The strength of domestic production networks: an economic application of the Finn cycling index

Abstract

There has been an increasing interest in analyzing the structure of domestic and global supply chains/networks in the past decade. Concerns about potential (systemic) risks resulting from overdependence on global supply networks have been magnified during the lockdowns triggered by the COVID-19 pandemic in the last year. Strengthening local and/or domestic networks may be an adequate approach to overcome the severe economic implications of this overdependence, but it also rises the question of how one can measure the strength of domestic supply/production networks and design an appropriate structure. The objective of this paper is to propose a method for measurement and to provide a first-cut analysis with this method on a sample of economies. Building on ecological network analysis, we borrow the Finn cycling index from its toolbox and show a ranking of countries with respect to the strength of their domestic production networks based on this index. The results suggest that the countries are very heterogeneous both in terms of the level of cycling index and its sectoral decomposition. Using panel-econometric techniques, we point out the role of the openness and structural asymmetry in shaping this strength, also controlling for other macroeconomic characteristics of the economies. The estimates reveal that openness has a negative, while asymmetry has a positive effect on this index, but other country-specific characteristics also play a role in shaping the systemic operation of national economies as measured by the Finn cycling index.