Evolving impacts of the COVID-19 pandemic on micro, small, and medium-sized enterprises in Asia

Igarashi, Takiko; Takeda, Asami; Hoa Thi Truong; Sonobe, Tetsushi Working Paper Evolving impacts of the COVID-19 pandemic on micro, small, and medium-sized enterprises in Asia ADBI Working Paper, No. 1286 Provided in Cooperation with: Asian Development Bank Institute (ADBI), Tokyo Suggested Citation: Igarashi, Takiko; Takeda, Asami; Hoa Thi Truong; Sonobe, Tetsushi (2021) : Evolving impacts of the COVID-19 pandemic on micro, small, and medium-sized enterprises in Asia, ADBI Working Paper, No. 1286, Asian Development Bank Institute (ADBI), Tokyo This Version is available at: https://hdl.handle.net/10419/249465 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/igo/ ADBI Working Paper Series EVOLVING IMPACTS OF THE COVID-19 PANDEMIC ON MICRO, SMALL, AND MEDIUM-SIZED ENTERPRISES IN ASIA Takiko Igarashi, Asami Takeda, Hoa T. Truong, and Tetsushi Sonobe No. 1286 September 2021 Asian Development Bank Institute The Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI’s working papers reflect initial ideas on a topic and are posted online for discussion. Some working papers may develop into other forms of publication. The Asian Development Bank refers to “China” as the People’s Republic of China. Suggested citation: Igarashi, T., A. Takeda, H. T. Truong, and T. Sonobe. 2021. Evolving Impacts of the COVID-19 Pandemic on Micro, Small, and Medium-Sized Enterprises in Asia. ADBI Working Paper 1286. Tokyo: Asian Development Bank Institute. Available: https://www.adb.org/publications/evolving-impactscovid-19-pandemic-micro-small-and-medium-sized-enterprises-asia Please contact the authors for information about this paper. Email: [email protected] Takiko Igarashi and Asami Takeda are project consultants, and Hoa T. Truong is a research associate, all at the Asian Development Bank Institute (ADBI), Tokyo. Tetsushi Sonobe is dean of ADBI. The views expressed in this paper are the views of the author and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. Working papers are subject to formal revision and correction before they are finalized and considered published. We are grateful to Md Zainuri Juri, Huong Thu Ngo, and Mayumi Nakagawa, our partners from the Asian Productivity Organization, for their wholehearted support and guidance. We owe special thanks to Rosmi Abdullah (Malaysia), Thu and Nguyen Le Hoa (Viet Nam), Md Nazrul Islam (Bangladesh), Mayank Verma (India), Ratna Sari Dewi (Indonesia), Vilakone Philomlack (Lao People’s Democratic Republic), Batbileg Tsagaan (Mongolia), Nadia Jahangir Seth (Pakistan), and all the other contributing NPO staff for their insights and support in the fieldwork and consultation. We thank Daisuke Miyakawa for providing helpful comments. The views expressed are the views of the authors and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments that they represent. ADBI does not guarantee the accuracy of the data included and accepts no responsibility for any consequences from the use of the data. The terminology that the paper uses may not necessarily be consistent with the official ADB terms. Asian Development Bank Institute Kasumigaseki Building, 8th Floor 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adbi.org E-mail: [email protected] © 2021 Asian Development Bank Institute ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe Abstract Since the first quarter of 2020, micro, small, and medium-sized enterprises (MSMEs) in developing countries have faced significant hardship due to the economic shocks related to the COVID-19 pandemic. Questions arise, however, regarding the extent to which MSMEs’ hardship has varied between sectors and between countries over time, whether it is gender neutral, whether the digitalization of MSMEs could alleviate it, and whether government support has reached MSMEs. This paper aimed to answer these questions using new survey data from eight developing Asian countries around the middle and toward the end of 2020. We found a wide variation in the severity of and responses to the pandemic impacts on MSMEs between sectors and between countries. Turning to common trends, our significant findings were as follows. First, MSMEs’ sales and non-permanent employment tended to recover toward late 2020. Second, despite the general trend, the pandemic shocks concentrated on hard-hit industries, such as food processing, textiles, tourism, food and drink services, and education, which even deteriorated in the second half of 2020. Third, women-led enterprises remained vulnerable, exhibiting bleak prospects for sales or more job cuts than men-led but otherwise similar enterprises. Fourth, the digitalization intensity had a nonlinear relationship with MSMEs’ sales and employment, suggesting that online sales beyond a certain threshold, around 40% of the total sales, could generate more revenues and jobs for MSMEs. Last, the number of MSMEs receiving support from their governments increased in the second half of 2020. Still, such support did not effectively reach the most affected or vulnerable MSMEs. Keywords: COVID-19, micro, small, and medium-sized enterprises (MSMEs), layoffs, cash shortage, digitalization JEL Classification: D22, J63, L25, O53 ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe Contents 1. INTRODUCTION .......................................................................................................... 1 2. COVID-19 MSME SURVEY ......................................................................................... 3 2.1 Survey Design and Administration ................................................................... 3 2.2 Data .................................................................................................................. 5 3. FINDINGS .................................................................................................................... 8 3.1 Evolving Situations of MSMEs ......................................................................... 8 3.2 Hard-Hit MSMEs .............................................................................................. 