"Unhealthy and low-productivity firms benefited the most from Covid support"

Although non-viable firms were less likely to have applied for support than viable firms, unhealthy and low-productivity firms benefited most from Covid support measures in 2020. This suggests that Covid support measures have had a negative impact on business dynamism and productivity growth. This is according to the CPB study 'Effects of Covid support measures on business dynamics and productivity growth: a new analysis with machine learning' published on 1 March.

In 2020, the Netherlands spent 3.6 percent of its GDP (almost €30 billion) on various Covid support packages. The large size makes it important to know the extent to which structurally unhealthy companies use them.

CPB used machine learning techniques and big data to examine whether unhealthy firms disproportionately used support and to what extent the support measures kept non-viable firms afloat. The study shows that healthy firms used Covid support measures more often than unhealthy firms. Among all firms that were already less viable even before the Covid-19 pandemic, 30% used at least one support measure in 2020. Among viable firms, this was 40%.

Fewer quitters
At the same time, it appears that relatively more stoppages were prevented among firms that had a high probability of exiting the market even without a pandemic than among those with a low probability. Unhealthy firms thus benefited more from Covid support. This is evident from a calculation of the possible number of firm exits prevented by Covid support. This number drops from 25% to 16% after adjusting for business viability. This percentage then drops further to 9% when prevented terminations are weighted by productivity. Both results indicate that mainly unhealthy firms (with a high probability of exiting the market) and low-productivity firms benefited from Covid support.

The study results suggest that the Covid support measures distorted the reallocation of labor and capital between viable and non-viable firms, thus negatively affecting productivity growth.

Source: CPB

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