Government support and firm performance during COVID-19

Governments around the world provided unprecedented support to firms when the COVID-19 pandemic started. For example, the World Bank’s SME-Support Measure Dashboard tracked 1,500 government measures to support small and medium-size enterprises (SMEs) in 132 countries. These support measures were successful in helping firms weather the crisis and preserving jobs in the short run, but their medium-run effects are largely unknown, in part because these measures may simply have delayed insolvency for some firms.

In a recent paper, we assess the medium-run effects of COVID-19 government support to firms, using data from three rounds of the World Bank’s Enterprise Surveys COVID-19 Follow-up Surveys for 15 emerging markets and developing countries in Europe and Central Asia. Government support reached many firms in the sample: 42 percent of firms received government support by Round 1 of the survey (in the first half of 2020), and 23 percent received support between Rounds 1 and 2 (during the second half of 2020 or early 2021), for a cumulative 50 percent of firms receiving support.

We ask how receiving government support by Round 1 and Round 2 of the COVID-19 Follow-up Surveys affected firm performance in Round 3 of the survey (generally, in mid-2021). Here, we examine the relationship between performance in Round 3 and support in Rounds 1 and 2 to minimize reverse causality.

The results show that firms that received support in Round 1 performed better in terms of sales in Round 3, compared to firms that received no support, but only if they did not receive continued support. Firms that also received support in Round 2 had similar sales in Round 3 as those that received no support and were more likely to decrease employment. Similarly, firms that received government support only in Round 2 experienced no boost in performance in Round 3.

Figure 1 illustrates our findings by showing simple averages for the medium-run performance of firms with different frequencies of government support. To reduce omitted variable bias, the analysis in the paper controls for a host of firm characteristics that may have affected both the probability of receiving support and firm performance, which we obtain by linking the data back to pre-COVID-19 Enterprise Surveys. Our results also hold up through various robustness checks, including controlling for firm performance in Rounds 1 and 2.

Our findings suggest that government support should be provided promptly, but it should also be phased out quickly. Doing so ensures that support measures help firms to weather the crisis but do not delay insolvencies for firms that may no longer be competitive. This conclusion is consistent with the notion that fiscal stimulus should be timely and temporary. In practice, responses to previous crises were often implemented too slowly and were not rolled back fully, leading to increasingly higher government spending.