Date Published:
Jul 1, 2005
Abstract:
This paper provides a detailed description of the shape and financial importance networks amongst the universe of firms in an emerging economy where a network link is defined as board interlocks i.e. two firms share a common director. We do so by making use of a novel dataset from Pakistan that includes information on all the 140,000 firms borrowing from formal financial markets over a four year period. We find that a significant fraction of firms, upto one-third, have board interlocks with other firms. More interestingly, while firm networks typically range from networks of 2 to 100 firms, there exists a single very large network—the "super-network"—that comprises of almost 10,000 firms and is more than a hundred times the size of the second largest network. This super-network plays a disproportionately important role in financial markets: Although comprising 7% of firms, over 55% of all formal lending goes to firms in this super-network. Moreover, super-network firms have access to a greater number of lenders, default less and appear to be insured against adverse shocks in the economy. The super-network is robust to different definitions of firm linkages and over time. Moreover, a closer examination reveals that there are no important nodes (directors or firms) in the super-network and that is a very robust and diffuse network—eliminating important nodes (either singly or in clusters) does little to disrupt the network. This suggests that in addition to what one normally thinks of as business groups—a closely coordinated group of firms—more loosely yet very stably knit firm networks may also play an important role in emerging economies.
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