History has shown that health and economic shocks are recurrent events; robustness to one such shock must be followed by preparedness for the next one. Accordingly, “the new normal” is a phrase that has been used throughout the COVID-19 pandemic to signal the need for fundamental change to follow the crisis. Resilience at both the government and sector levels can create conditions for countries to better withstand and recover from shocks. Our research based on World Bank data shows that manufacturing firms in countries with stronger industrial capabilities—proxied by higher Competitive Industrial Performance (CIP) scores—were more likely to remain in operation and experienced higher growth rates (or lower losses) in employment (see figure below).
The significance of industrial capabilities for robustness to the pandemic crisis
The correlation between industrial capabilities and firms' ability to survive is positive and statistically significant, even after controlling for country characteristics such as severity of the pandemic and stringency of containment measures (see figure below). This finding highlights the significance of country-level industrial capabilities in determining the manufacturing sector’s robustness. Despite the complexity of the pandemic’s impacts on firms—supply shortages, domestic and global demand shocks, logistics disruptions, worker absence and plant shut-downs—industrial capabilities emerge as a strong predictor of resilience.
The significance of sectoral conditions for robustness to the pandemic crisis
Countries’ pre-existing conditions alone cannot explain the capacity of firms to withstand and respond to the negative economic impacts of the crisis; the sector in which a firm operates also plays an important role in explaining the magnitude of the crisis’ impact. Firms operating outside the manufacturing sector or in COVID-19 vulnerable industries experienced stronger negative impacts than those engaged in robust industries (see figure below).1
The significance of micro-conditions for robustness to the pandemic crisis
Moving from the meso- to the micro (firm) level, productive capabilities generally refer to strategic and tacit internal resources and processes which are crucial to a firm’s performance, competitiveness and ability to move higher up the value chain by developing new, more complex products. Countries that have many firms with strong productive capabilities are likely to have a higher score in the CIP index and high industrial capabilities at the country level.
Productive capabilities can be broken down into two broad categories: (1) an index for technological capabilities comprising innovation, the share of foreign ownership, and investments in both R&D and new fixed assets; and (2) an index for production capabilities comprising quality certifications, training for employees, export intensity and managers’ years of experience. Our empirical analysis indicates that production capabilities had a positive and significant effect on shielding manufacturing firms from employment losses during the COVID-19 pandemic crisis, even when taking other country- and firm-level factors into account (see Figure 4 below). This supports the argument that production capabilities contribute to bolstering firms’ resilience, production and employment during severe shocks. In other words, robustness to shocks hinges on a set of pre-existing firm-level conditions, which are relevant for understanding the substantial heterogeneity that exists between and within countries and sectors when analysing a country’s overall resilience.
The positive employment effects for firms that received direct government COVID-19 assistance further highlight the importance of public policy and industrial strategies to protect the workforce in times of crisis. Another relevant factor that had a mitigating effect on employment during the pandemic crisis was the firm’s age. Firms with a longer presence in the market have more experience and are therefore more likely to weather market turbulence.
The significance of micro conditions for readiness to respond to the pandemic crisis
Resilience during the pandemic crisis not only depended on firms’ capacity to smooth out the negative economic impacts of the crisis, but also on their capacity to adapt their business models and, where possible, their production processes. As illustrated in the figure above, firms that converted their products or services in response to the COVID-19 pandemic (“production response”) were better able to navigate the crisis, showing better job performance when controlling for all other factors considered. In fact, a firm’s ability to change its business model is one of the leading factors for successfully adapting to the new international crisis context.
Production capabilities can also act as an engine of business transformation in manufacturing firms as they facilitate the adoption of advanced digital production (ADP) technologies. Recent empirical analyses indicate that digitally advanced firms introduced production-related responses more frequently than non-digitally advanced ones, and were less impacted by the negative economic effects of the crisis because they were more responsive to the new circumstances induced by the pandemic.2
Policy implications
SDG-9 “Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation” acknowledges the significance of the manufacturing sector’s role for development. SDG-9 builds on the conceptual foundation that manufacturing is an engine of growth; setting specific objectives to promote industrialization is therefore pivotal. Empirical evidence furthermore shows that industrialization through learning, and building and deploying ‘know-how’ is key to strengthening firms’ capacity to withstand the crisis and to adapt to challenging environments. Reinforcing industrial policy should be prioritized to support sustained growth induced by structural transformation and to contain the negative economic impacts of crises while facilitating the achievement of SDG-9 objectives.
This piece is part of the IAP IDR2022 series, based on UNIDO's flagship Industrial Development Report (IDR) 2022 and the background paper produced by Karmen Naidoo and Fiona Tregenna.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
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