Buyer-Supplier Networks and Aggregate Volatility
In this paper, we investigate the structure and evolution of customer-supplier networks in Japan using a unique dataset that contains information on customer and supplier linkages for more than 500,000 incorporated non-financial firms for the five 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 with a large number of customers, as well as losers 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 the survival rate per year for customer links is 92 percent and for supplier links 93 percent. 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 fluctuations in firm growth stems from the propagation of microeconomic shocks – shocks affecting only a particular firm – through customer-supplier chains.
Firms in a modern economy tend to be closely interconnected, particularly in the manufacturing sector. Firms typically rely on the delivery of materials or intermediate products from their suppliers to produce their own products, which in turn are delivered to other downstream firms. Two recent episodes vividly illustrate just how closely firms are interconnected. The first is the recent earthquake in Japan. The earthquake and tsunami hit the Tohoku region, the north-eastern part of Japan, on March 11, 2011, resulting in significant human and physical damage to that region. However, the economic damage was not restricted to that region and spread in an unanticipated manner to other parts of Japan through the disruption of supply chains. For example, vehicle production by Japanese automakers, which are located far away from the affected areas, was stopped or slowed down due to a shortage of auto parts supplies from firms located in the affected areas. The shock even spread across borders, leading to a substantial decline in North American vehicle production. The second episode is the recent financial turmoil triggered by the subprime mortgage crisis in the United States. The adverse shock originally stemming from the so-called toxic assets on the balance sheets of U.S. financial institutions led to the failure of these institutions and was transmitted beyond entities that had direct business with the collapsed financial institutions to those that seemed to have no relationship with them, resulting in a storm that affected financial institutions around the world.