Abstract
This paper studies the driving forces behind the formation of ties within the major communities in the Japanese nationwide network of production, which contains one million firms and five million links between suppliers (“upstream" firms) and customers (“downstream" firms). We apply the Infomap algorithm to reveal the hierarchical structure of the production network. At the second level of the hierarchy, we find a reasonable community resolution, where the community size distribution follows a power law decay. Then, we estimate the tie formation within 100 communities of different sizes. The studied model considers a large set of attributes, including both endogenous attributes (network motifs, e.g., stars and triangles) and exogenous attributes (economic variables, e.g., net sales and firm size). The estimation results show that the considered model converges and presents a high goodness of fit (GoF) for all communities. Moreover, it is found that the forces explaining the formation of links between suppliers and customers differ among communities. Some attributes, such as reciprocity, popularity, activity, location homophily, bank homophily and sales statistics, are common drivers of internal link formation for most of the studied communities. However, transitivity is rejected as a significant influencing factor for most communities, reflecting an absence of a sense of trust and reliability between firms with a common partner. Finally, we show that sector homophily does not serve as an obvious mechanism of partnership at the community level in the production network.
Highlights
Recent economic phenomena, such as multiple unexpected global crises, have motivated scientists to consider the economy as a complex system
The main findings in the literature include disassortative mixing in addition to the scale-free nature of the degree distribution and the Zipf distribution of the firm size. From another perspective, (Iino and Iyetomi 2015) specified the topology of the supplier-customer network of Japan in terms of its community structure. This analysis was extended by Chakraborty et al (2018, 2019) who showed that the topology of the Japanese production network is better fitted by a walnut structure than by a bow-tie structure
The number of irreducible communities, which are communities that do not contain any subcommunities, is denoted by cr. nc denotes the number of firms in irreducible communities sizes of the communities at this level reflect a reasonable partition resolution, we investigate the network structure at the second level of the hierarchy using an Exponential random graph model (ERGM)
Summary
Recent economic phenomena, such as multiple unexpected global crises, have motivated scientists to consider the economy as a complex system. The formation of links between suppliers and customers can be stimulated by the homophily of these attributes; for example, the probability of link emergence between firms from the same community increases if they have a common major bank.
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