Small businesses and their challenges during COVID-19 pandemic in developing countries: in the case of Ethiopia – Journal of Innovation and Entrepreneurship

COVID-19 is shuddering the world economy and it is a pandemic making a giant distractions to life and livelihoods as well as social and economic systems in the world. Based on different reports, it is the most horrible global crisis since WW II. This virus is highly transmittable and has spread with inconsistent progress in every corner of the world without any variance. COVID-19 is a massive health crisis BUT also much more. It is a systemic shock with profound implications, both in the short- and medium- to long-term. This virus has triggered a substantial short-term economic contraction, shuttered many firms, whether big or small, thrown tens of millions out of work, and has other effects on business activities. To prevent unemployment, poverty, and food insecurity rates from further skyrocketing during any time, small and medium enterprises around the globe can and should play a crucial role.

Small businesses are the backbone of any economy, and with the ripple effect of COVID-19 on economies all over the world, their protection has become important more than ever. Since the first case of pandemic surfaced in Ethiopia, the government has been taking various sweeping health and economic measures to mitigate its impact. Recognized by the government as a driver for economic growth and job creation, small businesses, or more commonly referred here as small and micro enterprises as the lexicon goes, the sector has been growing steadily for the past decade or so. However, facing the wrath of the coronavirus pandemic, most of these firms face difficulty surviving in the current climate for even above 5 months, Ethiopian press agency (2020).

According to ONE UN Ethiopia (2020) assessment report, Sub-Saharan Africa (SSA), including Ethiopia, are unlikely to escape the direct and indirect effects of the pandemic and the attendant global crisis. While the trajectory of COVID-19 is still at its initial stages in the region, the repercussions of development elsewhere are already being felt strongly. In these circumstances, it is vital to understand the scale, nature, and depth of social and economic impacts to design an appropriate and effective policy and programmatic response, whether at the country, regional, or global levels. Ethiopian small business also faced some major challenges as it was struck by COVID-19. The macroeconomic and development situation was challenging, evident in slowing but still high growth, the risk of debt distress, low levels of domestic resource mobilization, high inflation, high unemployment, not least among youth trying to find opportunities in an economy with elevated levels of informality, low forex reserves and significant pressure on the exchange rate of the Birr. Social unrest, triggered by longstanding issues that could now be aired in a more open civic and political environment, has led to conflict, loss of lives and property and, at the last count, 1.7 million internally displaced persons (IDPs). MSMEs not only play a vital l role in providing employment opportunities but also contribute to the socio-economic development of the country, notably in their role as facilitators for the transition to an industrial society. Amongst the several things this pandemic has taught us, there is the need to modernize the economy, including surveying the small business sector and identifying both the formal and informal sectors at sub-city level in the country and the small businesses themselves have also a part to play. While some businesses are taking steps to safeguard their business or are pausing their plans to grow, others are pivoting to other branches by gauging local demand even as an opportunity, like those that have switched to producing sanitizers, facemasks and other preventive materials.

According to Fairlie (2020a), find that the number of working business owners plummeted from 15.0 million in February 2020 to 11.7 million in April 2020 because of COVID-19 mandates and health- and economic-driven demand shifts. The loss of 3.3 million active business owners (or 22%) was the largest drop on record. When conditioning on working roughly 2 days per week or 4 days a week, the losses are even larger (28% and 31 percent, respectively). Total hours worked by all business owners dropped by 29%. Although incorporated businesses are more growth-oriented and stable, they experienced a drop of 20% from February to April 2020. The findings indicate that there was a partial rebound from April 2020 numbers in May and an additional rebound in June. The number of active business owners bounced back by 7 percentage points resulting in a 15% drop in business activity from February to May 2020, and an additional 5 percentage points rebound in June resulting in an 8% drop in business activity from February to June 2020.

