Academic Research

New study finds economic progress is aided by longer supply chains and deeper networks

January 5, 2022

Nations and industries benefit from longer supply chains and deeper networks, which magnify the benefits of innovative improvements, according to research published today in the journal, Proceedings of the National Academy of Sciences of the United States of America.

Although potentially counter-intuitive, the interdisciplinary research team, including experts from the University of Oxford and Harvard University, found there was more possibility of ideas-driven progress with a longer chain.

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How production networks amplify economic growth
McNerney, J., et al., 2022. How production networks amplify economic growth. Proceedings of the National Academy of Sciences of the United States of America (PNAS) , 119 (1). Publisher's VersionAbstract

Technological improvement is the most important cause of long-term economic growth. In standard growth models, technology is treated in the aggregate, but an economy can also be viewed as a network in which producers buy goods, convert them to new goods, and sell the production to households or other producers. We develop predictions for how this network amplifies the effects of technological improvements as they propagate along chains of production, showing that longer production chains for an industry bias it toward faster price reduction and that longer production chains for a country bias it toward faster growth. These predictions are in good agreement with data from the World Input Output Database and improve with the passage of time. The results show that production chains play a major role in shaping the long-term evolution of prices, output growth, and structural change.

Media release: New study finds economic progress is aided by longer supply chains and deeper networks

The new paradigm of economic complexity
Balland, P.-A., et al., 2022. The new paradigm of economic complexity. Research Policy , 51 (3). Publisher's VersionAbstract
Economic complexity offers a potentially powerful paradigm to understand key societal issues and challenges of our time. The underlying idea is that growth, development, technological change, income inequality, spatial disparities, and resilience are the visible outcomes of hidden systemic interactions. The study of economic complexity seeks to understand the structure of these interactions and how they shape various socioeconomic processes. This emerging field relies heavily on big data and machine learning techniques. This brief introduction to economic complexity has three aims. The first is to summarize key theoretical foundations and principles of economic complexity. The second is to briefly review the tools and metrics developed in the economic complexity literature that exploit information encoded in the structure of the economy to find new empirical patterns. The final aim is to highlight the insights from economic complexity to improve prediction and political decision-making. Institutions including the World Bank, the European Commission, the World Economic Forum, the OECD, and a range of national and regional organizations have begun to embrace the principles of economic complexity and its analytical framework. We discuss policy implications of this field, in particular the usefulness of building recommendation systems for major public investment decisions in a complex world.
McNerney, J., et al., 2021. Bridging the short-term and long-term dynamics of economic structural change.Abstract
In the short-term, economies shift preferentially into new activities that are related to ones they currently do. Such a tendency should have implications for the nature of an economy’s long-term development as well. We explore these implications using a dynamical network model of an economy’s movement into new activities. First, we theoretically derive a pair of coordinates that summarize long-term structural change. One coordinate captures overall ability across activities, the other captures an economy’s composition. Second, we show empirically how these two measures intuitively summarize a variety of facts of long-term economic development. Third, we observe that our measures resemble complexity metrics, though our route to these metrics differs significantly from previous ones. In total, our framework represents a dynamical approach that bridges short-and long-term descriptions of structural change, and suggests how different branches of economic complexity analysis could potentially fit together in one framework.
2021 Dec 20

Research Seminar: The Cushioning Effect of Immigrant Mobility

10:15am to 11:30am

Location: 

Zoom (registration information below)

Speaker: Cem Özgüzel, Economist, Organization for Economic Co-operation and Development (OECD)

Abstract: During the Great Recession, immigrants reacted to the drop in labour demand in Spain through internal migration or leaving the country. Consequently, provinces lost 13.5% of their immigrants or -3% of the total labour supply, on average. Using municipal registers and longitudinal administrative data, I find that immigrant outflows slowed the decline in employment and wage of natives. I use a modified shift-share instrument based on...

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2021 Dec 13

Research Seminar - Apollo’s Arrow: The Profound and Enduring Impact of Coronavirus on the Way We Live

10:15am to 11:30am

Location: 

Zoom (registration information below)

Apollo's Arrow offers a broad account of the impact of the coronavirus pandemic as it swept through American society in 2020 and of how the pandemic will unfold, and ultimately end, in the coming years. Using up-to-the-moment information, and drawing on epidemiology, sociology, medicine, public health, history, virology, and other fields, it explores what it means to live in a time of plague — an experience...

