Developing economies suffer from a lack of market dynamism and competitive firm selection. In these countries, transformative entrepreneurs are often unable to outcompete subsistence firms that operate in the same markets. The COVID-19 shock is an interesting shock to examine in this context. On the one hand, it may winnow out underperforming firms and allow more productive firms to expand their businesses, thus leading to overall efficiency gains. On the other hand, given the unique nature of the shock, the pandemic may enhance the exit of more productive businesses, with persistent negative impacts on future firm and market dynamics. In response to the crisis, all non-essential businesses in Uganda were shut down for more than one month starting 1 April. In this project, Vittorio Bassi et al. will combine four rounds of existing panel data on 4,299 Ugandan firms with a new phone survey to document firm and market dynamics before and during the COVID-19 pandemic.
The richness of the data collected pre-pandemic will allow the researchers to explore a number of drivers of firm dynamics, such as managerial ability, asset ownership and embeddedness in supply chains. Further, the geographical and sectoral diversity of the sample will help them pin down the effects of the COVID-19 shock by exploiting variation in the intensity and type of shocks that hit different businesses. To this end, information on firms’ characteristics and performance immediately before the pandemic will be collected to control for potential pre-trends. Finally, the researchers will rely on two firm censuses conducted in 2012 and 2017 to inform the construction of a counterfactual of how markets would have evolved in the absence of the COVID shock, and compare it to actual data on markets from the phone survey.
Understanding how the current pandemic is affecting the operations and survival of private enterprises is paramount for the design of policies aimed at stimulating economic recovery. This project will provide reports directly to the Ministry of Finance, Planning and Economic Development, and Ministry of Trade of Uganda, with whom the researchers have close ties. They plan to continue engaging with the Uganda government and other stake-holders going forward, and to resume organizing in-person policy workshops as soon as it becomes possible again. More broadly, there is little evidence on firm and market dynamics from developing countries. Understanding what are the drivers of firms’ survival and growth in periods of sustained growth, and in response to the COVID19 shock can help policy makers identify businesses with high growth potential and design policies that can enhance their expansion and/or resilience to large aggregate negative economic shocks.
