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The Importance of Firm Networks: Methods and Evidence from Transaction-Level Administration Data

Apr 2016 to Dec 2018



Centre for Economic Policy Research

How does the fate of one firm in a developing country depend on its linkages to surrounding firms? Research on firm-to-firm economic interactions has always been hindered by a lack of data, but we propose here a new striking new source – firm-to-firm transactions data obtained from administrative value-added tax (VAT) records – that can shed fresh light on the way in which firms in developing countries interact as well as implications for growth. Such data are available from Ecuador (the country whose data we draw on here) but also currently or imminently in a number of low-income countries. Armed with such data, we pursue three particular sub-projects concerning: (1) the extent to which demand shocks to one firm (driven by random aspects of government procurement policy) can spill over across firms; (2) how an economy’s aggregate volatility and fragility is shaped by the nature of its firm-to-firm network; and (3) how analysts’ current understanding of exporting and importing firms is potentially biased by an inability to observe indirect trading, and how this can be ameliorated with access to VAT data. Overall we propose both fundamental research that will be performed immediately and a set of methodologies, tools and training that can leverage VAT data from a number of LICs.