What Are Backward and Forward Linkages?
Backward and forward linkages describe the economic relationship between the customer and company. The concepts were developed by Albert Hirschman, an influential European economist.
Economics is a social science that focuses on the study of the production and consumption of goods. Further, it seeks to quantify the wealth transfer process used to produce and obtain goods in a given sector. Macroeconomics involves the study of large systems, such as the interactions between countries or in the international market while microeconomics involves the study of smaller systems, such as the interactions between individuals and companies.
The idea of linkages grew out of Hirschman’s theory of unbalanced growth and describes the relationships that exist between parties involved along the supply chain. Backward linkages describe the process of how a company in a given sector purchases its goods, products, or supplies from a company in a different sector; these are called inputs. Forward linkages describe the process of how a company in a given sector sells its goods, products, or supplies to a company in a different sector; these are called outputs. In Hirschman’s area of study, known as development economics, backward linkages exist when investments in an industry profit from inputs and forward linkages exist when investments in an industry profit from outputs.