Propagation of negative shocks across nationwide firm networks

This study examines how negative shocks due to, for example, natural disasters propagate through supply chains. We apply a simulation technique to actual supply chain data covering most Japanese firms. To investigate the property of the propagation in the network, we test different types of artificial negative shocks. We find that, first, network structures severely affect the speed of propagation in the short run, and the total loss in the long run. The scale-free nature of the actual supply-chain network—that is, the power-law degree distribution—leads to faster propagation. Second, more intensive damages—that is, more damages suffered by fewer firms—result in faster propagation than extensive damages of the same total size. Third, the actual supply-chain network has innate robustness that comes from substitutability of supplies. If the supply-chain network has severe substitutability, the propagation of negative shocks becomes substantially large. Fourth, direct damages in urban regions promote faster propagation than those in rural regions. Fifth, different sectoral damages show significant differences in the speed of propagation. Finally, we check the indirect damage triggered by a single firm’s loss: 9.7% of all firms contribute to significant loss, and this loss accounts for more than 10% of the damage to the entire production. The simulations conspicuously show that different direct damages, even if they have the same total magnitude of damages, can generate considerably different damages because of the structure of the supply-chain network.