9 3.3 Vulnerable MSMEs ......................................................................................... 12 3.4 Digitalization of MSMEs ................................................................................. 14 3.5 Government Aid for MSMEs ........................................................................... 16 4. CONCLUSION ........................................................................................................... 17 REFERENCES ...................................................................................................................... 18 APPENDIX ............................................................................................................................. 20 ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 1 1. INTRODUCTION The COVID-19 pandemic has caused severe disruption of economic activities globally since early 2020. In mid-July 2021, the World Health Organization (WHO) reported that the pandemic had led to 190 million confirmed cases and caused 4.1 million deaths worldwide, of which 21% of confirmed cases and 13% of deaths were concentrated in the South-East Asian region and the Western Pacific region. 1 At the time of writing, COVID-19 vaccine rollouts are still at an early stage in most developing countries, and resurgent outbreaks of new variants of the infection show that the pandemic is far from finished (ADB 2021). In particular, the pandemic has posed significant challenges for the survival and development of micro, small, and medium-sized enterprises (MSMEs), which are the backbone of Asia’s economic growth. Various studies on the economic impacts of the COVID-19 pandemic have reported severe hardship for small business owners, such as substantial losses of revenues, liquidity shocks, and business closures (e.g., Bartik et al. 2020; Fairlie 2020; Lu et al. 2020; Shafi, Liu, and Ren 2020; Apedo-Amah et al. 2020; Shinozaki and Rao 2021), while the scale of employment adjustment, such as layoffs of workers, was limited in scale in the early phase of the pandemic and lockdowns (Abebe, Bundervoet, and Wieser 2020; World Bank 2020). Given the enormous diversity of MSMEs in size, products and services, and technological and managerial sophistication as well as the labor, material, and output markets that they face, it is fair to say that our knowledge about MSMEs’ experience during the pandemic is not sufficient to guide policymakers. This report provides an overview of the major results of the survey of MSMEs in eight Asian countries—Bangladesh, India, Indonesia, the Lao PDR, Malaysia, Mongolia, Pakistan, and Viet Nam—that ADBI conducted in collaboration with the Asian Productivity Organization (APO) 2 and the respective countries’ national productivity organizations (NPOs). It aims to supplement our knowledge about the pandemicrelated crisis that MSMEs are facing in Asia. The survey took place in two waves in these countries in the middle and toward the end of 2020 in an online format because of the necessity to keep social distance as well as the lockdown measures that the governments had imposed. We sent out a questionnaire in the respective languages to MSMEs on NPOs’ lists of clients, such as training program participants and newsletter subscribers. We collected usable data from slightly more than 2,200 enterprises in the first wave and slightly more than 2,400 in the second wave. Two weaknesses of the data are noteworthy. First, while we repeated the survey, the data are not panel data. Unfortunately, only slightly over one-third of the enterprises that responded to the survey in the first wave responded to it in the second wave. Thus, the data are essentially two sets of cross-sectional data from different points in time. Because of the unavailability of a large panel, this paper did not intend to establish any causal relationship between variables. Instead, we confined ourselves to a descriptive analysis of the data. Even when we used regressions, their use aimed to summarize the statistical relationship between the left-hand-side variable and multiple right-hand-side variables. The second weakness is that our sample enterprises are likely to be biased toward MSMEs that are conscious of the need to improve their 1 Source: World Health Organization (WHO). n.d. “WHO Coronavirus (COVID-19) Dashboard.” https://covid19.who.int/. 2 The APO is an intergovernmental organization established in 1961 to increase productivity in the Asia and the Pacific region through mutual cooperation with its member national productivity organizations (NPOs). A list of member NPOs is also available on the official website: https://www.apotokyo.org/about/overview/. ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 2 management practices and learning about fintech and those that use digital platforms. This is because we sent our questionnaire only to MSMEs on the NPOs’ lists of clients, even though they were clients in a broad sense. It would not be surprising to learn that the sample MSMEs tended to outperform the average MSMEs in the same industry in the same country in firm survival, sound finances, and employment. It is necessary to bear such possible or likely biases in mind when interpreting the results of the data analysis that we report below. Despite such potential biases toward relatively high-performing firms, one of the major findings is that the majority of sample MSMEs in each country experienced acute cash shortages and drastic reductions in employment in the early half of the year and remained unable to escape from financial instability and to rehire regular workers in the second half. Another major finding is the considerable dissimilarity or heterogeneity among the eight countries with respect to the size distribution of the sample firms, the prevalence of women-led enterprises, the prevalence of digital commerce, and so on. Surprisingly, a significant difference among countries is apparent in the type of support that the government provided as well as the type of support that MSMEs preferred. The third major finding is that, despite such heterogeneity among countries, relationships still exist between variables; these relationships are apparent in several countries