economic activity which are the result of a variety of disaggregated changes that can be classified into three types of shocks: sectoral shocks, regional shocks, and sectoral and regional shocks. Such shocks affect the aggregate economy through the four important mechanisms: sectoral linkages, geographic factors, inter-regional trade, and migration. He built a model to quantify different disaggregated shocks, taking into account these four mechanisms and presented three examples: productivity boom in one region in one sector, reduction in inter-regional shipping costs, and some results about the Japanese economy. The limitation he has faced thus far is access to data. With more data available, the more that can be learned with his tools, and even better tools can be constructed to understand how disaggregated shocks actually affect the aggregate real economy. Finally, the last presentation "The Implications of Agglomeration and Regional Spillover Effects" by Robert Dekle (Professor of Economics, University of Southern California) considered the reasons why economic activities concentrate in some regions. He applied the Krugman model and the Helpman model to explain reasons for agglomeration, using the raw silk industry in Japan as an example. The Krugman model predicts that a fall in transport costs leads to more agglomeration as firms agglomerate and export goods to the agricultural labor, whereas, in contrast, the Helpman model states that a fall in transport costs promotes dispersion. Another study was introduced that showed industry concentration helps Japanese total factor productivity growth in non-manufacturing, though it does not help in manufacturing, which suggests that manufacturing as a whole may not be characterized by these dynamic externalities as much as non-manufacturing.

The symposium concluded with a panel discussion in the form of a Q&A session on a variety of related issues with the speakers and moderated by RIETI Program Director Nobuaki Hamaguchi. RIETI Senior Fellow Yukiko Saito gave an introduction on geographical frictions and the policy attempts to reduce them. The panelists then answered wide-ranging questions from the audience, including on topics such as new new trade theory becoming extended into new economic geography, inter-regional distortions, transport costs and their relation to agglomeration or dispersion, and the construction of a maglev between Tokyo and Osaka and its implications.

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