Firm Recovery and Covid-19: Productivity, Competition and the Digital Divide

Thursday, January 27, 2022 at 13:00-14:00 Vienna time (CET) 

Ms. Dorothe Singer, World Bank
Mr. Leonardo Iacovone, World Bank

Mr. Rilind Kabashi, Economist, Joint Vienna Institute

Policymakers around the globe responded to the Covid-19 crisis with an unprecedented set of policy measures, with many of them focused on providing support to the corporate sector. After two years of the pandemic, and already into a recovery stage, this webinar assessed the impact of the pandemic on firms, particularly the challenges in the period ahead. 

Dorothe Singer started with the role of competition during the crisis and recovery, since it is key for productivity growth, and thus for sustainable, long-term economic growth. A priori, it is not clear whether the Covid-19 crisis will result in a pattern of “creative destruction”, simply widespread destruction or a reallocation of activity to firms with greater market power or political connections, which would be detrimental to productivity growth.

According to her research, which is based on extensive World Bank Enterprise Surveys of firms in emerging and developing countries in Europe and Central Asia, firms with higher pre-crisis productivity had smaller drops in sales and employment, were less likely to anticipate falling into arrears, and were more likely to increase online activity and remote work. Related to this, the relationship between productivity and firm growth was stronger during Covid-19 than before, which suggests that ‘creative destruction’ increased and that the crisis would thus have a positive impact on long-term economic growth. She further emphasized that the reallocation of economic activity toward firms with higher pre-crisis labor productivity during the Covid-19 crisis was particularly pronounced in countries with a strong competition environment. On the other hand, government support measures implemented in response to the crisis often went to less productive and to larger firms, regardless of their pre-crisis innovation, which suggests adverse effects on the competition environment and economic recovery. Regarding policy implications of this study, she highlighted that, as recovery gains pace, policymakers need to phase out support measures as soon as appropriate, and focus on fostering a competitive business environment.  

Leonardo Iacovone focused on the digital technology adoption during the Covid-19 crisis, based a recent research using World Bank Enterprise Surveys and Business Pulse Surveys, as well as several other recent studies (which can be found at the COVID-19 Business Pulse Survey Dashboard). He noted that while the Covid-19 crisis ignited a “digital explosion”, there was considerable heterogeneity in effects across firms and sectors, as well as within sectors. This unprecedented wave of digitalization took various forms (online sales, use of digital platforms, remote work, investment in digital solutions), and was clearly correlated with the intensity of the shock. However, he emphasized the worrying signs of an emerging digital divide depending on firm size, and also sectors. In addition, different forms of digital adoption have varying effects on productivity, with the lowest impact coming from those related to marketing and sales, and the highest impact from those related to firm organization and internal efficiency. He highlighted that these differences are pronounced by firm size, with smaller firms focusing more on the “low hanging fruits”, which have a much lower impact on productivity. Overall, the digital divide and low technology adoption is driven by several factors, such as weak management capabilities, uncertainty and financial problems, and incentives and market integration. Consequently, policymakers should try to deepen technology adoption to promote an inclusive and productivity-driven recovery. This can be achieved by lowering uncertainty, expanding and supporting access to finance, supporting improvements in management and organization and deepening integration and supporting contestable markets.  

Rilind Kabashi, Economist, JVI


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