Evolution and determinants of firm-level systemic risk in local production networks

TL;DR

This study analyzes how firm-level systemic risk in Hungary's production network evolved from 2015 to 2022, highlighting the impact of COVID-19 and firms' adaptive behaviors on economic resilience.

Contribution

It introduces a null model based on maximum entropy to compare with empirical data, revealing how firms' roles in systemic risk change during crises and the importance of international trade.

Findings

Structural change in key systemic risk firms during COVID-19

Firms' adaptive behavior reduces systemic risk post-pandemic

International trade volume influences systemic risk with opposing effects

Abstract

Recent crises like the COVID-19 pandemic and geopolitical tensions have exposed vulnerabilities and caused disruptions of supply chains, leading to product shortages, increased costs, and economic instability. This has prompted increasing efforts to assess systemic risk, namely the effects of firm disruptions on entire economies. However, the ability of firms to react to crises by rewiring their supply links has been largely overlooked, limiting our understanding of production networks resilience. Here we study dynamics and determinants of firm-level systemic risk in the Hungarian production network from 2015 to 2022. We use as benchmark a heuristic maximum entropy null model that generates an ensemble of production networks at equilibrium, by preserving the total input (demand) and output (supply) of each firm at the sector level. We show that the fairly stable set of firms with highest systemic risk undergoes a structural change during COVID-19, as those enabling economic exchanges become key players in the economy -- a result which is not reproduced by the null model. Although the empirical systemic risk aligns well with the null value until the onset of the pandemic, it becomes significantly smaller afterwards as the adaptive behavior of firms leads to a more resilient economy. Furthermore, firms' international trade volume (being a subject of disruption) becomes a significant predictor of their systemic risk. However, international links cannot provide an unequivocal explanation for the observed trends, as imports and exports have opposing effects on local systemic risk through the supply and demand channels.