How Shocks to Large Companies Affect the Whole Economy: Estimating the Effects of Shockwaves Through Business Networks in Eight European Countries

Abstract

This paper investigates how disruptions affecting large companies can ripple through the wider economy by spreading across business networks. Using detailed firm-level data from eight European countries between 2006 and 2019, we show that when major firms experience sudden shocks – such as drops in demand or supply constraints – these shocks are transmitted to their connected partners, affecting performance across the network. Our results reveal three key contributions. First, the effects of firm linkages become more pronounced during periods of economic shocks, as their impact is amplified under both demand and supply shocks. Second, demand shocks tend to flow upstream to suppliers, while supply shocks more strongly affect downstream buyers – and these indirect effects can be even larger than the original shock. Third, the more concentrated the economy is around a few large firms, the more intense and widespread the shock transmission becomes. These findings emphasize the critical role of production networks in amplifying firm-level shocks and underline the need for policies that reduce systemic vulnerabilities in granular economies.