Governments around the world provided unprecedented support to firms during the COVID-19 pandemic. The World Bank’s SME-Support Measure Dashboard, for example, tracked 1,500 government measures to support small and medium-size enterprises (SMEs) in 132 countries. According to policymakers, these initial support measures aimed to prevent mass insolvency of viable firms and related knock-on effects for the financial sector, to preserve jobs and firm-specific intangible capital, and to reduce the friction costs of firms temporarily exiting the market.
Evidence on the impact of these policies is mixed, however, and often depends on the time period under study. For example, research suggests that government support measures were successful in helping firms weather the crisis and preserving jobs in the short run, although at a high cost. But the longer-run effects of COVID-19 support to firms are uncertain, in part since these measures may simply have delayed insolvency for some firms, leading to inefficiencies.
In a new paper, we assess the medium-run effects of government support to firms during the COVID-19 crisis and whether the effectiveness of this support varied with its timing. We find that government support helped businesses the most when it was provided early and phased out quickly, while delayed or prolonged support offered little additional benefit.
Tracking firm support during COVID-19
We use panel data from three rounds of the World Bank’s Enterprise Surveys COVID-19 Follow-up Surveys, allowing us to look at firm performance in mid-2021 or later, over a year after support measures were first enacted. Specifically, by analyzing data from surveys carried out between May 2020 and August 2022, we can relate government support in Rounds 1 and 2 with firm performance in Round 3. Our results add to the existing literature on government support during the COVID-19 shock, and also during previous crises more generally, which has provided little evidence on how the effect of this support varies with its timing.
We analyze data for 8,195 firms from 32 mostly emerging markets and developing countries. First, we document that 31 percent of firms received government support by Round 1 of the survey, and 22 percent received support between Round 1 and 2. Taken together, 41 percent of firms received support in either or both Round 1 and 2.
The support measure reaching by far the largest share of firms was wage subsidies, with three out of four firms that received any type of support receiving such subsidies. The second most wide-reaching measure was cash transfers, followed by fiscal relief, payment deferrals, and new credit.
When we investigate which firm characteristics predict receiving government support, we find that firms that were more productive at baseline were less likely to receive government support by Round 1. In addition, larger firms and those with a website were more likely to receive support.
Most importantly, we ask how receiving government support by Round 1 and Round 2 of the surveys affected firm performance in Round 3 of the survey. Here, we examine the relationship between Round 3 performance and support in Rounds 1 and 2 to minimize reverse causality. We capture performance by either sales growth, employment growth, or firms’ anticipation of falling into arrears. To reduce omitted variable bias, we control for a host of firm characteristics that may have affected both the probability of receiving support and firm performance.
Findings on timing and impact of support
Our research yields three main findings. First, firms that received government support by Round 1 performed better in terms of Round 3 sales compared to firms that did not receive any support. Second, this result holds only if firms did not continue to receive support in the following period. Interestingly, firms that continued to receive government support in the second round performed no better than those that did not receive any support. Finally, firms that received government support only in the second round experienced no performance boost compared to those that received no support.
These results hold up through various robustness checks, including controlling for firm exit and non-response, the competition environment, country-sector fixed effects, firm management quality, country COVID-19 restrictions, and firm performance in Round 1 and Round 2.
We obtain most of our results using the sales growth measure of performance and do not find a statistically significant relationship between receiving government support and employment outcomes independent of the timing of support. Also, we analyze the relationship between any type of government support and Round 3 firm performance, and cannot draw strong conclusions about the relative effects of different types of government support.
Implications for future economic crises
The main policy takeaway from these results is that during an economic crisis such as the COVID-19 pandemic, government support should be provided to firms quickly, but it should also be phased out quickly. Doing so ensures that support measures help firms weather the crisis without delaying 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, and distorting markets and firms’ incentives. Also, while there is some earlier evidence that government support preserved jobs in the short-run, we find no evidence of medium-run effects on employment.
A potential avenue for future research would be to investigate the effects of government support measures during the COVID-19 crisis on long-run firm performance once such data becomes widely available. To help inform the government response to future crises, researchers could also examine the relative merits of different firm support measures, such as wage subsidies compared to cash subsidies.
