Small and Medium Enterprises Amidst the Pandemic and Reopening: Digital Edge and Transformation

Abstract

Using administrative universal business registration data as well as primary offline and online surveys of small businesses (including unregistered self-employments) 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. After the January 2020 lockdown, firm entries exhibited a V-shaped pattern, with entries of e-commerce firms experiencing a less pronounced immediate drop and a quicker rebound. Moreover, the pandemic has accelerated the digital transformation of existing firms and the industry in multiple dimensions (e.g., altering operation scope to include e-commerce, allowing remote work, and adopting electronic information systems). The effect persists more than one year after reopening, and it is more pronounced for certain sectors, firms in industrial clusters, and areas with more digital inclusion but less financial efficiency, constituting initial evidence for the long-term impact of the pandemic and the supposedly transitory mitigation policies. This paper was accepted by David Simchi-Levi, finance. Funding: This research was funded in part by the China Natural Science Foundation [Grants 71874008, 71441008, 71873121, and 72192844], Peking University, the Kauffman Foundation [Junior Fellowship], and the FinTech Chair at Paris–Dauphine University–Université Paris Sciences et Lettres. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.02424 .