SMEs Amidst the Pandemic and Reopening: Digital Edge and Transformation

Using administrative universal firm registration data as well as primary offline and online surveys of small businesses in China, we examine (i) whether digitization helps Small and Medium Enterprises (SMEs) better cope with the COVID-19 pandemic, and (ii) whether the pandemic has spurred digital technology adoption. We document significant economic benefits of digitization in increasing SMEs’ resilience against such a large shock, as seen through mitigated demand decline, sustainable cash flow, ability to quickly reopen, and positive outlook for growth. Post the January 2020 lockdown, firm entries exhibited a V-shaped pattern, with entries of e-commerce firms experiencing a less pronounced initial drop and a quicker rebound. Moreover, the pandemic has accelerated digital transformation of existing firms and the aggregate industry in multiple dimensions (e.g., altering operation scope to include e-commerce, allowing remote work, and adopting electronic information systems). The effect persists one year after full reopening, offering suggestive evidence for the long-term impact of the pandemic and transitory mitigation policies.