Firm adaptation to the COVID-19 crisis

The COVID-19 crisis triggered a multitude of economic effects. At the microeconomic level, they varied across economic agents, notably firms, with some showing greater resilience than others, depending on intrinsic characteristics such as size and participation in international trade. Zooming in on firm size, the crisis was deeply felt by smaller firms. As for participation in international trade, stronger connections abroad increased firms’ exposure to global adverse shocks, while providing a broader scope for resilience-enhancing decisions about production and market management.

This study asks three questions regarding small- and medium-sized (SMEs) Portuguese firms. First, did exporters adapt their business activity in the wake of the crisis? Second, was there any difference in how smaller and larger exporters responded to the crisis? Third, did government support measures play a role in firms’ adaptation process? To answer these questions, the paper relies on data from the new Fast & Exceptional Enterprise Survey and the Integrated Business Accounts System.

As for the first question, the paper finds that exporters were more likely to adapt their business activity in the wake of the crisis, compared to a fully domestic firm, where adaptation could take the form of investing in IT, making greater use of teleworking, redirecting target markets and/or supply chains, changing stocks, and/or diversifying their product range.

Regarding the second question, the paper finds that exporters’ adaptation processes were multidimensional and firm-size dependent. Exporters adapted more intensively, using a wider range of mechanisms, and in a way that varied according to size. While exporting SMEs tended to adapt through multiple mechanisms, larger exporters appear to have followed a more parsimonious approach.

Lastly, government support measures were not a substitute, but a complement to firms’ own adaptation process. Government support measures were short-time work schemes (‘lay-off simplificado’), tax deferrals, publicly guaranteed credit lines, and debt moratoria. The paper finds that the intention to call upon support measures coincided with a greater likelihood of adaptation by exporters. Crucially, the support measures fostered the willingness of domestic firms to adapt, for which we also estimate significantly positive interaction terms, especially for SMEs.

Click here to go to the paper by João Capella-Ramos and Romina Guri.