Firms’ Resilience Firms’ Resilience, Innovation and Technology’
Online Conference Organized by the Private Sector Development Research Network
Over the course of just a few weeks, COVID19 has brought unprecedented disruption to economic activity, leaving millions of workers unemployed and bringing about a collapse in trade, investment and financial markets. This crisis has highlighted the importance of coordinated public and private sector action to help fill financing gaps and has emphasized the critical role of access to timely data and analyses for decision-making. The crisis also showcased the extraordinary creativity and agility of private firms as they adapted to the new difficult circumstances. As the world is moving towards a recovery from the pandemic, it is essential to take stock of lessons learned and to use them to build a private sector that is more resilient and sustainable.
The virtual conference on ‘Firms’ Resilience, Technology and Innovation’ offered an opportunity to bring together different ecosystems – DFIs and donor agencies involved in private sector development, academics and think-tanks – to discuss research, data, analysis and evidence; to set the agenda for future research; and to foster research collaboration.
The event focused primarily on actions and behaviors of private firms, investors, and markets. Conference participants discussed the changing landscape of firms in developing countries, the problems they face, and the solutions proposed based on past and recent learnings with a specific focus on resilience, innovation and technology.
In his opening remarks to conference participants, Eric Parrado highlighted the importance of the Private Sector Development Research Network as a partnership between academia, development finance institutions and think tanks to inform how best to support a resilient recovery. The pandemic, Parrado emphasized, served as a wake-up call for the international community, highlighting persistent inequalities, gender gaps and insufficient progress with respect to climate action. In thinking about the recovery, everyone should be aware that the crisis will have long-lasting consequence. Research, especially data and analysis, is a critical part of the toolkit to enable a sustainable recovery, as interventions need to be informed by high quality data and sound analysis. Parrado extended the call to participants who are not yet actively involved to join the PSDRN.
Moderated by Denis Medvedev, Practice Manager for Firm Capabilities and Innovation, Finance, Competitiveness & Innovation at the World Bank.
Panelists: Albert Bravo Biosca, Founding Director of the Innovation Growth Lab, Yasuyuki Todo, Professor, Graduate School of Economics at Waseda University, Chandran Nair, Founder and CEO of Global Institute for Tomorrow.
Denis Medvedev opened the plenary highlighting evidence that firms are adapting to new realities around the globe – the World Bank Business Pulse Survey data suggests that an average of 30% use more digital technologies because of COVID19; 15% have invested in new technologies. However, Medvedev pointed that adoption has been uneven: firms in Africa and South Asia in particular have been slower to adopt new technologies. Moreover, there is evidence of bottling of responses, where large firms are making many adjustments at once, and others are left behind.
Panelists were in agreement, describing ways in which different innovations have arisen as a response to the pandemic as well as aspects that relate to their medium-to-longer term persistence and impact. A key question, according to Albert Bravo Biosca is what will be the long-term impacts of COVID on innovation. Bravo Biosca highlighted that incentives to undertake investment in innovation will be weaker in markets that become more concentrated. But the agility that businesses have demonstrated may persist. And the accelerated digitization of many businesses may unlock a new period of faster productivity growth. Governments are taking immediate steps to support firms, but will they continue supporting them in an agile manner post-COVID, perhaps in a more structured way to learn what really works? An example to replicate comes from Britain’s “Business Basics” program, an experimentation fund that tests interventions from across the ecosystem to accelerate the adoption of better management practices and technologies among SMEs, with the view of scaling up the most successful ones.
Research collaboration is critical to support the innovation process taking place, according to Yasuyuki Todo, who presented new evidence on research collaboration linkages across countries and Japan in particular. Todo highlighted that open innovation is necessary, and there is greater need for mediators between public and private actors to support innovation.
