Chapter 2

Review Related Literature

Research Design

This chapter includes the related concepts are related studies which are essential and

significant to support the research objectives. The readings were carefully chosen as to its

significant contribution to the purpose of this study. Also, the shared views enriched the

discussion of this study and gave the researcher a wider understanding and perceptions about this

present inquiry.

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, Ethiopia press

agency (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 application 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 the 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 600 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 American’s small firms that has

little parallel since the Great Depression of the 1930s. The study result suggests 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.

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 important 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.

Based on the WHO’s report, the COVID-19 crisis was established I China in December

2019 and soon after became a global difficult pandemic. As of September 24, 2020, 213

countries and territories around the world were affecting, a total of 32,298,738 people infected,

984,974 deaths, and 23,820,147 patients (Worldometers, 2020). Although, crisis can be highly

damaging for business as they erode trust, damage company value, threaten business goals and

objectives, and may even lead to business failure. Existing literatures suggest that small

businesses may be more vulnerable to crisis events due to lower levels of preparedness, resource
constraints, relatively weak market positions, and higher dependence on government and other

domestic agencies. SMEs usually suffer from high losses, reduced sales volume, inability of

meeting contract terms, reduction in staff numbers, and even close down of the business during

or after crises. During this kind of challenging times, new startup firms have a high chance of

surviving during crisis periods than during the growth period, likely due to the lack of job

opportunities. Entrepreneurship activities could offset the negative impacts of crises by

maintaining the flow of goods and services and restoring the public condense of other business

owners and the community at large, and entrepreneurs pursued new opportunities and established

new directions for their firms during crises.

Based on these findings, post-crisis organizational learning capability is also critical to

recovery. SMEs with strong dynamic and innovation capabilities and are willing to learn from

crisis events recover quickly (Boin, 2008, Saunders et al., 2014). Similar findings were obtained

by Bullough and Renko (2018), who stated that entrepreneurs should engage in business

development training and seek networking events or special lectures to learn by modeling others

who have survived through challenging times.

The CPS data are used by the Bureau of Labor Statistics (BLS) to track unemployment

rates, and have been used in previous research to study determinants of business ownership (e. g.

recently, Levine and Rubenstein 2017, Wang 2019, Fairlie and Fossen 2019). The CPS captures

the current work activity of the business owner, and whether that business owner is currently

operating the business. Thus, the number of active business owners can be captured in the data,

but there is no way of telling whether these are temporary or permanent business closures. Many

of the inactive business owners, however, are likely to permanently close their businesses

especially if the COVID-19 induced recession is prolonged. Even temporary closure caused by
the pandemic are problematic because they reflect income losses to business owners in those

inactive months.

The Asian Development Bank (ADB 2020a) estimated that regional economic growth in

developing Asia would decline sharply from 5.1% in 2019 to -0.4 % in 2020 due to the

pandemic’s effects. As the contraction did not emanate from economic or financial turmoil, ADB

forecast a 6.8% rebound in regional economic growth in 2021. This assumed that the pandemic

is contained by using expansionary fiscal and monetary policies among ADB’s developing

members. The estimation indicated that the Philippine GDP would contract by 8.5% in 2020,

with an expected strong recovery to 6.5% growth in 2021, assuming that the restrictions ease and

businesses gradually reopen.

According to the Philippine Institute for Development Studies (Abrigo et al 2020), the

Philippines may suffer economic losses between P276.3 billion and P2.5 trillion due to the

COVID-19 pandemic. The most affected business sectors will be manufacturing, with losses

between P82.1 billion and P855.2 billion, wholesale and retail trade, with losses between P93.2

billion and P724.8 billion, and transport/storage/communication, with losses between P11.7

billion and P124.3 billion. Abrigo et al (2020) also estimated that if the ECQ continued to May

2020, it would potentially cost the Philippine economy at least P150 billion given the decline in

household consumption.

The COVID-19 crisis differs from the 1997-1998 Asian financial crisis and the 2008-

2009 global financial crisis (GFC) as the primary cause was not regional of global economic of

financial turmoil, suggesting a sharp recovery in 2021 from the significant contraction in 2020.

The International Monetary Fund (MF 2020a) estimated that the global economy would drop
sharply by -3% in 2020, a far worse fall than occurred during the GFC. However, it will recover

by 5.8% in 2021, assuming that countries control the pandemic in the second half of 2020.

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