Turbulence in startups: Effect of COVID-19 lockdown on creation of new firms and its capital

Camino-Mogro, Segundo (2020): Turbulence in startups: Effect of COVID-19 lockdown on creation of new firms and its capital.

Abstract

Business creation is an important measure of real economic activity because it shows the dynamics with which new firms are born, create jobs, move their capital, innovate and compete with old firms. In this sense, this paper analyzes the impact of the lockdown policies implemented to stop the spread of the COVID-19 on the creation of new formal firms in Ecuador. I use a regression discontinuity in time (RDiT) design jointly with official administrative real-time data, and find an overall large decrease in the creation of new formal firms (-73%) but also in the total amount of capital coming from the new formal firms (-40%). Additionally, my results suggest that the negative impacts of the COVID-19 lockdown on creation of new formal firms do not diminish over the time, in particular after one month and a half. Finally, I show that the March 16 lockdown measures help to explain only the observed changes in creation of new formal firms occurred the day after their announcement and not other changes that predate or follow these announcements. The main conclusion is that lockdown policies have a negative impact on firm creation, result that is of high policy relevance which can be a tool to design business attraction policies.

• Item Type: MPRA Paper
• Language: English
• Keywords: COVID-19; Lockdown; New firms; Regression Discontinuity; Ecuador
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M13 - New Firms ; Startups; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M21 - Business Economics

References

Adam, C., Henstridge, M., & Lee, S. (2020). After the lockdown: macroeconomic adjustment to the covid-19 pandemic in sub-saharan africa. Oxford Review of Economic Policy, 36 (Supplement 1), S338-S358.

Anderson, M. L. (2014). Subways, strikes, and slowdowns: The impacts of public transit on traffic congestion. American Economic Review, 104 (9), 2763-96.

Asturias, J., Hur, S., Kehoe, T. J., & Ruhl, K. J. (2017). Firm entry and exit and aggregate growth (Working Paper). National Bureau of Economic Research. Retrieved from https://www.nber .org/system/files/working papers/w23202/w23202.pdf

Auffhammer, M., & Kellogg, R. (2011). Clearing the air? the effects of gasoline content regulation on air quality. American Economic Review, 101 (6), 2687-2722.

Bachas, P., Brockmeyer, A., Santiago, G., & Semelet, C. (2020). El impacto del covid-19 en las empresas formales de ecuador (MTI Practice Note no. 9C). World Bank Group. Retrieved from http://documents1.worldbank.org/curated/en/705661598010734951/pdf/El-Impacto-del-COVID-19-En-las-Empresas-Formales-de-Ecuador.pdf

Barnes, S. R., Beland, L.-P., Huh, J., & Kim, D. (2020). The effect of covid-19 lockdown on mobility and traffic accidents: Evidence from Louisiana (Working paper). GLO Discussion Paper. Retrieved from https://www.econstor.eu/handle/10419/222470

BID. (2020). ¿cómo proteger los ingresos y los empleos?: Posibles respuestas al impacto del coronavirus (covid-19) en los mercados laborales de América Latina y el Caribe (Tech. Rep.). Banco Interamericano de Desarrollo. Retrieved from https://publications.iadb.org/publications/spanish/document/Como-proteger-los-ingresos-y-los-empleos-Posibles-respuestas-al-impacto-del-coronavirus -COVID-19-en-los-mercado-laborales-de-America-Latina-y-el-Caribe.pdf

Brandt, L., Van Biesebroeck, J., & Zhang, Y. (2012). Creative accounting or creative destruction? firm-level productivity growth in chinese manufacturing. Journal of Development Economics, 97 (2), 339-351.

Busso, M., Madrigal, L., & Pagés, C. (2013). Productivity and resource misallocation in latin america. The BE Journal of Macroeconomics, 13 (1), 903-932.

Caballero, R. J., & Hammour, M. L. (2005). The cost of recessions revisited: A reverse-liquidationist view. The Review of Economic Studies, 72 (2), 313-341.

