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 2022-02-23 20:22:14

PRODUCTION CHAINS IN AN INTERREGIONAL FRAMEWORK: IDENTIFICATION BY MEANS OF AVERAGE PROPAGATION LENGTHS

ERIK DIETZENBACHER

Faculty of Economics, University of Groningen, Netherlands, and Regional Economics Applications Laboratory (REAL),

University of Illinois at Urbana-Champaign, h.w.a.dietzenbacher@rug.nl

ISIDORO ROMERO

Faculty of Economics and Business Sciences, University of Seville, Seville, Spain, isidoro@us.es

When linkages between industries are studied from the perspective of production chains, sequencing is important. In this respect, both the strength of the linkages and the distance between industries are relevant. Distance is measured by the average propagation length, defined as the average number of steps it takes a stimulus in one industry to propagate and affect another industry. Using the 1985 intercountry input–output table for six European countries, we present three applications—visualizing the production structure by graphing its production chains, analyzing intercountry linkages between industries, and determining the role that each country plays within the system.

Keywords: input–output analysis; production chains; linkages

INTRODUCTION

Product or supply chains give a detailed description of all the steps taken in the production process of a good or service. This runs from the initial phase to the final product. Typically, supply chains are studied for a single good. Recently enterprise input–output models have been suggested for their analysis (see Albino et al. 2002, 2003).1 In life-cycle assessments, the scope is further extended by considering products from the cradle to the grave, focusing on material and energy requirements and environmental issues, such as emissions and disposals of solid waste (see e.g., Joshi 2000).

This paper aims to describe or visualize the production processes in a group of national economies using an interregional (or intercountry) framework.2 Interdependencies in the production structure of different countries are relevant in a globalized economy where perturbations quickly propagate from one coun- try to another through industries and markets. We adopt the underlying concept of sequencing in supply chains by viewing production as a stepwise procedure. Consistent with the ideas of the Austrian school in economics, some industries should be placed in an early stage and other industries in a later stage when ana- lyzing the production processes.3 A detailed overview of the production pro- cesses would require an in-depth study of all product chains. However, many different goods and services are produced, and each industry is involved in a large set of product chains. An adequate description of the supply chains of all goods and services in an economy is therefore impossible. Even if input–output tables at their most detailed level (which comprise some 500 industries/com- modities) were used, this would be a formidable task. Also, it should be noted that the classification in such tables still represents aggregates of groups of com- modities, implying that the data cannot reflect ‘‘true’’ product chains. At the same time, the question arises whether this level of detail is desirable to visua- lize the production processes.

In this paper we will not study separate product chains. Instead, we aim at find- ing chains in the national and intercountry production structures. These chains are termed production chains, in contrast to product chains that focus on a single pro- duct. To sketch the methodology that we have used, consider the following sim- ple example. The agricultural industry supplies a large part of its production to food processing, a major supplier for hotels and restaurants. There are direct links between agriculture and food processing and between food processing and hotels and restaurants. The link between agriculture and hotels and restaurants is indirect (via food processing). In determining this production chain, two aspects are important—the strength of the various links and the number of steps.

Measuring the strength of the links between industries has led to a substantial body of literature.4 Various alternative measures have been proposed for such interindustry linkages. One of the ways to distinguish between linkage measures is by asking whether the measures go through the production chain in a backward or a forward fashion. If, for example, consumers make more use of hotels and restaurants, this industry requires more products from the food processing indus- try, which in turn needs more inputs from agriculture. In analyzing the linkages, note that hotels and restaurants depend on their purchases from food processing, which depends on inputs from agriculture. The dependencies in this backward approach are clearly buyers’ dependencies. In the same way, we may trace a cost-push in agriculture in a forward fashion through the production chain to affect the total output value of hotels and restaurants. In this case, agriculture

depends on its sales to food processing, which depends on itssalesto hotels and restaurants. The dependencies in this forward approach are sellers’ dependencies. It should be stressed that these two approaches generally yield very different outcomes. As an example, suppose that hotels and restaurants (with an output value of $1,000) buy for $300 from food processing (with an output value of

$3,000). Hence, inputs that are worth 30 percent of the output value of hotels and restaurants are bought from food processing, while food processing sells only 10 percent of its outputs to hotels and restaurants. The (direct) backward dependence of hotels and restaurants on food processing is thus much larger than the (direct) forward dependence of food processin

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