Chandran Nair emphasized the need for wholesale change to make progress on development objectives in the current times. “We need to debunk the idea that every innovation will be digital” stressed Nair – the food system is broken in developing countries, water sanitation prevents health fforts, and the pandemic has brought up the question of innovation in these pressing areas. How innovation will look like (waterless toilets for example) and whether we can use digital technologies to support them remain open questions. Social innovation is critical to advance these objectives, according to Nair. China is one such country that innovated with a social contract that was draconian to address the impact of covid19. “The private sector cannot be the basis of which we approve technology and deliver progress. Regulators are captured by business interests and misinformed about how prosperity is created.” stressed Nair. But change needs to be fast. “When we say that things will take too long to change means, we don’t want to change.” Nair closed his remarks with advice to business leaders to look at the purpose of their innovation – ask whether it is essentially necessary or not.
Adding to previous remarks about constraints to innovation during the pandemic, Irene Arias stressed the necessity for real commitment to solve problems, which few firms actually have. Innovation is necessary; staying the same is not an option. But markets are not equally prepared to support it - some regions such as Latin America lag behind in terms of infrastructure that will allow them to seize opportunities. At the same time, Arias highlighted that there might be less need to rely on such infrastructure moving forward. New operational models allow problems to be solved with new tools, such as blockchain. Development finance institutions require a cultural change to support these innovations, of which Arias provided several examples.
Chaired by Ugo Panizza, Graduate Institute of International and Development Studies.
Presenters: Alen Mulabdic, World Bank Group, Florian Leon, FERDI, Gianluca Gucciardi, European Commission. Key theme: This session brought together research examining how firms in different sectors reacted and adapted to extreme events including natural disasters, civil conflict and the most recent pandemic.
Alen Mulabdic presented the paper Natural Disasters and Reconfiguration of Global Value Supply Chains, which empirically assesses firms’ responses to shocks in global supply chains. Examining the case of the 2011 Japanese earthquake, the authors find that firms shifted away from importing components from Japanese suppliers to low-cost suppliers in developing countries. They find no evidence of re-shoring, nearshoring or greater supplier diversification.
Florian Leon presented a paper examining how firm productivity recovered in Cote d’Ivoire after a systemic shock arising from local civil conflict. The authors find that firms recovered only partially, even in the long-run. Recovery was heterogeneous across firms, with labor intensive firms and those with better credit access faring better than others.
Gianluca Gucciardi presented results on venture capital reallocation following COVID-19. Despite a limited impact of COVID19 on the global venture capital market, the crisis induced greater reallocation towards pandemic-related deals, particularly in firms linked to the health value-chain.
Questions from the audience focused on unbundling specific results, such as on the puzzling effect of an
increase in electronics imports following supply chain shock and on the role of contract flexibility in
building firm resilience.
Chaired and moderated by Nancy Lee, Center For Global Development
Presenters/Panelists: Elizabeth Vazquez, WEConnect International, Sreelakshmi Papineni, Africa Gender Innovation Lab at the World Bank, Charles Mudiwa, Chief Executive of Stanbic Bank Kenya,
This mixed presentation and discussion session was developed around the fact that women-owned enterprises are suffering disproportionally from the COVID19 related economic fallout: They are seeing higher business closure rates and female entrepreneurs are able to devote less time to business as they are shouldering more domestic responsibilities.
Sreelakshimi Papineni presented on the results from The Future of Business Survey – a new source capturing information from SMEs with Facebook accounts in more than 40 developed and emerging economies. Data from May through October 2020 suggests that firms were hit hard at the height of the first wave of the pandemic, with SME closure rates ranging between 20 and 40% across all regions in May. Women-owned businesses are disproportionately affected with higher business closures and lower access to finance, in the form of a credit line. Women-led businesses are less able to devote time to their business, mainly because women also shoulder more domestic responsibilities
Elizabeth Vasquez Vazquez introduced WECommunity, a new multilingual online platform helping women-owned businesses based in more than 100 countries access new markets and connect with qualified buyers representing over US$1 trillion in annual purchasing power. Vazquez presented the results of the WEConnect International survey on COVID-19 impacts and highlighted new financial challenges for women-owned businesses, such as inability to receive payments for products and services already rendered, the need for new contracts and other sources of capital and the inability to pay employees. She emphasized technology adoption and digital business models as ways to create opportunities for women-owned businesses and shared examples of how women business owners are trying to innovate and build resiliency.