Camino-Mogro, S., & Armijos, M. (2020). Los efectos del con�finamiento por covid-19 en la inversión extranjera directa: evidencia de empresas ecuatorianas (Estudio Sectorial No. 2020). Superintendencia de Compañías, Valores y Seguros. Retrieved from https://investigacionyestudios.supercias.gob.ec/wp-content/uploads/2017/08/covid-IED.pdf

Camino-Mogro, S., Armijos-Bravo, G., & Cornejo-Marcos, G. (2018). Productividad total de los factores en el sector manufacturero ecuatoriano: evidencia a nivel de empresas. Cuadernos de Economía, 41 (117), 241-261.

Campbell, J. R. (1998). Entry, exit, embodied technology, and business cycles. Review of Economic Dynamics, 1 (2), 371-408.

Carrillo-Maldonado, P., Deza, M. C., & Camino-Mogro, S. (2020). Una radiografía a las empresas ecuatorianas antes del covid-19. X-pedientes Económicos, 4 (9), 83-117.

Carrillo-Maldonado, P., & Díaz-Cassou, J. (2019). An anatomy of external shocks in the andean region (IDB Working Paper Series No. IDB-WP-1042). InterAmerican Development Bank. Retrieved from https://www.econstor.eu/bitstream/10419/208193/1/IDB-WP-1042.pdf

Caselli, M., Fracasso, A., & Scicchitano, S. (2020). From the lockdown to the new normal: An analysis of the limitations to individual mobility in italy following the covid-19 crisis (Working paper). GLO Discussion Paper. Retrieved from https://www.econstor.eu/bitstream/10419/225064/1/GLO-DP-0683.pdf

Cattaneo, M. D., Idrobo, N., & Titiunik, R. (2020). A practical introduction to regression discontinuity designs: Foundations. Cambridge University Press.

CEPAL. (2020). Dimensionar los efectos del covid-19 para pensar en la reactivación (Tech. Rep.). CEPAL - Naciones Unidas. Retrieved from https://repositorio.cepal.org/bitstream/handle/11362/45445/4/S2000286 es.pdf

Cicala, S., Holland, S. P., Mansur, E. T., Muller, N. Z., & Yates, A. (2020). Expected health effects of reduced air pollution from covid-19 social distancing (Becker Friedman Institute for Economics Working Paper No. 2020-61). University of Chicago. Retrieved from https://bfi.uchicago.edu/wp-content/uploads/BFI WP 202061.pdf

Clementi, G. L., & Palazzo, B. (2016). Entry, exit, �firm dynamics, and aggregate fluctuations. American Economic Journal: Macroeconomics, 8 (3), 1-41.

Cole, H. L., Ohanian, L. E., Riascos, A., & Schmitz Jr, J. A. (2005). Latin america in the rearview mirror. Journal of Monetary Economics, 52 (1), 69-107.

Couch, K. A., Fairlie, R. W., & Xu, H. (2020). Early evidence of the impacts of covid-19 on minority unemployment. Journal of Public Economics, 192 , 104287.

Croushore, D. (2011). Frontiers of real-time data analysis. Journal of economic literature, 49 (1), 72-100.

Dang, H.-A., & Trinh, T.-A. (2020). The bene�cial impacts of covid-19 lockdowns on air pollution: Evidence from Vietnam (Working paper). IZA Discussion Paper. Retrieved from https://www.econstor.eu/bitstream/10419/223310/1/GLO-DP-0647.pdf

Díaz-Cassou, J., Carrillo-Maldonado, P., & Moreno, K. (2020). Covid-19: El impacto del choque externo sobre las economías de la región andina (IDB Working Paper Series No. IDB-DP-00779). InterAmerican Development Bank. Retrieved from https://publications.iadb.org/publications/spanish/document/COVID-19-El-impacto-del-choque-externo-sobre-las-economias-de-la-region-andina.pdf

Diebold, F. X., & Rudebusch, G. D. (1991). Forecasting output with the composite leading index: A real-time analysis. Journal of the American Statistical Association, 86 (415), 603-610.

Duncan, A., León-Ledesma, M., & Savagar, A. (2020). Firm creation in the UK during lockdown (CEPR Discussion Paper No. DP14671 No. DP14671). CEPR. Retrieved from https://www.niesr.ac.uk/sites/default/files/publications/Firm%20creation%20in%20the%20UK%20during%20lockdown.pdf

ECLAC. (2020). Sectors and businesses facing covid-19: Emergency and reactivation (Special Report COVID-19 No. 4). ECLAC - United Nations. Retrieved from https://repositorio.cepal.org/bitstream/handle/11362/45736/1/S2000437 en.pdf

Foster, L., Haltiwanger, J. C., & Krizan, C. J. (2001). Aggregate productivity growth: lessons from microeconomic evidence. In New developments in productivity analysis (pp. 303-372). University of Chicago Press.

