Companies have responded to Covid disruption by shortening supply chains but a study suggests longer supply chains provide more innovation and economic benefit.
A team of academics from the University of Oxford and Harvard University found supply chains – in which producers bought input goods, converted them into other goods and sold them to other producers – amplified the effects of technological improvements and price reduction.
“Longer production chains for an industry bias it toward faster price reduction, and longer production chains for a country bias it toward faster growth,” said the report.
The study comes as firms have sought to reduce risk by shortening supply chains and researchers admitted their results were “potentially counter-intuitive”.
Doyne Farmer, Baillie Gifford professor of mathematics and director of the Complexity Economics programme at Oxford University’s Institute for New Economic Thinking, said: “The more steps in the process, the more opportunity there is for innovation. Industries with greater supply chains do better. We have been able to predict this over long periods. It does not explain everything that happens, but the principle can be seen operating.”
The report said an industry benefited from “both its own productivity growth and the accumulation of productivity improvements in its upstream suppliers”.
“As a result, the longer its chains of production, the faster its expected rate of price reduction.”
James McNerney, research associate at Harvard's Growth Lab and lead author of the study, said: “We show that production chains accumulate the benefits of technology improvement so that long production chains facilitate faster price reduction in industries and faster GDP growth in economies.
“These are latent predictions in standard models that we develop theoretically and show that they bear out in the data.”
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