This paper analyses the impact of the dynamics in large enterprises in the wood industry on the dynamics of small enterprises and the shadow economy in this industry. We use unique firm-level survey data for the sample of small enterprises in the wood industry in Slovenia. We find a relatively small impact of the dynamics and size structure of large enterprises on the dynamics of small enterprises in the wood industry. The important impact is found for the dynamics of large enterprises on the shadow economy in the wood industry. The empirical results indicate implications for the regulatory system to provide a proper institutional enabling framework for the formal economy sector, a proper financial system for financing at acceptable assurance and costs, informal education schemes to provide basic business knowledge and good entrepreneurial practices.