Technological capacity and firms' recovery from Covid-19

Summary

Focus

Businesses have confronted unprecedented challenges during the Covid-19 pandemic. Restrictions on people's movements have not only led to a sharp slowdown in economic activity, but also forced firms to alter their business models. Selling goods online has become the new norm, and so too has remote work. This paper analyses the extent to which better digital and technological infrastructure has helped firms to withstand the Covid-19 recession and adapt to this new environment.

Contribution

Recent papers highlight the impact of rules about working from home, managerial practices and the role of technology more generally on firm performance during Covid-19. And yet, empirical evidence on the role of a country's digital capabilities to mitigate the effects of the pandemic on businesses is scarce.

Findings

Based on a large sample of firms in 17 countries, this paper shows that businesses headquartered in countries with better digital capabilities – as measured by their position in the World Digital Competitiveness Ranking – had higher revenues during the pandemic relative to their pre-pandemic trend. This effect is especially pronounced among smaller firms, suggesting that technological capacity may have mitigated the adverse effects of the pandemic on relatively small firms.

Abstract

Can higher technological capacity help firms to recover quicker from recessions? Analyzing the effects of the Covid-19 pandemic on firm revenues in several countries, we find that firms headquartered in jurisdictions with better digital infrastructure generated relatively higher revenue during the shock period. Improving a country's technological capability by one standard deviation is associated with a relative increase in revenues of the average firm by around 4%. The positive effect of technology is more pronounced among smaller firms, suggesting that it could have helped the recovery of SMEs.

JEL classification: E23, G10, G38, O30.

Keywords: Covid-19, pandemic, information technology, crisis, recovery.