Firm-to-Firm Transactions in Ecuador

Firm growth and development are key drivers of economic growth in low-income countries. Both the growth of an economy and its volatility are crucial contributors to the economic lives of the world’s poor. In this proposal we describe research that will draw on a unique dataset–the universe of formal sector firm-to-firm transactions in Ecuador, obtained from value-added tax records–that will allow us to investigate questions of firm development and economic volatility in a novel manner. Central to our proposal is the hypothesis that a key driver of both a firm’s growth and its volatility is due to that firm’s relation to other firms; that is, as one firm experiences a shock, the impact of this shock may spill over onto that firm’s suppliers and client firms. Such interconnectivity can on the one hand lead to positive multiplier effects and boost economic growth, but, depending on the structure of the firm network, it can also increase volatility in the economy. While this hypothesis and its implications have a long history in the theoretical Development Economics literature, its empirical implications have been hard to explore due to the extraordinary data demands that they pose. We aim to empirically tackle these issues with our unique–and yet dazzlingly complex and computationally demanding–new data on firm-to-firm networks and the more than 60 million transactions among them that occurred in our sample (2008-2012).