Identifying Productivity Spillovers Using the Structure of Production Networks

Despite the importance of agglomeration externalities in theoretical work, evidence for their nature, scale, and scope remains elusive, particularly in developing countries. Identification of productivity spillovers between firms is a challenging task, and estimation typically requires, at a minimum, panel data, which are often not available in developing country contexts. In this paper, we develop a novel identification strategy that uses information on the network structure of producer relationships to provide estimates of the size of productivity spillovers. Our strategy builds on that proposed by Bramoulle et al. (2009) for estimating peer effects, and is one of the first applications of this idea to the estimation of productivity spillovers. We improve upon the network structure identification strategy by using panel data and validate it with exchange-rate induced trade shocks that provide additional identifying variation. We apply this strategy to a long panel dataset of manufacturers in Indonesia to provide new estimates of the scale and size of productivity spillovers. Our results suggest positive productivity spillovers between manufacturers in Indonesia, but estimates of TFP spillovers are considerably smaller than similar estimates based on firm-level data from the U.S. and Europe, and they are only observed in a few industries.