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About this book

This book is one of the first comprehensive works to fill the knowledge gap resulting from the limited number of empirical studies on interfirm networks. The in-depth empirical research presented here is based on a massive transaction relationship database of approximately 400,000 Japanese firms. This volume, unlike others, focuses on the role of interfirm networks in three different fields: (1) macroeconomic activities, (2) economic geography and firm dynamics, and (3) firm–bank relationships. The database for this work is constructed in collaboration with Japan's largest credit research company, Teikoku Data Bank, and covers a substantial portion of Japanese firms with information on firms' transaction partners, shareholders, financial institutions, and other attributes, including their locations and performance.

Networks prevail in many aspects of economic activities and play a major role in explaining a wide variety of economic phenomena from business cycles to knowledge spillovers, which has motivated economists to produce a number of excellent works. In the policy arena, there has been a growing concern on the vulnerabilities of networks based on the casual observation that idiosyncratic shocks on firms can be amplified through inter-firm connections and leads to a systemic crisis. Typical examples are the manufacturing supply-chain networks in the automobile and electronics industries which propagated regionally concentrated shocks (the Great East Japan Earthquake and floods in Thailand in 2011) into global ones. An abundance of theoretical literature on the formation and functions of networks is available already.

This book breaks new ground, however, and provides an excellent opportunity for the reader to gain a more integrated understanding of the role of networks in the economy. The Economics of Interfirm Networks will be of special interest to economists and practitioners seeking empirical and quantitative knowledge on interfirm and firm–bank networks.

Table of Contents


1. The Economics of Interfirm Networks: Main Issues

Without Abstract
Tsutomu Watanabe, Iichiro Uesugi, Arito Ono

Structure and Evolution of Interfirm Networks


2. Buyer-Supplier Networks and Aggregate Volatility

This chapter investigates the structure and evolution of customer–supplier networks in Japan using a unique dataset that contains information on customer and supplier linkages for over 500,000 incorporated non-financial firms for the 5 years from 2008 to 2012. We find, first, that the number of customer links is unequal across firms: the customer link distribution has a power-law tail with an exponent of unity (i.e., it follows Zipf’s law). We interpret this as implying that competition among firms to acquire new customers yields winners that attract a large number of customers, as well as losers that end up with fewer customers. We also show that the shortest path length for any pair of firms is, on average, 4.3 links. Second, we find that link switching is relatively rare. Our estimates indicate that 92 % of customer links and 93 % of supplier links survive each year. Third and finally, we find that firm growth rates tend to be more highly correlated the closer two firms are to each other in a customer–supplier network (i.e., the smaller is the shortest path length for the two firms). This suggests that a non-negligible portion of firm growth fluctuations stem from the propagation of microeconomic shocks—shocks that affect a specific firm—through the customer–supplier chains.
Takayuki Mizuno, Wataru Souma, Tsutomu Watanabe

3. Community Structure of a Large-Scale Production Network in Japan

This chapter analyzes nationwide supplier–buyer relationship data for nearly a million firms and 4 million transactions in Japan. The production network constructed by firms through their transaction relations reflects the characteristics of economic activities in Japan. For an intuitive understanding of the network structure, we first visualize the network in three-dimensional space using a spring–electrostatic model. In this model, we replace nodes (firms) and links (transaction relations) by particles with identical charges and springs. This visualization shows that the network is highly heterogeneous, with some firms being tightly connected and forming groups, between which there are much looser connections. Such industrial communities are identified here using algorithms that maximize modularity, which measures the share of links encircled by a given partition of nodes, with reference to the expected share of intra-links for corresponding random networks with the same node partitions. Since major communities thereby detected are still very heterogeneous, the detection of communities is repeated within them. The 10 largest communities and their principal sub-communities are then characterized by areal and industry sectoral attributes of firms. In addition, how closely the sub-communities are related to each other is quantified by introducing a metric of “distance” between them. Finally, the hierarchical relationship between the communities is clarified by considering directional features of the transactions.
Takashi Iino, Hiroshi Iyetomi