and there are no data from any country that refute them. The descriptive analysis developed in this report begins by looking at the summary statistics of data on the major variables and reporting heterogeneity among countries. It will then turn to some simple hypotheses predicting how some of these variables associate with the extent of reduction in employment or sales revenue. One of such hypotheses is about gender inequality. A few existing studies have suggested that the impacts of the crisis on MSMEs are not gender neutral. That is, there has been a resurgence of interest in the so-called female underperformance hypothesis, which the economics and management literature has long discussed (e.g., Du Rietz and Henrekson 2000; Pucheta-Martínez and Gallego-Álvarez 2020; Pueyo, Carreras, and Ngoo 2020), in the context of the COVID-19 crisis. For example, Wei and Xu (2020) found that the pandemic has further widened the gender gap in business earnings based on data covering 24 developed and developing countries. Their study also reported that female entrepreneurs are more likely to face business closure mainly due to their disadvantages in access to finance and that women-led firms are more likely to decrease their number of employees, especially female employees. Interestingly, our data reveal that the reduction of the actual sales for women-led MSMEs was smaller than that of men-led but otherwise similar enterprises in late 2020. Nevertheless, they also show that female entrepreneurs have consistently bleaker prospects for future sales revenue and remain relatively less able to retain employment than enterprises with male leaders. The COVID-19 crisis has expedited the digitalization of the economy across the world, as Fang (2021), among many others, have argued. Guo, Yang, Huang, and Guo (2020), in their study in the People’s Republic of China (PRC), concluded that digitalization, especially digital platforms and smartphone apps, provides MSMEs with a new channel to connect with customers and enables them to respond more effectively to the crisis and improve their business performance. Sonobe et al. (2021), among others, hypothesized that digitalization would destroy and create jobs as initially the job destruction effect would dominate with the application of digital technologies but then the job creation effect would dominate. They reported that the hypothesis is consistent with both waves of the survey data: while MSMEs that earned only a small fraction of their revenue from online sales tended to reduce their employment more than those that did not engage in online sales, MSMEs that earned a large fraction of ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 3 their sales revenue from online sales tended to maintain their employment size better. The present report provides more evidence for such a nonlinear relationship. Some studies have analyzed the role of government support for MSMEs. Using firmlevel data in 17 developed countries, Gourinchas et al. (2021) argued that the absence of government support would increase the failure rate of SMEs by 9.1 percentage points during the pandemic. Government support can thus play an important role, but the question arises of which type of support is effective and whether its provision is efficient and equitable. It seems natural to hypothesize that government support that targets severely affected enterprises is effective. Our data, however, reveal that those enterprises that experienced cash shortages and more drastic employment reductions were no more likely to receive government support. Abebe, Bundervoet, and Wieser (2020) found that, while the majority of MSME entrepreneurs in Ethiopia identified the waiving of taxes as the most desirable form of support, fewer than 1% of female entrepreneurs received any government support. Consistently, the present study found that, while the second half of 2020 witnessed general increases in government support for MSMEs, the support provision did not necessarily reach the most affected enterprises, including ones with female leaders. The rest of the paper proceeds as follows. Section 2 describes the survey design and data. Section 3 summarizes the estimation results. Finally, Section 4 provides the conclusion. 2. COVID-19 MSME SURVEY 2.1 Survey Design and Administration An online survey took place in two waves over 2020 to understand the evolving situation of MSMEs undergoing economic shocks from the global COVID-19 pandemic in a partnership involving ADBI, the APO, and NPOs. In the two waves, eight NPOs in Bangladesh, India, Indonesia, the Lao PDR, Malaysia, Mongolia, Pakistan, and Viet Nam participated in the survey. The survey invited the clients of these NPOs, which are dominantly MSMEs, to respond. While the classification of small and medium businesses varies across countries (Gibson and Vaart 2008; Aga, Francis, and Rodgriguez Meza 2015), we defined an MSME by its employed workforce size 3 in this study. The client MSMEs are mostly those that have received training, consulting services, or newsletters from these organizations or attended their events. We did not restrict our target to any particular sector, size, or type of business but targeted either owners or managers of firms. We designed an online questionnaire using SurveyMonkey, the cloud-based software, in early April 2020 and revised it before the second wave in late 2020, mainly to capture the changing situations of MSMEs more closely. The questionnaires consisted of seven sections, beginning with identification questions about the firms and respondents and then enquiring about the immediate impacts of the pandemic, responses of MSMEs, government support, expected performance, profiles of firms, and business competitiveness. With NPOs, we translated it into the respective native languages and directly distributed it to their clients through email and online messaging services. Generally, it took respondents about 15 minutes to complete all the questions. The online form allowed respondents to resume if the internet connection was disrupted or respondents had to stop temporarily for various reasons. In addition, 3 A microenterprise has fewer than 10 permanent employees; a small enterprise has 11 to 30; and a medium enterprise has more than 30. ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 4 NPO staff surveyed respondents by telephone or visitation 4 and then entered their responses into the online system if most MSMEs did not have sufficient internet access. We launched the first wave of the survey first in Viet Nam and Malaysia in May 2020 and completed it by mid-June 2020. Five countries delayed the start to August 2020, and the Lao PDR launched it in September 2020. The follow-up or second wave of the survey started in November 2020 with Malaysia and Viet Nam. The rest of the countries began the second wave in January 2021. Though the timing of the survey’s start varied across participating countries due to government restrictions and levels of preparedness, the first wave aimed to capture the situation under the initial shocks during the first half of 2020, and the second wave sought to understand the changing situation in the second half of 2020. The implementation of the online survey took around 3 to 5 weeks and closed once each country had received about 300 valid and complete responses. The second survey aimed initially to consult those firms that had participated in the first wave to obtain panel data, which was a significantly challenging approach for online surveys. Some sample firms had closed their business, and others were reluctant to participate in the second wave for various reasons. As a result, the sample firms in the first wave were not necessarily the same as those in the second wave. Around 30% of the sample firms in the first wave participated in the second wave. Thus, the results in the report should be taken with caution and interpreted as conditional associations rather than direct influences. Enterprises participated in the survey voluntarily. While the online survey was open, each response was checked for completeness daily, and NPO staff followed up to ensure that the respondents answered all the mandatory questions in the form. Upon the closure of the online survey, staff reviewed the collected data carefully to remove duplicated entries or invalid respondents. The final sample included 2,344 valid responses in the first wave and 2,505 responses in the second wave, of which around two-thirds came from owners of enterprises. There are at least two sources of potential sample bias that readers should keep in mind when interpreting the findings of this paper. The first is that this survey might cover only those firms that were still in operation at the time of the survey, which would cause a sample selection bias in firm longevity and growth. However, this problem might not be particularly serious because our survey also covered firms that had temporarily shut down their business because of the COVID-19 pandemic. Around 35% of firms in the first wave and 30% of firms in the second wave reported temporary closure. The second source of bias is that the NPOs targeted the firms for which they have contact information. Firms in developing countries, especially microenterprises, are usually poorly managed, and the majority of their owners are not aware that training and coaching activities would improve their productivity and business performance (Higuchi, Nam, and Sonobe 2015; McKenzie and Woodruff 2017; Bruhn, Karlan, and Schoar 2018; Higuchi, Mhede, and Sonobe 2019; McKenzie 2020). Since the firms in our sample have some connection with the NPOs, they do not necessarily represent ordinary firms in their countries. Therefore, they are biased toward the well-informed type or the type of firms that are more eager to improve their productivity or competitiveness. Moreover, the sample is probably biased toward respondents who 4 Telephone interviews took place partially in Bangladesh, Indonesia, and Viet Nam. In-person interviews took place in the Lao PDR. ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 11 The finding suggests that hospitality service MSMEs stand out significantly from all other hard-hit MSMEs, facing the most severe likelihood of a significant decline in actual or forecasted sales revenues throughout the period. The findings also show that education service MSMEs quickly emerged in late 2020, perhaps due to prolonged school closures resulting from the pandemic, as well as the global economic slowdown, shrinking household incomes that had been allocated to private education. The probability of the most severe future sales growth prospects stayed lower in education service MSMEs than that for the average of other sectors in early 2020 but sharply increased to over 30% in late 2020, surpassing that for most industries except hospitality services. Similarly, we predicted the probability of severe layoffs of permanent and non-permanent employment (Figure 3). Again, the predicted probabilities of severe job cuts in hard-hit MSMEs remained consistently higher than those in other sectors throughout 2020. Furthermore, the probability of severe layoffs of permanent employees did not vary over 2020 in most hard-hit sectors except for hospitality services and food-processing MSMEs, which seem to have intensified the laying off of their permanent employees in the second half of 2020. On the other hand, the probabilities of non-permanent job cuts appear to have decreased sharply over time in all sectors except the hospitality service industries. Figure 3: Probability of Cutting over 40% of Permanent and Non-permanent Employees in the Hard-Hit Sectors in Early and Late 2020 Source: COVID-19 MSME Survey, ADBI. ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 12 3.3 Vulnerable MSMEs This section highlights the vulnerable MSMEs, particularly women-led firms and microenterprises, and investigates how COVID-19 affected them differently. Respectively, women-led firms and microenterprises account for about 30% and 50–60% of the sample firms (Table 3). Women-led firms are relatively more concentrated in the hard-hit industries, facing a greater chance of business disruptions. Table 4 compares the average characteristics of womenand men-led firms based on the survey sample. There are a few notable differences between the two groups. On average, women-led firms tend to be younger and predominantly micro-sized compared with their male counterparts. More women-led firms sell their goods and services online than men-led firms, and their online sales are more significant than those of men-led firms. Female entrepreneurs seem to be more willing to adopt digital technology. A possible explanation is that adopting digital technology enables female entrepreneurs to balance their domestic workloads, childcare, and business operations better (UN Women 2020) or diversify their marketing means as the traditional markets customarily favor men. Table 4: Comparison of Firms’ Characteristics by Gender of Firms’ Leadership Women-Led Firms Men-Led Firms Obs. Mean Std. Dev. Obs. Mean Std. Dev. Firm age (years) 1,392 9.8 8.5 3,001 14.4 13.1 Microenterprise 1,415 0.70 0.46 3,068 0.48 0.50 Small enterprise 1,415 0.19 0.39 3,068 0.26 0.44 Medium enterprise 1,415 0.11 0.008 3,068 0.27 0.008 Export oriented 1,393 0.17 0.38 3,001 0.18 0.39 Selling online 1,405 0.59 0.49 3,048 0.51 0.50 Online sales 2019 (%) 1,393 24.9 30.0 3,001 18.1 28.3 Note: All the variables in this table are binary variables with a value equal to zero or one except for firm age (years) and online sales 2019 (%). Source: COVID-19 MSME Survey, ADBI. The regression analysis using the second-wave sample shows that women-led firms have a positive association with the actual sales, suggesting that the sales revenue for female entrepreneurs recovered in the second half of 2020, which is inconsistent with the existing studies indicating that female entrepreneurs experienced a drastic decline in sales revenue during the pandemic. However, the result also shows that the coefficient of an interaction term between women-led firms and the second-wave survey dummy has a negative association with sales growth prospects (column (6), Appendix Table A1). This finding suggests that, despite some recovery, female entrepreneurs had gloomy prospects for sales growth in the second half of 2020. On the other hand, microenterprises have a negative association with both actual sales and sales growth prospects (column (2) in Appendix Table A1), suggesting that microenterprises had substantially lost their actual sales and had severe prospects for sales growth, especially in late 2020, compared with larger firms. With respect to employment, we found that the coefficient of the interaction term of women-led firms with the second-round survey dummy has a negative association with both permanent and non-permanent employment (columns (3) and (6), Appendix Table A2). This finding suggests that female leaders of firms cut more employees, ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 13 regardless of their permanent or temporary status, in late 2020 than their male counterparts. Similarly, the coefficient of the microenterprise dummy has a negative association with both permanent and non-permanent employees, indicating that they tended to cut employment more than larger firms. Figure 4 presents the predicted probabilities of having the most severe loss by gender of firm owners. For the actual sales revenue, there is no clear gender difference. However, for sales growth prospects, the likelihood of expecting more than a 40% decline increased substantially among women-led firms in late 2020. Regarding employment, the likelihood of having more than a 40% reduction of both permanent and non-permanent employees did not improve among female firm leaders compared to their male counterparts in late 2020. In sum, there are clear gender differences in MSMEs’ employment status; firms with female leaders cut employment of both permanent and non-permanent employees more than firms with male leaders in the second half of 2020. Figure 4: Probabilities of Losing over 40% of Sales and Employment by Gender of Firm Owners in Early and Late 2020 Source: COVID-19 MSME Survey, ADBI. Finally, turning to cash and raw material shortages, Appendix Table A3 presents the estimation results. The estimation result regarding whether women-led firms faced a cash or raw material shortage is not significant, but we found that firms with male leaders were more prone to experience raw material shortages in late 2020. We also found that microenterprises were more likely to suffer from cash flow disruptions than larger firms. ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 14 3.4 Digitalization of MSMEs MSMEs’ uptake of digital technology remains significantly behind that of larger firms though the COVID-19 pandemic has accelerated the adoption and usage of digital technologies. As presented earlier (Table 3), our survey data show that only about half of the survey sample firms stated that they have some online sales by the end of 2019. The sample firms have quite a wide distribution of online sales in their total revenues, with a significant concentration of MSMEs without any online sales. It is also important to note that the cross-country variation is substantial. For instance, over 80% of MSMEs in Viet Nam have some online sales; however, this share is around 30% of all MSMEs in Bangladesh and Mongolia. Next, we investigated whether digitalization could mitigate the adverse impacts of the pandemic. The regression analysis results show that the intensity of online commerce is strongly related to the overall sales revenues and the employment of permanent and non-permanent workers of MSMEs. First, the proportion of online sales has a nonlinear or u-shaped (convex) relationship with MSMEs’ sales revenues and growth prospects, especially during the second half of 2020 (Appendix Table A1). This means that sales revenues or sales growth prospects may have decreased as the online sales share increased to about 30% of the total sales, but the actual sales and growth prospects may have improved if the online sales share exceeded that point. This relationship is not significant according to the first-wave data. Second, we found that the intensity of online sales also exhibits a significant nonlinear relationship with MSMEs’ permanent and non-permanent employment. However, unlike our observation for sales, this relationship is significant