Charles Mudiwa reported on the day-to-day challenges that his institution sees with respect to women-owned businesses. He emphasized that women-owned enterprises face both professional and personal struggles, shouldering the majority of domestic responsibilities in their families. Supporting women via child-care arrangements and other measures that enables them to dedicate more time towards their business hence will be crucial. In addition, providing training on supply and procurement process, as well as connecting them to global supply chains proves valuable.
Participants: Discussion with various participants, introduced by Dirk Willem te Velde, ODI.
This breakout session explored resilience through the lens of a sector particularities (as opposed to firm), exploring the ways in which sector conditions like governance and information flows enable or impede the ability of firms to respond to shocks and stresses.
Dirk Willem te Velde introduced the importance of resilience at the sector level and invited presenters to discuss different ways of supporting firms and firms’ resilience at the sectoral level, and whether/how DFIs should engage at the sector level.
Justin Highstead discussed the importance of having a sector approach to resilience, arguing also that political risk is a key component of firms’ resilience since all companies need political room to operate. A key success factor is the ability to engage with governments to determine a vision for a sector regarding how it contributes to a country’s economic structure. Thus, adequate resilience requires a combination of a public and private sector approach. Highstead recommended to look at the type and scope of an industry and assess (1) ways to collaborate with the government and (2) ways for governments to influence success.
Participant interventions highlighted the risk of too strong of a sector approach given that currently DFIs rather lack capacities for engaging at the subsector and firm level. Other participants shared experiences of engaging with firms in country contexts of war, famine, and recently, COVID-19 highlighting the necessity to engaging collaborative action across entities, including (local) governments, companies, networks, and other actors for interventions to be sustainable.
Participants: Discussion with various participants, introduced and moderated by Alexandros Ragoussis, IFC.
Alexandros Ragoussis opened the discussion inviting participants to discuss proposals, areas of ongoing work and areas of collaboration, with a focus on operational relevance – highlighting that DFI interventions beyond lending remain understudied.
Participants discussed ongoing research on the COVID19 impact on SMEs, as well as partnerships with academia for inciting actionable academic research. Others highlighted the value of learning from past extraordinary events to understand firm behavior under uncertainty. Identified research gaps include digital adoption (esp. e-commerce), climate change adaptation, value chain shifts and the interaction of health and investment. A common thread has been the willingness to collaborate more effectively and exchange information on ongoing work.
Hosted by Alessandro Maffioli, Chief of the Development Effectiveness Division at IDB Invest.
In her keynote address, Susan Athey described the ways in which COVID19 affects the ongoing structural trend towards digitalization and automation, especially in advanced economies. COVID19 accelerated automation as it led to labor substituting investments which are unlikely to be rolled back. By reinforcing remote work models, the pandemic might have showcased a new solution to the perennial problem of an increasing rural urban divide, especially in high tech industries where the shortage of workers acts as a constraint. It offered a solution to increase education but also showcased a lack of knowledge about the learning outcomes of online education. She argues that whilst now we know how to teach at low costs, we do not know whether we are teaching the right skills that set people up for success. Many behavioral skills needed for the workplace might be the byproduct of in-person education. Moreover, institutions will need to adapt to ensure that non-traditional education can be trusted and that we can match supply and demand.
