Must-Read: Dominick Bartelme and Yuriy Gorodnichenko: Linkages and Economic Development: “Linkages across firms and industries….

Countries with stronger linkages have indeed higher productivity. A single Honda automobile is made of 20,000 to 30,000 parts produced by hundreds of different plants and firms… relie[s] on an extensive division of labour across plants which trade specialised inputs with one another in convoluted networks…. Hirschman (1958) reasoned these industry linkages were essential for economic development, and focused on how to promote the formation of robust input markets in poor countries and target investment to the industries with the strongest linkages…. Recent work by Ciccone (2002), Acemoglu et al. (2007), Jones (2011) and others has shown that distortions in input markets can in principle explain a large fraction of productivity differences between countries, but this literature has remained largely theoretical…. We show that the strength of linkages — measured as the average output multiplier (AOM) from an input-output table — is strongly and positive related to measured output per worker and total factor productivity…. A one standard deviation increase in the average output multiplier is associated with a 15–35% increase in output per worker…