Taking advantage of firm networks within local supply chains can significantly improve a company’s profitability and market competitiveness. These benefits are closely linked to the effective transfer of knowledge between network participants, highlighting the critical role of not only the physical flow of goods, but also the exchange of insights and expertise within global supply chains.
“Firms can achieve substantial savings on intermediate inputs, such as raw materials, components and auxiliaries used in production, by participating in buyer networks of firms that purchase the same locally produced inputs”, says Michael Koch, co-author of the study. “The amount of savings might depend on how well firms in the network share knowledge. For example, if more firms use locally produced machines for the processing of textiles, up- and downstream producers might benefit, due to increased sharing of positive and negative acknowledgments on the optimal use and design of such machines. This applies also to regions or countries. In all areas where knowledge flows efficiently, businesses can save more on production costs, helping to enhance profit margins and gain a competitive edge in both local and export markets.”
The study shows that firms that operating within a network of other firms can determine their demand for intermediates based on mutually shared knowledge and the behaviour of their network peers. Specifically, as firms in the same network increase their use of intermediates, the demand for these inputs by an individual firm decreases. This interaction reflects the benefits of localised knowledge-sharing within networks, allowing firms to optimise production processes and reduce costs associated with intermediate inputs. The researchers found that a 10 per cent increase in the number of firms buying the same inputs within a region-industry pair, reduces input demand by more than 1 per cent.
Using information on the input structure of industrial production from Statistics Denmark, the researchers developed a new and improved theoretical trade model that sheds light on the complex dynamics of supply chain networks and highlights the importance of considering both the physical flow of goods and the flow of goods within supply chains.
“Understanding and leveraging the role of intangible inputs in global supply chains — such as knowledge and services — enables firms to innovate, remain competitive, and achieve sustainable growth in today’s rapidly evolving markets,” says the study’s second author, Antonella Nocco, Professor of Economics at the University of Salento. “Efficient knowledge sharing within firm networks drives innovation and enhances product and process quality, strengthening firms’ market positions and resilience to disruptions. This is particularly crucial in an increasingly volatile global landscape marked by trade wars, geopolitical tensions, pandemics, and other challenges.”
Read study now: “Intermediate Trade and Knowledge Flows”
