Crises like COVID-19 exposed the fragility of highly interdependent corporate supply networks and the complex production processes depending on them. However, a quantitative assessment of individual companies’ impact on the networks’ overall production is hitherto non-existent. Based on a unique value added tax dataset, we construct the firm-level production network of an entire country at an unprecedented granularity and present a novel approach for computing the economic systemic risk (ESR) of all firms within the network. We demonstrate that 0.035% of companies have extraordinarily high ESR, impacting about 23% of the national economic production should any of them default. Firm size cannot explain the ESR of individual companies; their position in the production networks matters substantially. A reliable assessment of ESR seems impossible with aggregated data traditionally used in Input-Output Economics. Our findings indicate that ESR of some extremely risky companies can be reduced by introducing supply chain redundancies and changes in the network topology.
Crises like COVID-19 or the Japanese earthquake in 2011 exposed the fragility of corporate supply networks. The production of goods and services is a highly interdependent process and can be severely impacted by the default of critical suppliers or customers. While knowing the impact of individual companies on national economies is a prerequisite for efficient risk management, the quantitative assessment of the involved economic systemic risks (ESR) is hitherto practically non-existent, mainly because of a lack of fine-grained data in combination with coherent methods. Based on a unique value added tax dataset we derive the detailed production network of an entire country and present a novel approach for computing the ESR of all individual firms. We demonstrate that a tiny fraction (0.035%) of companies has extraordinarily high systemic risk impacting about 23% of the national economic production should any of them default. Firm size alone cannot explain the ESR of individual companies; their position in the production networks does matter substantially. If companies are ranked according to their economic systemic risk index (ESRI), firms with a rank above a characteristic value have very similar ESRI values, while for the rest the rank distribution of ESRI decays slowly as a power-law; 99.8% of all companies have an impact on less than 1% of the economy. We show that the assessment of ESR is impossible with aggregate data as used in traditional Input-Output Economics. We discuss how simple policies of introducing supply chain redundancies can reduce ESR of some extremely risky companies.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.