Regarding the questions of whether AI and digitization will be beneficial to society, Susan Athey pointed towards a choice. Technology can be labor enhancing or labor substituting; the type of R&D investments undertaken will drive that outcome - though private incentives might be biased towards investing in labor substituting technology. Moreover, Athey argued that the beneficial impact of the same technology may depend on the market environment, as taking advantage of new technological application may be contingent on the presence of enabling public goods. Electronic money transfers for instance require digital identifiers and education requires access. Other examples highlighted referred to algorithmic approaches such as Generalized Adversial Networks, adaptive experiments, bandits and reinforcement learning to solve public policy challenges. Since the sources of profit in these models is data, not the underlying algorithmic infrastructure, the latter can be cheaply adopted. At the same time, the risks of private organizations gate-keeping crucial data must be managed through regulation.
The following discussion focused on the contingencies of the massive development potential of new technologies with an eye on how to create the right policy frameworks to ensure that it is welfare-enhancing rather than contributing to persistent divides. Moreover, participants highlighted tensions between developing and advanced economies’ state capacities to create an environment that fosters innovation and takes advantage of more cost-efficient production, while protecting its people.
Participants: Ana Valero, Center of Economic Performance, Chiara Criscuolo, OECD. Introduced and moderated by Alexandros Ragoussis, IFC
Based on a survey of hundreds of UK businesses in the summer of 2020, Valero highlighted widespread and rapid adoption of technology in the UK during the pandemic; significantly higher than seen in the previous surveys. A lot has to do with the provision of services, remote work and online sales. Criscuolo confirmed that the pace and scale of adoption has been similar in other OECD countries, even in economies where infrastructure lags behind, particularly when it comes to remote work. While there are short-run savings and benefits from this adoption there are also risks – “most of the innovation process takes place through face-to-face interaction, exchange of ideas, all of this might be lost.” Criscuolo highlighted that innovations such as remote work are not necessarily for the long-run; the fact that they are involuntary and understudied leaves many question marks open regarding their evolution. The firms that were able to ride the first waves of digital transformation - those that had made investments and had already a large market share - have not lost ground during the crisis, said Criscuolo.
Skill gaps within countries are often caused by digital infrastructural deficiencies that governments should address for smaller players not to be left behind. Many of them do not exit the market now – bankruptcy rates surprisingly have not increased across the OECD. Conditional government support is necessary to make sure firms adapt. Based on the UK experience, Valero highlighted that remote delivery of training is becoming more acceptable and stands to make a difference in spreading innovations from the few to the many, and in scaling up support to many businesses. Successful adoption of technology hinges on skills and information sharing among managers and workers. Both speakers agreed that there is growing body of evidence around which schemes work and which can be tailored to the specific circumstances of different developing countries.
Participants: Richard Davies, Bristol University and author of Extreme Economics, Alexia Latortue, Managing Director, Corporate Strategy, EBRD
Introducing his book, Richard Davies highlighted that the concept of resilience has less to do with responses to an event (such as a large shock to the stock market), and more to do with extreme situation ( such as not having a stock market or currency at all, or when a society’s main industry collapses). People in such situations attempt to build back a local informal economy to meet basic economic needs. The speakers then discussed the importance of reputation and the human desire for choice which featured strongly in extreme contexts.
Asked whether his characterization of informal markets tended to romanticize them, Davies responded that the dichotomy is not clear - some informal markets need to be better supported while some formal markets should be better regulated. Davies is of the view that humans are natural traders because we recognize our different strengths and the consequent benefits to trading.
A key feature throughout the discussion has been the necessity to expand commonly used methodological toolkits towards qualitative and interview-based research, with a goal of understanding issues that formal economics and econometrics might not capture.
Chaired by Elizabeth Asiedu, University of Kansas.
Presenters: Rodolfo Stucchi, Inter-American Development Bank, Miriam Bruhn, World Bank, Morten Bennedsen, Copenhagen Business School, INSEAD.
