Understanding Firm Dynamics and Performance Under COVID-19

Abstract

Abstract We use data from the 2020/21 Egyptian Industrial Firm Behavior Survey (EIFBS) to examine the impact of the COVID-19 crisis on firm dynamics and performance. To gain a deeper understanding, our second objective is to explore potential underlying correlates of firm dynamics, specifically firm characteristics and behaviour. We also examine the distribution of COVID-19 government support to assess whether it targeted the most vulnerable sectors. The COVID-19 crisis induced both demand- and supply-side shocks, affecting the entire Egyptian manufacturing sector. However, in line with Schumpeter’s (1934. “Depressions: Can We Learn from Past Experience?” In Economics of the Recovery Program , edited by D. Brown, et al. New York: McGraw-Hill) theory of creative destruction, the market shows signs of ‘self-cleansing’, with less efficient firms more likely to exit or downsize. Our descriptive results show resilience of larger, public, formal, and export sector firms thus revealing pre-existing fragilities of the smaller, private and informal sector. These fragilities often reflect being less privileged. Public sector large firms operate under a ‘soft budget constraint’ and may thus appear artificially productive with better dynamics and performance compared to their less favoured counterparts. The contraction of the formal sector has expanded the informal one as the only alternative way to earn a living. As a ‘survival sector’, it has thus provided ‘helping-hand employment’. Firms that had adopted sound managerial practices, invested in innovation, technology, and worker training prior to the crisis were better positioned to adapt their business models and maintain performance post-crisis. Government support disproportionately reached larger and less vulnerable sectors, such as fabricated metals and rubber, suggesting a focus on survivability rather than vulnerability.