The Dynamics of Sectoral Network Formation

Abstract: Recent studies have highlighted the role that linkages between firms and sectors play in impacting shock transmission, R&D development and expansion of trade relationships. However, mechanisms that govern how these linkages form and develop over time are not fully understood. The present work tackles this issue and aims at characterising the international sectoral network formation using a random graph model. The proposed framework incorporates elements of input-output structure, geographical variation of linkages, and path dependence in new link formation. The developed model exhibits properties such as: (i) the distribution of firms and sectors by number of linkages is skewed and fat-tailed; (ii) the average distance of connections increases with the higher number of outward linkages; (iii) the likelihood of new link formation depends on network proximity and geographical distances between sectors. These implications are then tested in an empirical setting using the World Input-Output Database (WIOD). Empirical analysis finds supporting evidence for (i) and (iii), whereas evidence for (ii) is inconclusive.