throughout 2020 (Appendix Table A2). This finding means that layoffs of employees may have intensified to a point at which the online sales share exceeded 40% of the total revenues, but the job cuts moderated if their online sales share surpassed that point. In sum, these findings point to the growing importance of digitalization for MSMEs to survive the pandemic shocks. Based on the regression analyses, we predicted that the probability of having over 40% online sales declined at different levels of online commerce shares in actual sales and growth prospects for future sales (Figure 5) as well as temporary and permanent employment (Figure 6). As Figure 5 shows, the degrees of curvature of actual sales and growth prospects are sharper in late 2020, and online sales are not significant according to the first-wave data. In early 2020, the digitalization of MSMEs could rarely predict whether they would lose a substantial amount of sales, but, in late 2020, digitalization became increasingly more critical for MSMEs as their survival seems to have been conditional not just on whether they had online sales but also on the extent to which they could digitalize their marketing. Similarly, we predicted the probabilities of cutting permanent and non-permanent employment by more than 40% at different intensities of online sales (Figure 6). The figure shows similar concave curves, which peak at around 30–40% in early and late 2020. The probability of cutting non-permanent employees is also located slightly lower in late 2020 than in early 2020. We also found that MSMEs’ digitalization could benefit both menand women-led firms almost equally. The findings imply that increasing online commerce had the potential to transform the trajectory of MSMEs, including vulnerable firms, by boosting their revenues and employment even amid the prolonged pandemic shocks. ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 15 Figure 5: Probabilities of Losing over 40% of Actual Sales and Growth Prospects and Digitalization Intensity in Early and Late 2020 Source: COVID-19 MSME Survey, ADBI. Figure 6: Probabilities of Cutting over 40% of Permanent and Non-permanent Employees and Digitalization Intensity in Early and Late 2020 Source: COVID-19 MSME Survey, ADBI. ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 16 We then attempted to characterize the MSMEs that have more online sales and those that intend to expand their online sales. Our findings show that women-led, younger, or export-oriented firms tended to have more online sales than their respective counterparts (columns (1)–(3) in Appendix Table A4). Among various industries, more firms in hospitality industries, such as food and drink services and hotels, and education service providers tended to have more online sales, particularly in the second-wave sample. We also found that younger firms and export-oriented firms had a stronger intention to expand their online sales share (columns (4)–(6) in Appendix Table A4). Furthermore, firms with over half of their total sales coming from online sales were more willing to increase their online sales in the coming months. The gender of MSMEs’ heads or firm size was not significant in relation to the intention to expand online sales. Further research, however, is necessary to understand MSMEs that had no online sales and to determine what could motivate them. 3.5 Government Aid for MSMEs This section examines the government support that MSMEs have received and still feel to be necessary to cope with the COVID-19 shocks. Three types of government support are in focus: (a) any assistance, covering all types of assistance; (b) tax-related support (e.g., tax payment deferrals, tax exemptions, and lowered tax); and (c) loanrelated support (e.g., rescheduling of bank loans and emergency loans). More than half of the firms needed tax-related support, with considerable variations among countries. For example, around 70% of Vietnamese sample firms but only 8% in Bangladesh and 15% in Indonesia reported that they needed tax-related support. Nearly 70% of sample firms in Malaysia and Bangladesh but only around 20% of Indonesian firms reported the need for loan-related support. Appendix Table A5 presents the estimation results regarding whether firms have received or needed any kind of government support. First, we found that the secondwave survey dummy was positive and significant, suggesting an overall increase in MSMEs receiving government support over time (column (3) of Appendix Table A5). Second, women-led MSMEs, hard-hit sectors, and microenterprises showed a negative association with receiving government support in the second half of 2020. This finding suggests that MSMEs in the hard-hit sectors, firms with female leaders, and microenterprises were less likely to receive government support than their counterparts in the second half of 2020. Third, export-oriented firms and long-established firms had a close association with receiving any government support. We turn now to the regression results concerning MSMEs’ need for government support. Again, we found that the second-wave survey dummy was positive and significant, suggesting an overall increase in firms needing government support over time (column (6) of Appendix Table A5). However, only women-led firms had a negative association with such a need according to the second-wave sample (columns (5) and (6)). Next, we focused specifically on loanand tax-related support, obtaining similar findings overall. Specifically, women-led firms, microenterprises, and hard-hit sector dummies (only loan related) had a negative association with these specific kinds of government support (Appendix Tables A6 and A7). However, one exception was that the second-wave survey dummy was negative and significant for receiving both loanand tax-related support, suggesting that fewer firms received loanand tax-related support in late 2020. In addition, women-led firms and microenterprises had a negative association with the need for taxor loan-related support. In sum, our findings revealed that MSMEs in vulnerable conditions, such as firms with female ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 17 leaders, microenterprises, or firms in the hard-hit sectors, were relatively less likely to have received or demanded government support, despite their disparate situations. 