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How did the COVID-19 Pandemic affect the pace of business formation?

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Macroeconomic factors often harm entrepreneurs and business owners. As business start-ups became less able to access capital and income, the Pandemic threatened innovation. Lockdowns led to lower revenues for existing businesses and negative cash flow for those companies that couldn’t cut operating expenses.

This is a long-term study of entrepreneurial activity. The business registries are the entry point for entrepreneurs entering or transitioning into the formal sector. Data are directly collected from them. The World Bank Entrepreneurship Database has new data that helps understand the dynamics of business start-ups all over the globe. This latest edition covered more than 170 countries from 2006 to 2020. These data show the effect of COVID-19 on new business registrations.

The majority of economies experienced a decrease in new business creation.

The number of limited liability companies (LLCs), newly registered in 2020, fell by 58%. However, the number was up in 42% of the economies. (Figure 1). This is a departure from previous years where there was a tendency to increase the number of firms. The number of firms grows in 2/3 of countries in a given year while it slows in 1/3.

Figure 1.

In the past 14 years, 2009 and 2020 were the only times when the number of countries with lower business entry rates was more incredible than those with higher numbers.

68% of countries experienced a decline in registered firms between 2009 and 2010. The number of countries where business registrations declined was more significant during the financial crisis of 2009 than in the COVID-19 turmoil of 2020. A high correlation was found between the severity of the financial crisis and how the problem had affected new firm formation. New business creation was more affected in countries with high levels of economic development like OECD high-income economies.

The COVID-19 crisis, however, had a greater impact on developing nations. The most significant drop in business entrance in 2020 was in Europe and Central Asia. 78% of Central Asian and European economies saw a decrease in newly registered businesses. The Middle East and North Africa (75 percent of economies experienced a decline in business entry), and Latin America and the Caribbean (72% each) followed suit. Contrary, 55% of OECD’s high-income economies had an increase of business entry in 2020, as many of these economies offered significant support to individuals and businesses in weathering the crisis.

It was typical for temporary drops in business entry to occur.

Many economies experienced a halt in business registrations in spring 2020 after the World Health Organization (WHO) declared the COVID-19 Pandemic as a pandemic and urged countries to take action immediately.

Figure 2.

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Many economies experienced a temporary slowdown in economic activity due to COVID-19-related restrictions. Many countries experienced a quick drop in business registrations for a few months. However, a yearly basis could show an overall increase despite this temporary decrease. Brazil, for example, saw a general rise of new firms in 2020 but experienced a temporary decline in April and May compared to 2019.

The business registry found that some months were busier than others. This seasonality was temporarily affected by the COVID-19 Pandemic in 2020.

WHAT WAS THE SITUATION AFTER 2020?

The Entrepreneurship Database focuses on entrepreneurship in the formal sector. It measures new business density, which is the ratio of 1,000 working-age people per country to the number of limited-liability firms that have been registered per year. The 2020 median new business density was 5.1 in OECD high-income economies (Figure 3). Estonia had the highest rate of new business density globally, with 24.2 LLCs per 1,000 people. Estonia’s innovative E-residency policy, which allows entrepreneurs to open new businesses abroad, has greatly benefited. After Brexit, many British companies registered in Estonia to access the European market. Hong Kong SAR, China (19.2 LLCs per 1,000 adults), and the United Kingdom (18.1 LLCs per 1000 adults).

Figure 3.

Sub-Saharan Africa, South Asia, and South Asia continue to have the lowest levels of entrepreneurship. In 2020, less than one new LLC was created for every 1,000 people. The new business density numbers for South Asia were consistent across all economies, but there was wide variation in Sub-Saharan Africa. The Democratic Republic of Congo and Liberia, for example, had less than 0.1% new LLCs per 1,000 adults, while Botswana, Cabo Verde, and Botswana had more than 13 LLCs per 1,000 adults. Numerous regulatory reforms were implemented to reduce barriers to entry and make it easier for entrepreneurs to be formalized. Cabo Verde introduced a new Commercial Code in 2019, simplified business registration at the one-stop-shop for business start-ups, and created electronic minute books to assist new companies. Botswana’s Companies and Intellectual Property Authority introduced an online mandatory business registration system in 2019. Electronic registration allowed entrepreneurs to register their company online and reserve a unique name. Technology played an essential role in assisting local entrepreneurs to be formal.

For new business creation, digital technology has never been more critical.

Digital technology helped businesses to continue their services during the COVID-19 crisis. Online company registrations were an option for many economies. They allowed businesses to continue operating and helped reduce the COVID-19 restrictions. Figure 4 shows that the number of companies opened each year per 1,000 people tends to be greater in countries where digital technology is more widely used (Figure 5).

Figure 4.

Source and Note: The Entrepreneurship Database calculated the New Business Entry Density in 2020. The Digital Adoption Index 2016 World Bank Group shows the percentage of people adopting digital technology. This data is the most current digital adoption data and is valid for the 2016 business entry density. This relationship is significant at the level of 1%.

Moving forward

Access to digital technology is a crucial component that can help accelerate recovery and unlock the potential of aspiring entrepreneurs. The Entrepreneurship Database’s latest edition gives us a glimpse of the connection between business creation and recent COVID-19 crises. The Entrepreneurship Database will be updated in future editions to provide information on the recovery rate in new business registrations after the problem.

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