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. Using the World Bank’s Enterprise Surveys (ES) COVID-19 Follow-Up Surveys for about 8,000 firms in 23 emerging and developing countries in Europe and Central Asia, matched with 2019 ES data, the paper finds that economic activity was reallocated toward firms with higher pre-crisis labor productivity during the COVID-19 crisis. 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 to 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 they went to less productive and larger firms, regardless of their pre-crisis innovation