This paper investigates the interaction between production networks and firms’ research and development (R&D) decisions and their implications for aggregate inefficiency. Using a unique long-term dataset that combines panel data on inter-firm transactions and patent data in Japan, we investigate the relationship between the life cycle of firms’ production networks and R&D. Our findings indicate that production networks are age-dependent, with older firms being more interconnected and their counterparts also aging. Additionally, increased R&D, indicated by the patents of connected firms, stimulates a firm’s own R&D activities. Motivated by these empirical findings, we construct a model that incorporates the dynamics of production networks and R&D as a new variety creation. In this model, firms gradually build their supply chains and can leverage their existing supply chains to develop and sell new products. Our model implies that older firms at the center of the production network underinvest in R&D relative to the optimal allocation.
We present a theory for growth accounting in open economies with distortions. In addition to domestic distortions, we include distortions from imported intermediate inputs and from exports. We show that trade can influence aggregate TFP growththrough three channels:, the distortion of exports, the production network propagation of import distortions and through how imports are accounted for in national accounts. We quantify these forces by using administrative firm-to-firm and tax data for the universe of formal firms from Chile between 2005 and 2021. Observed TFP growth is explained by allocative efficiency rather than technological change. International trade accounts for 48% of aggregate TFP growth, with all three channels being quantitatively important.