What is Economic Interdependence?

Definition: An economic interdependence is a condition that exists when two or more persons, organizations, regions or countries exchange goods and services with the purpose of filling each other multiple needs. The term mostly applies to situations of intensive trade among two or more participants to ensure proper availability of products and services to each of them.

What Does Economic Interdependence Mean?

Economic interdependency exists everywhere. Organizations, industries and nations are all deeply dependent on each other. Every company is economically dependent on many other firms thus creating a large and complex network of interdependent entities. This condition means that the entire network is affected in some degree if one of the entities is impacted by an event or suffers a substantial change. Such interdependency happens because every firm tends to be a kind of specialist, producing only a narrow range of goods or services. Specialization often results in higher efficiency and quality so firms prefer to focus on just some products.

However, this strategy means that all remaining items have to come from outside. Indeed, the higher the specialization, the higher the economic interdependence. If an organization produces ready-to-eat cereals as a for-profit business, it is surely dependent on companies that provide wheat, sugar, cardboard and plastic packages, along with stationery products, cleaning products, transport services, etc.

The cardboard producer is instead dependent on manufacturers of pulp-based paper and so on.

Example

Top management must be aware of economic interdependence and identify which are the highest risks associated to that. For example, depending on only one tested supplier of a key raw material can be risky because this supplier could increase prices too much or simply fail in its supply capacity. A strategy to diminish the risk might be searching for a second supplier. In other cases, the company prefers to lower some dimensions of the interdependence.

For example, a manufacturing firm with numerous machines may decide to eliminate the dependence on external maintenance and therefore to create its own technical maintenance department.