Gourio, F., Messer, T., & Siemer, M. (2016). Firm entry and macroeconomic dynamics: a state-level analysis. American Economic Review, 106 (5), 214-18.

Haltiwanger, J., Jarmin, R. S., Kulick, R., & Miranda, J. (2016). High growth young �firms: contribution to job, output, and productivity growth. In Measuring entrepreneurial businesses: current knowledge and challenges (pp. 11-62). University of Chicago Press.

Haltiwanger, J., Jarmin, R. S., & Miranda, J. (2013). Who creates jobs? small versus large versus young. Review of Economics and Statistics, 95 (2), 347-361.

Hausman, C., & Rapson, D. S. (2018). Regression discontinuity in time: Considerations for empirical applications. Annual Review of Resource Economics, 10 , 533-552.

Imbens, G. W., & Lemieux, T. (2008). Regression discontinuity designs: A guide to practice. Journal of Econometrics, 142 (2), 615-635.

Karimov, S., & Konings, J. (2020). How lockdown causes a missing generation of start-ups and jobs (VIVES Briefing No. 2020/05). KU Leuven. Retrieved from https://lirias.kuleuven.be/3053539?limo=0

Koenig, E. F., Dolmas, S., & Piger, J. (2003). The use and abuse of real-time data in economic forecasting. Review of Economics and Statistics, 85 (3), 618-628.

Lee, Y., & Mukoyama, T. (2015). Entry and exit of manufacturing plants over the business cycle. European Economic Review, 77 , 20-27.

Max Roser, E. O.-O., Hannah Ritchie, & Hasell, J. (2020). Coronavirus pandemic (covid-19). Our World in Data. (https://ourworldindata.org/coronavirus)

McQueen, G., & Thorley, S. (1993). Asymmetric business cycle turning points. Journal of Monetary Economics, 31 (3), 341-362.

OECD. (2020). Foreign direct investment flows in the time of covid-19 (Tech. Rep.). Organisation for Economic Cooperation and Development. Retrieved from https://read.oecd-ilibrary.org/view/?ref=132 132646-g8as4msdp9&title=Foreign-direct-investment-flows-in-the-time-of-COVID-19

Pugsley, B. W., & Sahin, A. (2019). Grown-up business cycles. The Review of Financial Studies, 32 (3), 1102-1147.

Rudebusch, G. D. (2001). Is the fed too timid? monetary policy in an uncertain world. Review of Economics and Statistics, 83 (2), 203-217.

Ruiz-Arranz, M., & Deza, M. C. (2018). Creciendo con productividad: Una agenda para la región andina. Banco Interamericano de Desarrollo.

Samaniego, R. M. (2008). Entry, exit and business cycles in a general equilibrium model. Review of Economic Dynamics, 11 (3), 529-541.

Sedlácek, P. (2016). The aggregate matching function and job search from employment and out of the labor force. Review of Economic Dynamics, 21 , 16-28.

Sedlácek, P. (2020). Lost generations of firms and aggregate labor market dynamics. Journal of Monetary Economics, 111 , 16-31.

Sedlácek, P., & Sterk, V. (2017). The growth potential of startups over the business cycle. American Economic Review, 107 (10), 3182-3210.

Sedlácek, P., & Sterk, V. (2020). Startups and employment following the covid-19 pandemic: A calculator (CEPR Discussion Paper No. DP14671 No. DP14671). CEPR. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract id=3594304

Shen, H., Fu, M., Pan, H., Yu, Z., & Chen, Y. (2020). The impact of the covid-19 pandemic on firm performance. Emerging Markets Finance and Trade, 56 (10), 2213-2230.

Superintendencia de Compañías Valores y Seguros, S. (2018). Mipymes y grandes empresas en el Ecuador, período 2013-2017 (Estudio Sectorial). Superintendencia de Compañías, Valores y Seguros. Retrieved from https://investigacionyestudios.supercias.gob.ec/wp-content/uploads/2018/09/Panorama-de-las-MIPYMES-y-Grandes-Empresas-2013-2017.pdf