Forward-Backward Linkage Analysis


 From the development perspective, one of the most important features of any industry is the degree to which it is able to generate demand for the products of other industries. This phenomenon is known as linkage. An industry may encourage investment both in the subsequent stages of production by forward linkage and in earlier stages through backward linkage. According to Chui (2012), linkages are input-output relationships between firms or industrial sectors in an economy.

 A firm purchasing inputs from a local supplier is an example of a backward linkage, while a firm selling intermediate inputs to another firm creates a forward linkage. The importance of such linkages with the local economy for economic development has long been recognized in the economics literature. Marshall (1920) argues that input-output relationships between firms are one of the advantages of localized industry. In line with this Hirschman (1958) discusses the importance of linkages between sectors in an economy in the context of unbalanced growth strategy for developing countries. He suggested that the unbalanced growth in demand and supply is the potential strategy to develop linkages between sectors in which a leading sector (which has the highest potential for linkages creation), through linkages with a follower sector, may foster the development of the latter industry.

In other words, it means that the manufacturing sub-sector acts on the supply side while the economic sectors act on the demand side of the sub-sector’s product markets. On the other hand, the backward linkage refers to the relationship between the manufacturing sub-sector and the rest economic sectors, where their linkage is opposite to forward linkage where the manufacturing sub-sector lies on the demand side while the rest sectors lie on the supply side of input markets. Forward and backward linkage effects are then useful in assessing the impact of the manufacturing sub-sector on the national economy as a whole.
The input output (I-O) model is a good framework to analyze the interdependence of industries in the national economy. There have been some studies that used I-O model to analyze the influence of one industry on other sectors of an economy (Kwak et al., 2005; Lee et al, 2006; Chiu et al., 2012).
The I-O coefficients that help estimate the forward and backward linkages of the manufacturing industries can be determined based on two approaches. The first approach uses quantities of inputs and outputs of the manufacturing industry and the second approach uses values of these variables expressed in terms of monetary units. This study adopts the later approach, for it is impossible to sum up the quantities of different inputs and outputs of a manufacturing industry having different measuring units if one adopts the first approach. This problem will then be addressed if we use values of the variables instead.

In the framework of an I-O model, production by a particular sector has two types of economic effects on the other sectors in the economy: the forward and backward linkage effects. The forward linkage effect is represented as the sensitivity of dispersion. Similarly, the backward linkage effect is expressed as the power of dispersion. Comparison of the strengths of the backward and forward linkages for the sectors in a single economy provides one mechanism for identifying the “key” or “leading” sectors in that economy and for grouping sectors into spatial clusters (Miller et al., 1985).

Tuesday, 08th Mar 2016, 12:19:10 PM

Add Your Comment:
Post Comment