4. Interfirm Networks in Manufacturing Industry Agglomerations in Japan: Evidence from Survey Data

This chapter focuses on interfirm networks in Japan’s major manufacturing agglomerations and conducts fact-finding analyses on the following three issues: (1) the nature of interfirm transaction relationships, including developments in such relationships over time; (2) firms’ participation in network activities other than supplier-customer transactions; and (3) interactions between interfirm transaction relationships and relationships of other types. Based on the results of a unique firm-level survey completed by more than 1800 firms in December 2009, it is found, first, that the number of interfirm transaction relationships, especially those involving smaller firms, has declined over the past ten years. Second, the survey indicates that, apart from transaction relationships, many firms participated in group activities in individual industry associations and local chambers of commerce, indicating that firms tend to maintain relationships with firms similar to themselves. Third, it is found that bank lending attitudes are positively associated with the extent to which a firm is interconnected with other local firms, indicating that interfirm and firm-bank relationships are complementary.
Iichiro Uesugi

Networks, Economic Geography, and Firm Activities


5. Economic Geography and Interfirm Transaction Networks

Recent years have seen a remarkable expansion of empirical research using microdata on interfirm transactions that capture disaggregated firm-level transaction relationships. This chapter reviews the background to and recent empirical research on this issue. The chapter starts with a review of studies examining transaction networks without the use of transactions microdata and then shows the limitations of such research. Following this, a definition of transactions microdata and specific examples are provided. Finally, recent empirical research using transactions microdata is reviewed. The review focuses on the following three important questions. How substantial are geographic frictions in the formation of interfirm transaction networks? How great is the impact of networks on the behavior of agents within such networks? And to what extent does a geographically localized shock propagate through such networks? Finally, the future outlook in this line of research is considered.
Kentaro Nakajima

6. Delineating Metropolitan Areas: Measuring Spatial Labour Market Networks Through Commuting Patterns

This chapter first discusses the necessity of defining metropolitan areas and current practice in several countries. It argues for the use of a simple algorithm that exploits cross-municipality commuting patterns. Municipalities are aggregated iteratively provided they send a share of their commuters above a given threshold to the rest of a metropolitan area. This algorithm is implemented on Colombian data and its robustness is assessed. Finally, the properties of the resulting spatial labour market networks are explored.
Gilles Duranton

7. Determinants of Business and Financial Network Formation by Japanese Start-up Firms: Does Founders’ Human Capital Matter?

Business start-ups are considered to make major contributions to economic growth. However, most lack the internal business resources necessary for survival and growth. Therefore, business and financial networks that provide business opportunities and external resources are essential for the post-entry performance of start-ups. Although preceding studies examine such networks, most do not explicitly investigate the determinants of network formation. Against this background, the present chapter argues that the formation of business and financial networks by start-up firms depends on founders’ human capital, measured in terms of founders’ educational attainment and business experience. This hypothesis is empirically tested using a large unique company database in Japan. Moreover, the focus is not only on the size of such networks, but also on their quality, which is measured based on the nature of major partners. The empirical results show that lengthy industry experience of 10 years or more on the part of the founder has a significant positive effect on the size of both business and financial networks, while having a university education positively affects both the size and quality of business and financial networks. The analysis further shows that a founder’s specific strengths and personality traits also significantly affect network formation. No distinct differences are found between the determinants of business and financial networks.
Hiroyuki Okamuro, Kenta Ikeuchi

8. Geographical Spread of Interfirm Transaction Networks and the Great East Japan Earthquake

This chapter examines how the impact of the Great East Japan Earthquake spread geographically to unaffected areas through interfirm transaction networks. Previous studies on transaction networks revealed small-world structure and geographical proximity, which have conflicting implications for the geographical impact of the earthquake. Using interfirm transaction data from approximately 800,000 firms, it is examined how firms in physically unaffected areas are linked with those in the affected areas. It is found that only 3 % of firms in unaffected areas have direct transaction links with those in the affected areas. On the other hand, the share increases to 40–60 % if indirectly linked transaction partners (i.e. partners of partners) are taken into account. Further, it is shown that it is a small number hub firms with interfirm links spanning larger distances that are responsible for linking more local networks in different regions and hence for geographically spreading the economic impact of the earthquake.
Yukiko Umeno Saito