Rodolfo Stucchi presented the paper The impact of guarantees on SMEs access to credit and employment, which assesses the effectiveness of guarantees extended through Mutual Guarantee Companies in improving SMEs’ access to finance and performance in Argentina. The paper uses administrative records to compare firms that receive benefits with those that do not. The authors find that both short-, medium- and long-term guarantees increase the probability of SMEs receiving a loan. Those firms who received guarantees feature increased survival probability and create more jobs, though the increased job creation does not hold true for firms that only received short-term guarantees.
Miriam Bruhn presented the paper The Impact of Mobile Money on Poor Rural Households: Experimental Evidence from Uganda, which empirically assesses how mobile money can contribute to firm resilience in Uganda. Bruhn outlined three possible channels: 1) increased liquidity from remittances eases credit constraints 2) possibility of receiving remittances acts as insurance thus allowing households to risk self-employment 3) ease and safety of making payments to businesses. The authors find that the observed effects are mostly driven by areas which are further away from existing bank branches, whilst those closer to bank branches hardly see an effect. Effectively, the introduction of agents lowered transportation costs from having to travel to mobile money agents. They also find that self-employment almost doubled in areas where agents were introduced. Their analysis finds no effect on savings, agricultural outcomes, or poverty.
Morten Bennedsen presented research on Understanding the impact of government aid to firms in the COVID-19 pandemic. The authors assess the impacts of Danish government aid – labour aid, cost aid and fiscal aid (postponement to VAT payment) – on firm revenues, survival and job retention. The authors use a survey method combined with administrative data for their analysis. They find that firms receiving labor support were more likely to furlough workers and less likely to fire workers in comparison to those who did not receive aid. Cost aid in contrast reduced lay-offs to some extent but did not increase furloughs, and fiscal aid was unlikely to have done either.
Chaired by Jing Cai, University of Maryland
Participants: Simon Quinn, University of Oxford, Namrata Kala, MIT Sloan School of Management, Zhengyun Patricia Sun, Harvard University.
Simon Quinn presented findings from the paper Learning Management Through Matching: A Field Experiment Using Mechanism Design. The hypothesis of the paper, that entrepreneurship is a tacit skill best learned by experience, was examined through a randomized experiment which allows aspiring young entrepreneurs to learn from successful entrepreneurs in established medium to large sized firms. The authors find that participation in the program leads to positive average effects on wage employment and incomes from wage work but no average effect on self-employment.
Namrata Kala presented findings from the paper The Impacts of Managerial Autonomy on Firm Outcomes. The paper addresses the link between managerial autonomy in decision making and firm performance. The author uses data from the earned autonomy program of state-owned enterprises in India to examine the question. The program granted SOE managers additional decision rights, such as capital expansion and forming joint ventures, based on prior performance. The paper finds that firms with more autonomous managers increased their capital stocks and formed more strategic partnerships, which in turn lead to greater sales and profits relative to other SOEs. Moreover, managers who were granted autonomy were more likely to subsequently join a board of a private firm, indicating that career concerns is a consistent explanation for these managerial decisions.
Zhengyun Patricia Sun presented findings from the paper Lifting Growth Barriers for New Firms: Evidence from an Entrepreneur Training Experiment with Two Million Online Businesses. Whilst e-commerce platforms have lowered market entry barriers for SMEs, growth barriers persist. The authors examine whether business training can help SMEs overcome growth barriers on e-commerce platforms and how the presence of trained sellers affects consumer experience. They conducted a randomized control trial, with training participation of over 2 million SMEs on a leading e-commerce platform in China providing practical skills specific to online business operations. The authors find that sellers who received treatment earn higher revenues, attract more consumers to their sites, become more engaged in marketing and improve customer service. Moreover, they find that consumers have higher purchase probability when they encounter new sellers regardless of treatment status. When making purchases, consumers choose treated new sellers over incumbents without affecting the quality of their purchases.
