Date Published:
Jan 1, 2007
Abstract:
Developing countries are marked by the prevalence of informal business networks. Many believe that these networks facilitate information sharing, trade, and contractual enforcement in weak institutional environments. However estimating network benefi
ts remains difficult due to data
limitations, and identi
fication concerns. This paper uses ownership data on all (but the very small)private
firms in Pakistan to construct business networks involving 100,000
firms. We link two
firms together if they have a director in common, and document the presence of a super-network in the
economy. It comprises 5% of all
firms, is over a 100 times larger than the next largest network and obtains more than half of all bank credit. We then investigate the economic value that membership to the super-network brings by exploiting entry (exit) of
firms over time into the network. We identify the causal effect of network membership through a number of tests, including instrumenting network membership with incidental entry/exit of
firms. Network membership increases total external fi
nancing by 16.5%, reduces propensity to enter
financial distress by 9.7%, and better insures fi
rms against industry and location shocks. When forming new banking relationships, entering
firms are also more likely to select banks that already have existing relationships with adjoining
firms. We also
find that consistent with theories of strategic network development, benefi
ts of memberships are stronger when
firms connect through more powerful network nodes.
Notes:
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