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Estimating the drivers of urban economic complexity and their connection to economic performance
Gomez-Lievano, A. & Patterson-Lomba, O., 2021. Estimating the drivers of urban economic complexity and their connection to economic performance. Royal Society Open Science , 8 (9). Publisher's VersionAbstract
Estimating the capabilities, or inputs of production, that drive and constrain the economic development of urban areas has remained a challenging goal. We posit that capabilities are instantiated in the complexity and sophistication of urban activities, the know-how of individual workers, and the city-wide collective know-how. We derive a model that indicates how the value of these three quantities can be inferred from the probability that an individual in a city is employed in a given urban activity. We illustrate how to estimate empirically these variables using data on employment across industries and metropolitan statistical areas in the USA. We then show how the functional form of the probability function derived from our theory is statistically superior when compared with competing alternative models, and that it explains well-known results in the urban scaling and economic complexity literature. Finally, we show how the quantities are associated with metrics of economic performance, suggesting our theory can provide testable implications for why some cities are more prosperous than others.

Productive Ecosystems and the Arrow of Development

What drives economic development? Or more precisely, what constrains economic development? An emerging consensus on this question surrounds the role of locally embedded productive capabilities and the idea that countries build on their existing capabilities to move into new economic activities. In new research published in Nature Communications, Neave O'Clery, Muhammed Yildirim and Ricardo Hausmann develop a mathematical model based on capability accumulation of countries and use this model to construct a directed network of products, the Eco Space. They uncover a modular structure in...

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Shen, J.H., Wang, H. & Lin, S.C.-C., 2021. Productivity Gap and Inward FDI Spillovers: Theory and Evidence from China. China & World Economy , 29 (2) , pp. 24–48. Publisher's VersionAbstract
This paper constructs a two-stage sequential game model to shed light on the spillover effect of inward FDI on the efficiency of domestic firms in host countries. Our model shows that, given an optimal joint-venture policy made by foreign firms, the impact of the spillover effect of inward FDI is contingent upon the productivity gap between the domestic firms and foreign ones. In particular, we demonstrate that the spillover effect of inward FDI varies negatively with the productivity gap between domestic low-productivity firms and foreign firms but works in the opposite way for high-productivity firms. This suggests that once the productivity gap widens, the entry of foreign firms will increase the efficiency of high-productivity firms but reduce the efficiency of low-productivity firms. In support of our theoretical model, we provide robust empirical results by using the dataset of annual survey of Chinese industrial enterprises.
Toward an empirical investigation of the long-term debt and financing deficit nexus: evidence from Chinese-listed firms
Jiang, X., Shen, J.H. & Lee, C.-C., 2021. Toward an empirical investigation of the long-term debt and financing deficit nexus: evidence from Chinese-listed firms. Applied Economics. Publisher's VersionAbstract
As the literature has studied the financing method of Chinese-listed firms for a long time, but with inconclusive indications, this research thus adopts non-financial Chinese-listed firms’ data from 2003 to 2015 to investigate the relationship between long-term debt financing and financing deficit. We pay particular attention to three channels (ownership concentration, market timing, and state ownership) that potentially affect the adoption of long-term debt financing when there is a financing deficit. The empirical analysis documents a positive relationship between financing deficit and changes in the long-term debt ratio in our sampled firms for both static and dynamic panel models. Moreover, among the three channels we show that state ownership has the strongest positive impact on the adoption of long-term debt financing, followed by ownership concentration, while the weakest channel is the market timing’s negative effect. In general, our empirical analysis finds that the important external financing method of long-term debt is most likely to be impacted by the state ownership aspect.
O'Clery, N., Yildirim, M.A. & Hausmann, R., 2021. Productive Ecosystems and the arrow of development. Nature Communications , 12. Publisher's VersionAbstract

Economic growth is associated with the diversification of economic activities, which can be observed via the evolution of product export baskets. Exporting a new product is dependent on having, and acquiring, a specific set of capabilities, making the diversification process path-dependent. Taking an agnostic view on the identity of the capabilities, here we derive a probabilistic model for the directed dynamical process of capability accumulation and product diversification of countries. Using international trade data, we identify the set of pre-existing products, the product Ecosystem, that enables a product to be exported competitively. We construct a directed network of products, the Eco Space, where the edge weight corresponds to capability overlap. We uncover a modular structure, and show that low- and middle-income countries move from product communities dominated by small Ecosystem products to advanced (large Ecosystem) product clusters over time. Finally, we show that our network model is predictive of product appearances.

Listen to the authors discuss their findings in this Growth Lab Podcast.

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