Functional structure in production networks

TL;DR

This paper reveals that production networks at the company level exhibit a functional structure similar to biological networks, characterized by over-represented closed squares, and explains this through the principle of complementarity rather than homophily.

Contribution

It introduces the concept of functional structure in production networks, drawing parallels with biological networks, and demonstrates how complementarity shapes local connectivity patterns.

Findings

Production networks have a functional structure with over-represented closed squares.

Companies are more similar to close competitors than to trading partners.

Complementarity explains the emergence of this structure in production networks.

Abstract

Production networks are integral to economic dynamics, yet dis-aggregated network data on inter-firm trade is rarely collected and often proprietary. Here we situate company-level production networks among networks from other domains according to their local connectivity structure. Through this lens, we study a regional and a national network of inferred trade relationships reconstructed from Dutch national economic statistics and re-interpret prior empirical findings. We find that company-level production networks have so-called functional structure, as previously identified in protein-protein interaction (PPI) networks. Functional networks are distinctive in their over-representation of closed squares, which we quantify using an existing measure called spectral bipartivity. Shared local connectivity structure lets us ferry insights between domains. PPI networks are shaped by complementarity, rather than homophily, and we use multi-layer directed configuration models to show that this principle explains the emergence of functional structure in production networks. Companies are especially similar to their close competitors, not to their trading partners. Our findings have practical implications for the analysis of production networks and a thorough understanding of their local connectivity structure will help us better reason about the micro-economic mechanisms behind their routine function, failure, and growth.