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

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 growing 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 economy from 2015 to 2022. We benchmark our results to a heuristic maximum entropy null model that generates randomized production networks while 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 pattern not reproduced by the null model. Although empirical systemic risk closely matches the null value prior to the pandemic, it becomes significantly lower afterwards, reflecting the emergence of a more resilient economy driven by firms' adaptive behavior. Furthermore, firms' international trade volume (being itself a channel of potential disruption) becomes a significant predictor of their systemic risk. However, international linkages alone cannot fully explain the observed trends, as imports and exports exert opposing effects on local systemic risk through the supply and demand channels.