These results build on the findings from a few related studies of the early effects of the coronavirus on small businesses in different countries. Employer business applications as measured by the U.S. Census weekly Business Formation Statistics (BFS) fell in 5 weeks from mid-March to mid-April by over 27% relative to the previous year (Wilmoth, 2020). Examining more recent data from the BFS there is some evidence of a bounce back, but weekly estimates show a lot of variation (U.S. Census Bureau, 2020). Estimates from the weekly U.S. Census Small Business Pulse Survey indicate that roughly 50% of businesses report having a large negative effect from the COVID-19 pandemic and that only 15–20% of businesses have enough cash on hand to cover 3 months of operations (Bohn et al., 2020; U.S. Census Bureau, 2020). Another weekly survey indicates that decreased demand is more problematic than supply factors, such as accessing materials and goods (Desai & Looze, 2020). Bartik et al. (2020) conducted a survey in late March of nearly 6000 small businesses that were members of the Alignable business network. They find that 43% of businesses are temporarily closed, large reductions in employees, and the majority of businesses have less than 1 month of cash on hand.

Alexander et al. (2020) research examined the financial fragility of many small businesses, and how deeply affected they are by the current crisis. In their sample, which is skewed toward the retail sector, they found that 43% of businesses were temporarily closed and that employment had fallen by 40%. This represents a shock to America’s small firms that has little parallel since the Great Depression of the 1930s. The study result suggest that many of these firms had little cash on hand toward the beginning of the pandemic, which means that they will either have to dramatically cut expenses, take on additional debt, or declare bankruptcy. This highlights the ways in which the immediacy of new funding might impact medium term outcomes.

Based on the above problem statements and lack of sufficient findings on the related area the researcher was initiated to conduct this study. So that the study will fill the knowledge and other gaps such as researches with inconsistent results that are conducted in the recent world.

Crisis and small business firms

There’s no doubt that the COVID-19 pandemic has added to small business challenges around the world, regardless of size, location, or funding. According to Eggers (2020), most of the studies that focus on finance are concerned with the consequences of the crisis on small firms, namely, the lack of funding and financing sources. The strategy-oriented studies indicate that successful firms adopt a strategy that is both market- and entrepreneurship-oriented during a crisis. Small business research has recognized the importance of a crisis perspective (Herbane, 2010). A recent review of literature on crisis and small- and medium-enterprises (SMEs) finds that most of the publications focus on financial issues (51%), followed by strategy (41%), and institutional environment (8%) (Eggers, 2020). Moreover, based on research conducted after the 2004–2012 economic crisis about entrepreneurial culture and the knowledge diversity of small firms in the United Kingdom (Bishop, 2019), Kuckertz et al. (2020) argue that adequate entrepreneurial responsiveness cannot be addressed by short-term measures and needs consistent policies. This highlights the importance of considering the temporal perspective of the crisis. A recent qualitative study about the effect of the COVID-19 pandemic on 16 startups in Germany (Kuckertz et al., 2020) examines how innovative startups deal with the lockdown and the most effective policies. They find that many startups deploy various responses associated with resilience to turn crisis-induced adversity into opportunity. They propose that entrepreneurs who demonstrate flexibility in their business models are likely to access broader emerging opportunities. This finding points to the temporal aspects of the crisis that require further investigation.

Small business challenges to adapt to the ongoing crisis

One of the biggest trends to emerge during the COVID-19 pandemic is small businesses going online and creates different opportunities to solve many challenges. Indeed, for many small businesses, the internet remains a lifeline, helping them to stay afloat during the pandemic.

According to Facebook’s report, in the 30 days prior to the survey fielding, 23% of businesses reported using digital ordering tools, 16% service delivery tools, and 37% digital payment tools. 36% of operational personal businesses that use online tools report that they are conducting all their sales online. However, we have also seen a lot of small businesses find creative ways to succeed during COVID-19, from expanding into new markets to finding new ways to deliver their products and services. At the same time, a number of large technology companies such as Facebook and Google are creating new ways for small businesses to connect with their customers.

Even when businesses remain open, employees are experiencing financial cuts from lost employment or fewer hours worked. It’s important to remember that any time a business closes or has to lay off workers, it affects entire communities of people who rely on income from jobs to support themselves, and in turn, support other local businesses and organizations.