Bank-Firm Relationships and Firm Dynamics


9. Bank-firm Relationships: A Review of the Implications for Firms and Banks in Normal and Crisis Times

Banks are important providers of external finance to firms. In order to solve asymmetric information problems, firms and banks often engage in bank-firm relationships. Relationship banking occurs when a bank and a borrower enter multiple mutual interactions and both parties invest in obtaining some counterparty specific information, binding bank and firm, to a certain degree, to each other. This chapter starts with a discussion of reasons for having exclusive versus non-exclusive relationships. It provides a concise overview on the determinants of the number and intensity of bank-firm relationships, and reviews how relationship banking generates costs and benefits for both banks and firms. We show that on average bank-firm relationships generate value for both. The costs and benefits of bank-firm relationships, however, vary substantially with whether an economy is in normal or crisis times.
Hans Degryse, Vasso Ioannidou, Steven Ongena

10. A New Look at Bank-Firm Relationships and the Use of Collateral in Japan: Evidence from Teikoku Databank Data

Employing a unique micro dataset on the financial relationships between Japanese firms and their main banks and the use of collateral in their debt financing, this chapter provides a detailed account of the current landscape of business financing in Japan. The findings can be summarized as follows. First, main bank relationships are stable for most firms: less than 1 % of firm switch their main bank in any particular year, although more than 80 % of firms have established relationships with multiple banks. Second, main bank relationships are stronger in terms of deposit transactions than in terms of borrowing: the share of deposits with the main bank in the total amount of deposits is larger than the share of the amount borrowed from the main bank in the total amount of borrowing outstanding. Third, the most frequently pledged type of collateral is real estate property. And fourth, more than 30 % of real estate properties are used as collateral for multiple secured loans, suggesting that the use of junior liens is quite common in Japan.
Arito Ono, Hirofumi Uchida, Souichirou Kozuka, Makoto Hazama

11. What do Cash Holdings Tell us About Bank-Firm Relationships? A Case Study of Japanese Firms

This chapter examines the nature of bank-Firm relationships in Japan by investigating firms’ cash holding behavior based on a panel dataset of Japanese firms for the 2000s provided by Teikoku Databank. This dataset has the virtue of identifying firms’ main bank(s) or financial institution(s) with which they have a close relationship. This information is used to characterize the cash holding behavior of firms with varying degrees of closeness in their relationships with banks. The findings indicate that having a main bank relationship helps client firms in their cash management in two important ways. First, firms need to hold less cash for precautionary motives because main banks are ready to provide them with liquidity on a rainy day. Second, main banks can cushion shocks to client firms, so that client firms can keep the adjustment of cash holdings to such shocks to a minimum. However, client firms pay a price for maintaining long-term, stable relationships with main banks, namely, the monopoly rent imposed by main banks on their client firms in the form of a higher effective borrowing rate.
Kazuo Ogawa

12. Bank Lending and Firm Activities: Overcoming Identification Problems

This chapter presents an overview of the extant literature on the real impact of financial constraints, with a particular focus on financial constraints originating from adverse shocks to bank lending. While there has been significant progress in theoretical research on the causal link between negative fund supply shocks and various firm activities, there are relatively few empirical studies that successfully identify loan supply shocks. The first part of this chapter reviews the large body of literature on this topic and details how recent studies have attempted to overcome the important identification challenge of disentangling fund supply and demand shocks. Following the discussion of various attempts to overcome this challenge ranging from the use of natural experiments to the employment of extensive panel datasets, two studies by the authors of this chapter are discussed in detail, which employ a natural disaster in Japan as a natural experiment to examine the real impact of financial constraints on the capital investment and export behavior of firms.
Kaoru Hosono, Daisuke Miyakawa


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