This subsection provides a brief overview of the Eurostat input-output framework which is used in this study to define industry relatedness. For a detailed description of how the input-output tables are used in the formation of customer and supplier portfolio, see subsection 5.1.
As mentioned earlier, this study uses Eurostat symmetric input-output tables (IO-tables) to identify
customer and supplier industries for a given stock and industry.44 More specifically, this paper uses
consolidated Eurostat IO-tables for the aggregate Eurozone and EU27 which provide a detailed picture of the interdependent structure of the European economy by reporting the amount of inter-
industry flows of goods and services.45 The Eurostat input-output-tables are part the European
System of Accounts (ESA95) framework which consists of three types of tables: supply tables, use tables and symmetric input-output tables. The supply and use tables (SUT) constitute the core of the ESA95 framework. SUTs are matrices that show the production processes and transactions for particular products and industries by product and industry: the supply table reports where goods and services are produced whereas the use table shows where they are used in intermediate
43 Industry accounts with less than five firms for each month (year) during the sample period are excluded from the sample in the
return cross-predictability analysis (industry fundamentals analysis). Minimum industry size of five firms per industry is used also in prior studies (see, e.g., Fan and Lang, 2000; Hong, Torous, and Valkanov, 2007; Ling, Chan, Dasgupta and Gao, 2011).
44 For other studies that use input-output tables to define industry relatedness, see e.g., Fan and Lang (2000) and Kale and Shahrur
(2007).
45 Eurostat launched a set of projects aimed to combine individual supply and use tables of EU27 countries into aggregated EU-level
tables. The outcome of the project was consolidated supply and use tables for EU27and the Eurozone which are transformed in this study to symmetric input-output tables. The use of consolidated EU-level input-output tables provides an accurate description of industry relations within EU. For more information on consolidated EU-level tables, see EUROSTAT (2011).
consumption, final consumption, gross capital formation and export. The SUTs as such serve mainly for statistical purposes, but when transformed into symmetric input-output tables, they provide valuable insight on, for example, the interdependencies between industries. (EUROSTAT, 2008.)
The symmetric Eurostat input-output tables used in this study are industry-by-industry matrices which show the flow of goods and services between industries. Basically, the IO-tables combine the supply and use tables into a single table with identical classification of industries applied to both rows and columns. Since consolidated EU-level industry-by-industry IO-tables are not readily available in the Eurostat database, this paper transforms consolidated EU-level SUTs into EU-level industry-by-industry IO-tables. It is important to note that compiling input-output tables on the basis of supply and use tables is an analytical step, which requires various assumptions. This paper follows EUROSTAT (2008) and uses a transformation method known as fixed product sales structure transformation model, (also referred to as industry-by-industry variant of the industry
technology assumption in literature) to transform the SUTs into industry-by-industry IO-tables.46
This transformation procedure is based on the assumption that each product has its own specific sales structure, irrespective of the industry where it is produced. The transformed input-output table for EU27 with few selected industries is presented in Appendix 2 in order to provide the reader with
a better understanding of the tables.47
The ESA95 framework requires that each EU-member country transmits their individual country- level supply and use tables annually and their input-output tables every five years. For the purposes of this study, industry-by-industry input-output tables are constructed for both EU27 and the
Eurozone for years 2000 and 2005.48 The IO-tables are used on a rolling basis to measure supplier
and customer relations between industries. This approach is adopted primarily to improve measurement accuracy because each table provides a historical snapshot and thus, may be inadequate for describing the structure of the European economy for the entire sample period. Hence, in the analysis industry relations data from the 2000 Eurostat IO-table is used between 2000 and 2004 and data from 2005 Eurostat IO-table is used between 2005 and 2009.
46 An alternative transformation method for constructing industry-by-industry input-output tables would require the assumption of
fixed industry sales structure. However this model is rejected due to its unrealistic character of the alternative assumption of fixed industry sales structure. In addition, the fixed product sales structure model that is used in this paper is also widely applied by countries such as Denmark, Hungary, the Netherlands, and Finland. (EUROSTAT 2008.)
47 For more information on the ESA95 framework and a detailed description of the transformation process, see EUROSTAT (2008). 48 Years 2000 and 2005 are chosen based on data quality considerations. EUROSTAT (2011) notes that the data situation for
European countries is best for years 2000 and 2005 due to the five-yearly data transmission of symmetric input-output tables required by ESA95 framework.