What contributes to SME vs. large firm resilience to economic crisis in developing countries? A decomposition analysis based on the COVID-19 shock

A key concern with small and medium enterprises (SMEs) is that they are less resilient to economic crises than large firms, thereby magnifying a crisis’ impact. However, for developing countries, a formal analysis of the issue is lacking. This study uses the mean Kitagawa–Oaxaca–Blinder decomposition and the quantile decomposition methods to analyze the difference in the decline in sales of SMEs and large firms (the “gap”) following the outbreak of COVID-19 in 19 developing countries. The decline in sales was bigger for SMEs by 12.2% points. Several factors are identified together with an estimate of their contribution to the gap, essentially laying out a policy roadmap. Some important findings are as follows. First, relative to large firms, SMEs experienced more inputs supply disruptions during the pandemic, had lower initial labor productivity, and were concentrated in country-industry cells with a bigger sales decline. These differences in “endowments” widen the gap. SMEs also suffered more than large firms from a given level of financial constraints, inputs supply disruptions, and country-industry specific factors, and benefitted less from initial labor productivity. These differences in the returns to factors or “structural” effects also widen the gap. Second, the gap is much larger at the relatively high quantiles of sales decline distribution. Thus, relative to large firms, SMEs’ sales are less resilient to large shocks than small shocks. Third, individual factors’ contributions to the gap vary across the sales decline distribution. Thus, optimal policy mix depends in part on the shock’s magnitude. Industry-specific differences in the contributions of the factors and their policy implications are also discussed.