RIETI Report February 2018

The dynamics of inter-firm networks and firm growth

Japan is prominent among developed countries for its fast-declining business dynamism as evidenced by a 23% drop in the number of small and medium-sized enterprises (SMEs) between 1999 and 2014. This reflects an increase in the retirement of aging business owners and weak entrepreneurial activities, and has been of concern to policymakers as existing inter-firm networks, which are vital to productivity and sustained economic growth, are being lost. In the February issue of the RIETI Report, we present "The dynamics of inter-firm networks and firm growth" by Fellow Daisuke Fujii, Senior Fellow Yukiko Saito, and Tatsuro Senga, originally published on VoxEU and now reposted on the RIETI website.

As the importance of intangible capital accumulation over the lifecycle dynamics of firms and businesses is becoming clear, Fujii et al look at this from Japan's perspective, analyzing creation and destruction of buyer-supplier relationships at the firm level, with a focus on firm age. They then examine the effect of the development of buyer-supplier relationships on firm growth at different stages in the firm lifecycle. Finally, Fujii et al provide policy implications to address this issue.

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The dynamics of inter-firm networks and firm growth

FUJII DaisukeFellow, RIETI

SAITO YukikoSenior Fellow, RIETI

SENGA TatsuroFellow, RIETI

Japan stands out among developed countries for its fast-declining business dynamism. For example, the number of small and medium-sized enterprises (SMEs) dropped by 23% between 1999 and 2014, reflecting the increase in retirement of ageing business owners and weak entrepreneurial activities (Small and Medium Enterprise Agency 2017). This has created concern among policymakers as existing inter-firm networks, which are vital to productivity and sustained economic growth, are being lost.

Firms form production networks through selling and buying goods and services to and from each other. Such buyer-supplier relationships are important for both short-run sales and profits, but also for long-run growth for firms. For example, Toyota Motor Corporation would share its business knowledge with suppliers, which would allow them to learn how to improve efficiency and performance. This, in turn, would help reduce costs and improve the quality of products made by Toyota. Firms can benefit from these intangible assets by building long-term relationships with buyers and sellers. Recent literature has highlighted the importance of such intangible capital accumulation over the lifecycle dynamics of firms and establishments (Atkeson and Kehoe 2005, Hsieh and Klenow 2014).

Development of buyer-supplier networks

In recent work, we constructed panel data of Japanese firms with supplier-customer information (Fujii et al. 2017). The sample includes about one million firms over 10 years, provided by Tokyo Shoko Research Ltd. Using these panel data, we studied creation and destruction of buyer-supplier relationships at the firm level, focusing on firm age.

To read the full text
https://www.rieti.go.jp/en/columns/v01_0105.html

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