Chaired by Mathieu Teachout, International Growth Centre
Matthieu Teachout introduced the topic of the discussing noting pressing issues regarding inequality, different forms of employment, as well as firm level resilience. Participants suggested that there is a knowledge gap regarding DFI programs that best support firm survival and the scarring expected for firms that survive crises. Other participants highlighted the importance of firm level research, arguing that the crisis revealed that firm level impacts cannot be explained by the country and sector within which firms operate or the government support they received. There is a black box of about 80% unexplained variation that determines firm survival, which requires more research.
Moderated by Ralph De Haas, Director of Research at the European Bank for Reconstruction and Development (EBRD).
Panelists: Juanita Gonzalez-Uribe, Assistant Professor in Finance at London School of Economics, Caroline Freund, Global Director for Trade, Investment & Competitiveness at the World Bank, James Zhan, Director of Investment and Enterprise at the United Nations Conference on Trade and Development (UNCTAD).
In her opening intervention, Juanita Gonzalez-Uribe, focused on the objective of understanding resilience itself. An important lesson from the Global Financial Crisis, according to Glonzalez-Ube, is how the build up of financial vulnerability at the level of firms allows crises to propagate across markets. We know much less about other types of vulnerabilities with such an effect, such as rigidity in wages for example. The response to these vulnerabilities is not well understood either. The role of accelerators – i.e. of knowledge that is generated by connecting experienced entrepreneurs to new entrepreneurs - and the role of learning-by-doing offer important opportunities for new research. In terms of methodologies, Gonzalez-Uribe took a step back and highlighted the value of quasi-experimental methods rather than randomized controls in addressing these questions. Interpreting estimates with regards to efficiency by combining these with structural models would be necessary to get something meaningful of the analytical effort, stressed Gonzales-Uribe.
In an effort to outline knowledge gaps, Caroline Freund, highlighted that we understand more about firm productivity, growth, and allocative efficiency; but less about firm resilience and survival. The two do not always fall into the same place, according to Freund: the most productive firms are not always the ones that survive longer, especially during crises. The covid-19 crisis is destructive rather than creative-destructive, and does no favors to allocative efficiency. To better understand the process of building resilience, Freund recommended focusing on highly productive firms with growth potential – which are not necessarily large, or in high value-added sectors. “It’s not about big firms, it’s about ensuring that the most productive firms survive and grow large.” Removing constraints to firm entry and growth is critical, but is often not enough. Growth can be encouraged, for example, through SME programs that channel increasing funds and training opportunities to firms that use initial support more effectively (the so-called funneling approach).
Starting with the forecast on the global decline of foreign investment, James Zhan highlighted five driving forces for GVC transformation towards 2030, i.e. economic governance realignment, new industrial revolution, sustainability endeavor, corporate accountability and resilience-oriented restructuring. All this may lead to six megatrends in GVC transformation and new FDI landscape that we need to take as hypotheses and develop a better understanding of through future analytical work. These trends include 1. less fragmentation of manufacturing value chains and subsequently less intermediate and more final goods trade. 2. the rise of platform-based multinational enterprises (MNEs), operating with foreign-asset-light business models. 3. the shift of value chains from global to regional and subnational, which implies less efficiency seeking but more market-seeking FDI. 4. the shift from mass-production to mass-customization, enabled by distributed manufacturing (e.g. 3D printing). 5. More fragmentation of service value chains, leading to increased services trade and FDI compounded by the “servification” of manufacturing. 6. the growth of FDI in green and blue economies. Efficiency (cheaper labor and land) will become a secondary consideration, according to Zhan, as the focus shifts from scale to scope. The type and scale of transformation will vary from industry to industry. In response, Freund expressed the opinion that the reshaping of GVCs is overstated. She highlighted that value chains are extremely productive; There are weak incentives for firms – other than policy changes – to reshore or recreate value chains differently given the higher costs of production at home and the costly destruction of know-how and relational capital that comes with reshaping. Both speakers agreed that policies and technology will significantly impact on the future trends of GVCs and FDI.