As the global COVID-19 pandemic shows signs of improvement in some countries, most businesses have slowly started to return to normal operations. However, this is not true for all firms as the crisis induced by the pandemic resulted in permanent closures of businesses across the globe. A recent World Bank working paper uses the World Bank Enterprise Surveys (ES) from 2019 and 2020 along with a series of follow-up surveys conducted since the outbreak of the pandemic to assess the effect of the COVID-19 on business closures. The original ES data collection, which concluded just before the outbreak of the COVID-19 pandemic, offers a unique baseline to study the impact of the crisis on firm survival during the pandemic. Commonalities among the survivors exist.
How big is the damage?
Obtaining an exact assessment of the extent of closures in a time of mass disruptions of daily operations, and as the pandemic is ongoing, is difficult. Nonetheless, the analysis presents a first comprehensive attempt. We use data collected up to March 2021 to build two measures of exit. One, a conservative measure of confirmed permanently closed businesses. Two, a measure of assumed exit which, in addition to the confirmed closures, includes firms that could not be contacted during fieldwork, despite the rich and updated contact information collected during the baseline and the short time span between the pre-pandemic baseline survey and the follow-up survey.
Exit rates, however, vary significantly across countries. Confirmed exits range from as low as 0.02 percent in Greece, to as high as 19.7 percent in Mongolia. Assumed exit rates, that by definition are higher, range from nearly half a percent in Montenegro to 23 percent in Mongolia.
Schumpeter at work
Non-exiters are characterized by higher productivity levels as depicted by the kernel density of sales per worker presented below. Multivariate analysis confirms the results with the relationship between firm permanent exit and labor productivity being large, negative, and statistically significant after controlling for several firm characteristics as well as for the business environment.
The COVID-19 crisis has a unique impact on economic activity marked with mass restrictions of movement and human interactions.
Innovation, Digitalization, and Business Environment
Beyond productivity, certain business characteristics improve the likelihood of businesses surviving. The introduction of new products on the market points to the importance of businesses' ability to adapt to rapidly changing market conditions as a way to increase firms’ resilience in a time of crisis. Similarly, the use of technology, which has become particularly relevant during the COVID-19 crisis as a way to offset the physical remoteness imposed by the social distancing requirements, is critical for survival. The role of mitigating factors, such as innovation and digitalization, is stronger for smaller firms. Finally, operating in burdensome business environments appears to be a contributing factor for firm exit.
Two policy implications can be drawn from this analysis:
- The results confirm the importance of supporting innovation and digitalization in the private sector for small firms.
- Agile regulations and good governance are beneficial to firm survival.
While this analysis brings evidence of a higher likelihood of exit among less productive firms more than one year since the start of the pandemic, much remains to be learned about the recovery process. As more data become available, issues such as the reallocation of resources, both in terms of labor and capital, and the characteristics of the new entrants on the market remain to be explored.