Competition and firm recovery post-COVID-19

This paper examines the impact of the COVID-19 crisis on the reallocation of economic activity across firms and whether this reallocation depends on the competition environment. The paper uses the World Bank’s Enterprise Surveys COVID-19 Follow-up Surveys for about 8000 firms, including both small and large firms, in 23 emerging and developing countries in Europe and Central Asia, matched with 2019 Enterprise Surveys data. It finds that during the COVID-19 crisis, smaller firms were hit harder, and economic activity was reallocated toward firms with higher pre-crisis labor productivity. Countries with a strong competition environment experienced more reallocation from less productive to more productive firms than countries with a weak competition environment. The evidence also suggests that reallocation from low- to high-productivity firms during the COVID-19 crisis was stronger compared with pre-crisis times. Finally, the analysis shows that government support measures implemented in response to the crisis may have adverse effects on competition and productivity growth since support went to less productive and larger firms, regardless of their pre-crisis innovation.