Identifying Productivity Spillovers Using the Structure of Production Networks

In economic literature, productivity spillovers refer to events at a firm that lead to ripple effects at another firm. Previous research has investigated spillover effects resulting from multinational firms receiving foreign direct investment and then transferring knowledge to domestic firms. Identification of productivity spillovers between firms is a challenging task, and estimation typically requires data which are often not available in developing country contexts.

In a new working paper, Samuel Bazzi and colleagues develop a strategy for identifying productivity spillovers between firms and apply their methodology to high quality firm-level panel data on Indonesian manufacturers. After estimating firm-level productivity, they specify a model that relates a firm’s own productivity to the average productivity of firms to which it is connected. Their results suggest positive productivity spillovers between manufacturers. However, their estimates of productivity spillovers in Indonesia are considerably smaller than similar estimates based on firm-level data from the US and Europe, and positive effects are only observed in a few industries.

The paper contributes to several strands of literature by making use of a novel network structure identification strategy that is broadly applicable to other contexts beyond Indonesia. More research is needed to determine whether the productivity spillovers estimated from this approach are similar to other productivity spillover estimates. Implementing this approach with firm-level panel data in many countries would allow researchers to clearly study differences between productivity spillovers in developed and developing countries.