A New Measure of Inter-industry Distance and Its Application to the U.S. Regional Growth

Abstract

We propose a new measure of inter-industry ‘distance’. This is constructed à la Antras et al. (2012). While they measure the distance of an industry from its final use – what they call ‘downstreamness’ of an industry – we measure the distance between a pair of industries. Our proposed index is a measure of in- put-output linkages between industries that incorporates a ‘distance’ flavor. Our measure distinguishes the number of vertical production stages that an indus- try’s product goes through until it is finally used by another industry by assign- ing larger weights to the value of input use with longer production chains. Hence our measure contains more information on the relation between two industries along the vertical production chain. We use this index to construct an aggregate measure of ‘industry connectedness’ of regions in the U.S. It measures the degree of industrial linkages of a region. We then empirically es- tablish that each region’s labor productivity is positively associated with the ‘in- dustry connectedness’. The result contributes to the large literature of agglom- eration economies that the industrial linkage is one of the main sources of ag- glomeration economies and productivity growth, as emphasized by Marshall (1920). It also suggests that our index can serve as an alternative measure of the industrial linkages.