The spread of the COVID-19 virus followed by lockdown measures and changes in economic behaviour have severely impacted businesses. Governments worldwide responded with a diverse and sizeable set of support instruments – including wage subsidies, tax deferrals, loan guarantees, and allowances for fixed costs – to protect employment and help businesses stay afloat. These support schemes and lockdown measures can affect future productivity via business dynamics through two main channels: firm entry and exit. The consequences of these measures for businesses are becoming increasingly visible. Using data from Q1 2007 to Q4 2020,1 we investigate how business dynamics have changed during the COVID pandemic and how they vary across different firm sizes, sectors, and other economic crises such as the Global Crisis. Our results highlight that business dynamics in 2020 looked very different from dynamics in the years preceding COVID-19 or during the Global Crisis of 2008/2009, and there are reasons to be concerned.
New business entries have slowed down in all sectors except wholesale and retail trade
Entries for businesses with more than one person have strongly declined.2 This is worrisome as this decline represents missed opportunities for innovation and productivity growth. The overall number of business entries, including one-person firms, increased slightly by 0.5% from 2019 to 2020. A closer look indicates that this positive increase in 2020 was mainly driven by one-person businesses. Entries for businesses with more than one person declined by about 6.4% from 2019 to 2020 (Figure 1). Entries of businesses with two to ten employees and ten to 50 employees have by about 28.6% and 6.0% respectively, indicating that SMEs have been hit harder than others.
Figure 1 Change in business dynamics (year-on-year, %)
Source: Statistics Netherlands (CBS)
Note: Only businesses with more than one-person are included here. However, in the case of bankruptcies, all businesses are included (including one-person businesses) due to data constraints.
In 18 of the 19 sectors, the number of new firms with more than one employee declined. The only sector with an increase in new firms in 2020 is the wholesale and retail trade sector, with 26.5% more compared to 2019. A large portion of these new firms happen to be online retailers (Figure 2). This large increase is consistent with an ongoing push towards remote interactions between consumers and businesses, and the pandemic seems to have amplified this trend of more remote interactions. Other developed countries such as the US and France have experienced a similar surge in online retailers during the pandemic (Buffington et al. 2021).
Figure 2 Increase in online businesses in retail trade sector
Source: Dutch Chamber of Commerce (KvK)
Business exits for multi-person businesses remained unchanged in 2020, whereas they went up by 32% during the Global Crisis in 2009
Exits of businesses with more than one person remained almost unchanged (0.8%) from 2019 to 2020.3 This is different from what we saw in the Global Crisis. Then, exits of businesses with more than one person went up by about 32% from 2008 to 2009 (Figure 1). This indicates that during the first year of COVID-19 there is less scope for productivity-enhancing reallocation. The difference between this and the Global Crisis can perhaps be explained by the economic support schemes.
Bankruptcies are at their lowest level in more than two decades
The number of bankruptcies dropped by 17% from 2019 to 2020. However, the hardest hit (contact-intensive) sectors, such as accommodation or food services, saw an increase in overall bankruptcies. Economic crises are generally associated with an increase in bankruptcies (Figure 3) since businesses who suffer losses find it hard to stay afloat and many end up failing (Djankov and Zhang 2021). For example, from 2008 to 2009, overall bankruptcies in the Netherlands went up by about 53%.
This decline in bankruptcies can be explained by two factors. First, the multifaceted policy response may have helped businesses to stay afloat by providing accommodative financial conditions. Second, Ebeke et al. (2021) argue that businesses in advanced economies entered the COVID-19 pandemic in a much better shape in terms of corporate profitability, levels of indebtedness, and presence of initial cash buffers as compared to the Global Crisis, which might have played some role in keeping bankruptcies at bay. Moreover, the closure of courts during the lockdowns and change in bankruptcy laws might also have played an important role in keeping bankruptcies low – at least for the time being. On one hand, this decrease in bankruptcies is a positive sign that illustrates the usefulness of policy response in helping businesses stay afloat and in protecting employment. On the other hand, it brings worries too as it might jeopardise future productivity (Blanchard et al. 2020).
Figure 3 Change in bankruptcies from Q1 1981 to Q4 2020
Source: Statistics Netherlands (CBS)
Note: “Natural persons” are personally legally liable for all business acts. Grey bars represent economic recessions where GDP growth rate was negative.
Our results suggest that there are reasons to be concerned, as fewer firms than expected have quit the market and fewer new firms have entered than in normal times. A steep decline in bankruptcies (including non-viable firms that might have gone bankrupt without government support) brings worries as it may jeopardise future productivity, impair resource allocation, and stifle output growth. These worries relate to the longer term. Thanks to the economic support schemes, short-term worries about quick increases in unemployment have been stalled for now.
As the economy slowly starts to emerge from the lockdown, it is important to restart the economy and ensure productivity-enhancing resource allocation. Policymakers will be facing complex trade-offs in the near future. On one hand, it seems desirable to continue support to businesses to minimize bankruptcies and exits of viable but insolvent firms so that jobs can be protected, especially in the hardest hit sectors. On the other hand, it would be crucial to prevent ‘zombie feeding’ of non-viable firms, to preserve market efficiency, and to avoid unsustainable levels of public debt. A more targeted approach of smart debt restructuring, in cooperation with private lenders, is likely to be needed going forward.
Blanchard, O, T Philippon and J Pisani-Ferry (2020), “A new policy toolkit is needed as countries exit COVID-19 lockdowns”, Policy Contribution 12/2020, Bruegel.
Buffington, C, D Chapman, E Dinlersoz, L Foster, and J Haltiwanger (2021), “High Frequency Business Dynamics in the United States During the COVID-19 Pandemic”, US Census Bureau, Center for Economic Studies.
Djankov, S and E Zhang (2021), “As COVID rages, bankruptcy cases fall”, VoxEU.org, 4 February.
Ebeke, C H, N Jovanovic, L Valderrama and J Zhou (2021), “Corporate Liquidity and Solvency in Europe during COVID-19: The Role of Policies”, IMF Working Papers, No. 2021/056.
1 The data on business entries and exits are obtained from Statistics Netherlands (CBS) from Q1 of 2007 to Q4 of 2020, whereas the data on bankruptcies are available from Q1 1980 to Q4 2020. The data on online businesses come from the Dutch Chamber of Commerce (KvK).
2 A business entry refers to a genuine new firm, i.e. name changes or mergers or takeovers are not included.
3 An exit occurs when a firm with its employees is no longer active. A firm can exit voluntarily or involuntary via a bankruptcy. A merger or acquisition in itself does not constitute an exit.