Identifying Business Networks in Emerging Economies

This paper provides a detailed description of the shape and financial importance networks amongst the universe of firms in an emerging economy where a network link is defined as board interlocks i.e. two firms share a common director. We do so by making use of a novel dataset from Pakistan that includes information on all the 140,000 firms borrowing from formal financial markets over a four year period. We find that a significant fraction of firms, up to one-third, have board interlocks with other firms. More interestingly, while firm networks typically range from networks of 2 to 100 firms, there exists a single very large network – the “super-network” – that comprises of almost 10,000 firms and is more than a hundred times the size of the second largest network. This super-network plays a disproportionately important role in financial markets: Although comprising 7% of firms, over 55% of all formal lending goes to firms in this super-network. Moreover, super-network firms have access to a greater number of lenders, default less and appear to be insured against adverse shocks in the economy. The super-network is robust to different definitions of firm linkages and over time. Moreover, a closer examination reveals that there are no important nodes (directors or firms) in the super-network and that is a very robust and diffuse network – eliminating important nodes (either singly or in clusters) does little to disrupt the network. This suggests that in addition to what one normally thinks of as business groups – a closely coordinated group of firms – more loosely yet very stably knit firm networks may also play an important role in emerging economies.