One contaminated pipe at a milk processing factory of New Zealand’s largest company, Fonterra, New Zealand’s largest company (7% of GDP) and largest exporter caused such a loss of brand-name value of the company that the New Zealand Treasury revised down its GDP forecasts for the year.
It is a little bit scary to wonder what kind of nation we live in when a single, small, dirty pipe threatens to bring the nation to its knees. That indeed was the fear when, over the weekend, Fonterra announced the contamination of a small amount of whey powder from a Waikato processing plant – Bank of New Zealand
This growth forecast revision after the milk contamination scandal, but turn out to be false reading, is a good example of how the random fortunes of individual large companies can have economy-wide implications and can even lead to recessions.
Figure 1: Sector’s concentration (Herfindahl Index) and sector’s contribution to aggregate volatility
Source: (Gabaix 2011).
There is growing evidence that idiosyncratic shocks to the fortunes of the 100 largest firms arising from changes in demand and cost conditions in their local and export markets combine to contribute about one-third of up-swings and downswings in U.S. output and employment (Gabaix 2011).
In an economy dominated by a few large firms, idiosyncratic shocks to large firms do not cancel out. The ups and downs in the individual fortunes of very large firms combine with firm-to-firm linkages to travel far beyond the firm and sector of origin (Gabaix 2011). These effects are likely to be stronger outside of the USA because it has a more diversified economy than most countries (Gabaix 2011).
Di Giovanni and Levchenko (2010) found that having fewer and less diversified firms and exports dominated by large firms helps to explain why small, more open economies such as New Zealand are more volatile. Fonterra accounts for 7 per cent of GDP and 20 per cent of overall exports. Drought is important to the New Zealand business cycle and agricultural exports (Buckle, Kim, Kirkham, McLellan and Sharma 2007).
As another example of the importance of a few large firms, Samsung and Hyundai account for 35 per cent of Korean exports and 22 per cent of Korean GDP.It would not be a good idea for the chief executives of those two Korean businesses to travel in the same car and have an accident.
Finland was monikered the one-firm economy because Nokia was responsible for 1/5th of Finnish economic growth, exports and company tax revenues for two decades. Nokia shares initially fell by 90 per cent in 2007 when Apple leap-frogged it with an iPhone that resembled a PC. The loss of one product development race imperilled the foundation of one-fifth of Finnish economic growth.
The literature on the contribution of large firms to business cycle volatility is a good examples of how the real business cycle theory is alive and well and is a progressive research programme.
Utopia, you are standing in it! 
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