4.2 Industry interconnectedness
Indices of industry interconnectedness focus on the number of direct and indirect transactions between industries and provide an indication of the degree of outsourcing and diversification in an economy. More purchases of intermediate products by industries indicate an increase in outsourcing, while a rise in the number of sales to other industries suggests an increase in diversification; that is, an expansion of an existing industry into other commodities or markets.[16]
Following Soofi (1992), two measures of industry interconnectedness are calculated: (i) a measure of concentration and (ii) entropy as a measure of variation.[17] The concentration measure is calculated from the unweighted total requirement matrix and thus focuses on the intermediate sector. The entropy based measure of dispersion is more descriptive of the characteristics of the economy as a whole as it takes into account final demand sales.
The backward concentration index is defined as
(9) 
and the forward index as
(10) 
- Figure 7: Backward concentration index
Notes
- [16]Diversification may be related or unrelated. Related diversification occurs when an industry (firm) expands into similar product lines. Unrelated diversification takes place when the products are very different from each other, for example a food processing firm manufacturing leather footwear as well. Diversification may arise for a variety of reasons: to take advantage of complementarities in production and existing technology; to exploit economies of scope; to reduce exposure to risk; to stabilize earnings and overcome cyclical business conditions; etc. See the OECD’s Glossary of industrial organization economics and competition lawwww.oecd.org/pdf/M00007000/M00007651.pdf.
- [17]Entropy is explained further below.
