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Published: 28-11-2012, 03:12

Linkages, backward and forward

Linkages, backward and forward: Intersectoral Linkages

Linkages, backward and forward: Interfirm Linkages

Linkages, backward and forward: Policy Implications

Linkages are input-output relationships between firms or industrial sectors in the same economy. A firm purchasing inputs from a local supplier is an example of a backward linkage, while a firm selling intermediate inputs to another firmcreates a forward linkage. The importance of such linkages with the local economy for economic development has long been recognized in the economics literature. For example, Marshall (1920) argues that input-output relationships between firms are one of the advantages of localized industry, since ‘‘subsidiary trades grow up in the neighborhood, supplying [the firm] with implements and material, organizing its traffic, and in many ways conducing to the economy of its material’’ (271).

In an early view, Hirschman (1958) discusses the importance of linkages between sectors in an economy in the context of his strategy of unbalanced growth for developing countries. At the heart of this strategy is the suggestion that developing countries should aimat generating imbalances in demand and supply in order to achieve continuing growth. An important part of the unbalanced growth strategy is the potential to develop linkages between sectors in which a leading sector, through linkages with a follower sector,may foster the development of the latter industry.

The issue of local linkages has regained importance in the last decades of the 20th century due to the increasing globalization of the world economy, where many inputs and outputs can be internationally traded, and therefore, inputs can easily be sourced locally or abroad. Given the increasing significance of foreign direct investment and multinational companies in many developed and developing countries alike, a particular focus of interest has been on interfirmlinkages between foreign multinationals and indigenous firms, which to some extent echo the role of linkages in Hirschman’s earlier work.

Whereas in Hirschman’s concept of unbalanced growth ‘‘leading sectors’’ (which have the highest potential for linkages creation) induce growth in other sectors, themore recent viewonmultinationals largely sees these as ‘‘leading firms’’ inducing growth in local enterprises. Hence one can think of the former concept as intersectoral linkages, while the latter are interfirm linkages. Essentially, the interfirm linkage is at the heart of the Hirschman-style intersectoral linkage, since a sector is composed of a number of firms.The concept of interfirmlinkages is a much wider and richer concept, however, and the intersectoral linkage leading to economic development is only one ofmany effects of interfirmlinkages.

See also appropriate technology and foreign direct investment; footloose production; foreigndirect investment and labor markets; foreign direct investment under monopolistic competition; foreign direct investment under oligopoly; location theory; multinational enterprises; technology spillovers


  • Go¨rg, Holger, and Frances Ruane. 2000. ‘‘An Analysis of Backward Linkages in the Irish Electronics Sector.’’ Economic and Social Review 31: 215 35. An empirical analysis of linkages in domestic firms andmultinationals using firm level data for Ireland.
  •  Hirschman, Albert O. 1958. The Strategy of Economic De velopment. New Haven: Yale University Press. An early contribution setting out the benefits of intersectoral linkages for economic development.
  •  Javorcik, Beata Smarzynska. 2004. ‘‘Does Foreign Direct Investment Increase the Productivity ofDomestic Firms? In Search of Spillovers through Backward Linkages.’’ American Economic Review 94: 605 27. An empirical analysis of the importance of linkages between multina tionals and domestic firms for technology transfer.
  •  Krugman, Paul R., and Anthony J. Venables. 1995. ‘‘Glo balization and the Inequality of Nations.’’ Quarterly Journal of Economics 110: 857 80. A theoretical model showing the importance of linkages for agglomeration of production. 
  • Lall, Sanjaya. 1980. ‘‘Vertical Inter FirmLinkages inLDCs: An Empirical Study.’’ Oxford Bulletin of Economics and Statistics 42: 203 26. An early empirical analysis of linkages by multinational companies in developing countries.
  •  Markusen, James R., and Anthony J. Venables. 1999. ‘‘Foreign Direct Investment as a Catalyst for Industrial Development.’’ European Economic Review 43: 335 56. Theoretical model highlighting the importance of link ages between multinationals and domestic firms for development of local industry.
  •  Marshall, Alfred. 1920. Principles of Economics. 8th ed. London:Macmillan. Discusses, among other things, the potential benefits of input output linkages between firms for development.
  •  Moran, Theodore H. 2001. Parental Supervision: The New Paradigm for Foreign Direct Investment and De velopment. Washington, DC: Institute for Interna tional Economics. Presents many case studies on back ward linkages between multinationals and domestic suppliers. 
  • Yotopoulos, Pan A., and Jeffrey B. Nugent. 1976. ‘‘In De fence of a Test of the Linkage Hypothesis.’’ Quarterly Journal of Economics 90: 334 43. Early contribution to the measurement of intersectoral linkages using input output tables. There are other papers on this topic in the same issue of the journal.


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