Intermediates trade and knowledge flows the cost-saving mechanism of local buyer networks

This paper shows that firms can substantially reduce their intermediate input expenditures by participating in dense local input-buyer networks. Using detailed administrative data, we construct a measure of buyer-network density based on the number of nearby firms sourcing the same locally produced and imported inputs and document that stronger networks consistently lower input costs, while leaving revenues and productivity unchanged. To explain this pattern, we develop a theoretical framework in which network participation reduces fixed input requirements through knowledge spillovers among buyers. A key prediction is that potential revenue effects depend on the cost of benefiting from the network. Using product-level information on relationship specificity, we confirm that network expansion raises domestic revenues only for relationship-intensive products, where knowledge transmission is more effective.