4. CONCLUSION This study provides a comprehensive analysis of MSME business owners’ responses to the severe global pandemic shocks based on new data that we collected over 2020 in eight developing countries across Asia. MSMEs have played an essential role in sustaining Asia’s economic growth and absorbing the growing working population in the region for several decades. However, their economic activity has contracted significantly due to sudden shocks, especially the stringent government policy responses, and a rapidly shrinking demand due to the global pandemic. Moreover, relative to large-scale companies, MSMEs have inherited more challenges, which place them in vulnerable situations. Thus, the recurrent pandemic waves may have exacerbated their hardship, and many of them are approaching business failure despite striving to survive. The study described the overall evolving situation of MSMEs. While the general picture showed that they started regaining the substantial losses in actual sales revenues and suspended the reduction of the number of non-permanent workers toward the end of 2020, they remained unable to recover their confidence in their future prospects and permanent workers by the end of 2020, which may also pose uncertainty for their business survival and sustainable development. The general trend may mask a significant disparity emerging among small business owners, which may worsen. MSMEs in hard-hit sectors (i.e., food processing, textiles, wholesale/retail trading, hospitality services, and education) and vulnerable conditions, such as women-led firms and microenterprises, have not experienced the general positive trend. As shown, the characteristics of hard-hit sectors and vulnerable groups are quite closely correlated. Without shocks, they were relatively more prone to any risks due to their limited working capital and limited access to finance. The findings also revealed that these vulnerable MSMEs were more likely to reduce their number of employees, which will damage their operation in the long term. Despite the significant hardship for MSMEs, the vital role of digitalization and government support appeared hopeful. We showed that intensifying online sales benefited menand women-led MSMEs equally and did not discriminate microenterprises or specific sectors. Moreover, the study found a nonlinear relationship with sales and employment in late 2020, suggesting that the use of online sales decreases sales and displaces labor input up to a certain point but that larger-scale use of online sales increases sales and creates jobs. An urgent question concerns how governments can support MSMEs to boost their digitalization. In addition, despite increases in the number of MSMEs receiving government support, the provision has not reached the most affected or vulnerable firms, such as firms operating in hard-hit sectors, firms with female leaders, or microenterprises. Thus, governments could improve their targeting and design support to meet their needs. While the vaccine rollout is advancing in many countries, the pandemic shocks are still far from over. As the economy gears up for a speedy recovery, supporting MSMEs remains a critical and urgent challenge. The evidence from this study should be helpful for policymakers in crafting policy responses to support MSMEs in surviving the hardship. ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 18 REFERENCES Abebe, G., Bundervoet, T., and C. Wieser. 2020. “Does the COVID-19 Pandemic Affect Women-Owned Firms Differently?” Monitoring COVID-19 Impacts on Firms in Ethiopia; No. 4. Washington, DC: World Bank. Aga, G., D. C. Francis, and J. Rodriguez Meza. 2015. “SMEs, Age, and Jobs: A Review of the Literature, Metrics, and Evidence.” Policy Research Working Paper No. 7493. Washington, DC: World Bank. Apedo-Amah, Marie Christine, Besart Avdiu, Xavier Cirera, Marcio Cruz, Elwyn Davies, Arti Grover, Leonardo Iacovone, Umut Kilinc, Denis Medvedev, Franklin Okechukwu Maduko, Stavros Poupakis, Jesica Torres, and Trang Thu Tran. 2020. “Unmasking the Impact of COVID-19 on Businesses: Firm Level Evidence from Across the World.” Policy Research Working Paper No. 9434. Washington, DC: World Bank. Asian Development Bank (ADB). 2021. Asian Development Outlook 2021: Financing a Green and Inclusive Recovery. Manila: Asian Development Bank. Bartik, A., M. Bertrand, Z. Cullen, E. Glaeser, M. Luca, and C. Stanton. 2020. “The Impact of COVID-19 on Small Business Outcomes and Expectations.” Proceedings of the National Academy of Sciences 117 (30): 17656–66. Bruhn, M., D. Karlan, and A. Schoar. 2018. “The Impact of Consulting Services on Small and Medium Enterprises: Evidence from a Randomized Trial in Mexico.” Journal of Political Economy 126 (2): 635–87. Du Rietz, A. and Henrekson, M. 2000. “Testing the Female Underperformance Hypothesis.” Small Business Economics 14(1): 1–10. Fairlie, R. W. 2020. “The Impact of COVID-19 on Small Business Owners: Evidence of Early-Stage Losses from the April 2020 Current Population Survey.” NBER Working Paper 27309. Cambridge: National Bureau of Economic Research. Fang, H. 2021. COVID-19: The Impact on the Economy and Policy Responses—A Review. ADBI Working Paper Series. No. 1236. Tokyo: Asian Development Bank Institute. Available: https://www.adb.org/publications/covid-19-impacteconomy-policy-responses-review. Gibson, T., and H. J. van der Vaart. 2008. Defining SMEs: A Less Imperfect Way of Defining Small and Medium Enterprises in Developing Countries. Brookings Global Economy and Development. https://www.brookings.edu/wpcontent/uploads/2016/06/09_development_gibson.pdf. Gourinchas, P., S. Kalemli-Özcan, V. Penciakova, and N. Sander. 2021. “COVID-19 and SME Failures.” NBER Working Paper 27877. National Bureau of Economic Research, Inc. Guo, H., Z. Yang, R. Huang, and A. Guo. 2020. “The Digitalization and Public Crisis Responses of Small and Medium Enterprises: Implications from a COVID-19 Survey.” Frontiers of Business Research in China 14: 19. Hale, T., N. Angrist , R. Goldszmidt, B. Kira, A. Petherick , T. Phillips, S. Webster, A. Cameron-Blake , L. Hallas, S. Majumdar, and H. Tatlow. 