Functional Structure in Production Networks

Abstract

Production networks are integral to economic dynamics, yet dis-aggregated network data on inter-firm trade is rarely collected and often proprietary. Here we situate company-level production networks within a wider space of networks that are different in nature, but similar in local connectivity structure. Through this lens, we study a regional and a national network of inferred trade relationships reconstructed from Dutch national economic statistics and re-interpret prior empirical findings. We find that company-level production networks have so-called functional structure, as previously identified in protein-protein interaction (PPI) networks. Functional networks are distinctive in their over-representation of closed squares, which we quantify using an existing measure called spectral bipartivity. Shared local connectivity structure lets us ferry insights between domains. PPI networks are shaped by complementarity, rather than homophily, and we use multi-layer directed configuration models to show that this principle explains the emergence of functional structure in production networks. Companies are especially similar to their close competitors, not to their trading partners. Our findings have practical implications for the analysis of production networks and give us precise terms for the local structural features that may be key to understanding their routine function, failure, and growth.

Keywords: bipartivity; complexity economics; economic statistics; functional networks; inter-firm networks; production networks; trade linkages.

Figure 1

Degree distributions of (A) Zeeland and (B) Netherlands production networks reflecting the unique, unweighted, undirected (inferred) trade relationships among companies with 5+ employees.

Figure 2

Toy networks with seven nodes and eleven edges, each of a different type, shown in increasing order of their spectral bipartivity value.

Figure 3

Value of logit-transformed spectral bipartivity for networks of (A) Person-person friendships and (B) Protein-protein interactions and the comparable distributions of their randomized versions.

Figure 4

Value of logit-transformed spectral bipartivity of reconstructed (A) Zeeland and (B) Netherlands production networks and the comparable distributions of their randomized versions.

Figure 5

Values of logit-transformed spectral bipartivity for simulated networks of trade-compatible relationships and their randomized comparisons, centered by the median comparison value. Layers are designated according to the European CPA (2008) and its Dutch implementation, which is the most detailed.