Uncovering Functional Blocks in Interregional Production Networks: Evidence from Input-Output Linkages in Japan

TL;DR

This study uncovers the underlying functional block structure of Japan's interregional production network by isolating non-geographic production linkages, revealing insights into regional coordination and sectoral integration.

Contribution

It introduces a novel approach combining a structural gravity model with a stochastic blockmodel to identify functional blocks in interregional input-output networks.

Findings

Identification of functional blocks with high regional coherence

Evidence of cross-regional integration beyond geographic proximity

Distinct bifurcation between manufacturing and urban services

Abstract

This paper examines the latent functional block structure of Japan's production network using interregional input-output data. To isolate non-trivial production linkages, we first estimate a structural gravity model to account for spatial frictions and economic scale, and then apply a weighted stochastic blockmodel (SBM) to the resulting residual network. Because these residual linkages often connect distant regions, the SBM is well suited to grouping region-industry pairs based on their shared macroeconomic roles. The results reveal that even after explicitly filtering out the mechanical effects of geographic proximity, the network is organized into functional blocks that maintain a high degree of regional coherence. Beyond this baseline spatial clustering, we find evidence of cross-regional integration, a structural bifurcation between manufacturing and urban services in metropolitan areas, and broadly spanning primary sectors. These findings provide a network-based perspective on regional coordination, offering guidance for how structurally defined production blocks-rather than simple geographic proximity-can inform wide-area policy design.