2021. “A Global Panel Database of Pandemic Policies (Oxford COVID-19 Government Response Tracker).” https://www.bsg.ox.ac.uk/research/research-projects/covid-19government-response-tracker. ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 19 Higuchi, Y., E. P. Mhede, and T. Sonobe. 2019. “Shortand Medium-Run Impacts of Management Training: An Experiment in Tanzania.” World Development 114 (C): 220–36. Higuchi, Y., V. H. Nam, and T. Sonobe. 2015. “Sustained Impacts of Kaizen Training.” Journal of Economic Behavior and Organization 120 (C): 189–206. Liu, Y., S. Wei, and J. Xu. 2021. “COVID-19 and Women-Led Businesses around the World.” Finance Research Letters: 102012. https://doi.org/10.1016/ j.frl.2021.102012. Lu, Y., J. Wu, J. Peng, and L. Lu. 2020. “The Perceived Impact of the Covid-19 Epidemic: Evidence from a Sample of 4807 SMEs in Sichuan Province, China.” Environmental Hazards 19 (4): 323–40. McCullagh, P. 1980. “Regression Models for Ordinal Data.” Journal of the Royal Statistical Society. Series B (Methodological) 42 (2): 109–42. Accessed 4 June 2021. http://www.jstor.org/stable/2984952. McKenzie, D. 2020. “Small Business Training to Improve Management Practices in Developing Countries: Re-assessing the Evidence for ‘Training Doesn’t Work.’” Oxford Review of Economic Policy, forthcoming. McKenzie, D., and C. Woodruff. 2017. “Business Practices in Small Firms in Developing Countries.” Management Science 63 (9): 2967–81. Pucheta-Martínez, M. C. and Gallego-Álvarez, I. 2020. “Do Board Characteristics Drive Firm Performance? An International Perspective.” Review of Managerial Science 14(6): 1251–1297. Pueyo, A., Carreras, M., and Ngoo, G. 2020. “Exploring the Linkages between Energy, Gender, and Enterprise: Evidence from Tanzania.” World Development 128: 104840. Shafi, M., J. Liu, and W. Ren. 2020. “Impact of COVID-19 Pandemic on Micro, Small, and Medium-Sized Enterprises Operating in Pakistan.” Research in Globalization 2: 100018. Shinozaki, S., and L. Rao. 2021. “COVID-19 Impact on Micro, Small, and MediumSized Enterprises under the Lockdown: Evidence from a Rapid Survey in the Philippines.” ADBI Working Paper No. 1216. Tokyo: Asian Development Bank Institute. Sonobe, T., A. Takeda, S. Yoshida, and H. Truong. 2021. “The Impacts of the COVID-19 Pandemic on Micro, Small, and Medium Enterprises in Asia and their Digitalization Responses.” ADBI Working Paper No. 1241. Tokyo: Asian Development Bank Institute. UN Women. 2020. Leveraging Digitalization to Cope with COVID-19: An Indonesia Case Study on Women-Owned Micro and Small Businesses. Jakarta: UN Women. World Health Organization (WHO). 2020. “Coronavirus Disease (COVID-19) Pandemic: Public Advice.” Accessed 17 June 2021. https://covid19.who.int/. ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 20 APPENDIX Appendix Figure A1: Government Response Stringency Index, February 2020–April 2021 Note: This is a composite measure based on nine response indicators, including school closures, workplace closures, and travel bans, rescaled to a value from zero to 100 (100 = strictest). If policies vary at the subnational level, the figure shows the index as the response level of the strictest sub-region. Source: Hale et al. (2021). ADBI Working Paper 1286 Igarashi, Takeda, Truong, and Sonobe 27 Appendix Table A7: Estimated Functions Explaining Received Loan-Related Support and Need for Loan-Related Support: Logit Regressions 2 (2) (3) (4) (5) (6) Only W1 Only W2 All Only W1 Only W2 All Variables Received Loan-related Support Needed Loan-related Support Second survey wave –0.550*** –0.154* (0.093) (0.079) Women-led firms –0.204 –0.275** –0.314** –0.066 –0.132 –0.068 (0.139) (0.133) (0.128) (0.115) (0.110) (0.108) Second wave ## women-led firms 0.105 –0.071 (0.173) (0.141) Firm age (years) –0.000 0.010** 0.004 –0.009** –0.015*** –0.011*** (0.005) (0.005) (0.003) (0.004) (0.005) (0.003) Export oriented 0.276* 0.341** 0.290*** 0.009 0.178 0.093 (0.151) (0.151) (0.105) (0.129) (0.125) (0.089) Microenterprise –0.723*** –0.397** –0.595*** 0.026 –0.209 –0.055 (0.157) (0.168) (0.112) (0.135) (0.140) (0.096) Small enterprise –0.028 –0.039 –0.027 0.211 –0.134 0.078 (0.152) (0.174) (0.112) (0.136) (0.148) (0.099) Online sales in 2019 0.698 0.956 0.778* 0.184 0.903* 0.385 (0.670) (0.693) (0.470) (0.570) (0.544) (0.385) Online sales in 2019—squared –0.728 –1.470* –1.028* –0.411 –1.111* –0.607 (0.757) (0.839) (0.546) (0.640) (0.636) (0.443) Manufacturing—food processing 0.226 –1.078*** –0.548*** –0.192 –0.279 –0.289 (0.344) (0.277) (0.211) (0.291) (0.252) (0.188) Manufacturing—textiles and leather –0.604 –0.841* –0.669* 0.405 –0.381 –0.083 (0.717) (0.460) (0.385) (0.559) (0.415) (0.327) Services—tourism, food and drink services 0.146 –2.005*** –1.011*** –0.499 –1.015*** –0.818*** (0.412) (0.423) (0.275) (0.346) (0.314) (0.230) Services—wholesale/retail trading 0.224 –1.287*** –0.725*** –0.421 –0.426* –0.435** (0.373) (0.296) (0.228) (0.310) (0.255) (0.195) Services—information and education –0.361 –1.674*** –1.165*** –0.767** –1.192*** –1.052*** (0.470) (0.440) (0.310) (0.375) (0.341) (0.250) Constant 1.292*** 0.821*** 1.427*** 0.579* 1.534*** 1.211*** (0.393) (0.306) (0.241) (0.331) (0.284) (0.216) Observations 2,071 2,262 4,333 2,071 2,262 4,333 Country FE Yes Yes Yes Yes Yes Yes Sector FE Yes Yes Yes Yes Yes Yes Pseudo R-squared 0.220 0.137 0.175 0.0736 0.0929 0.0744 Log-likelihood –1,020 –1,006 –2,072 –1,329 –1,400 –2,764 Notes: The numbers in parentheses are standard errors. ***, **, and * indicate the 1%, 5%, and 10% significance levels, respectively. “W1” refers to the first-wave survey period (early 2020), and “W2” refers to the second-wave survey period (late 2020). The notes to Table 1 and Table 2 define the dependent variables and explanatory variables, respectively. The coefficient of “second survey wave” indicates the difference from the first survey wave. “Second wave ## womenled firms” is the interaction term of the second-wave survey dummy and the women-led firm dummy. All the specifications include country and sector fixed effects.