Macroeconomic lockdown and SMEs: the impact of the COVID-19 pandemic in Spain.

Abstract: The relative importance of small- and medium-sized enterprises (SMEs) and large firms is a recurrent topic in the small business economics literature. This paper presents a real and financial social accounting matrix (FSAM) capable of distinguishing the direct and indirect effects that are transferred from micro-, small, medium, and large firms to the rest of the economy. We use the hypothetical extraction method (HEM) to explore the sequence of reactions associated with shocks that arise from the COVID-19 lockdown. Using a structural model for the Spanish economy, we identify the role of different firm size categories in the aggregate gross domestic product (GDP). Our results allow us to reconcile the mixed narrative that accompanies the evaluation of the role played by these categories in economic activity by revealing that both SMEs and large firms are important for supporting economic activity. In particular, SMEs help explain 43% of the income and two-thirds of the unemployment decline caused by the COVID-19 pandemic. Our findings also show the importance of conditioning SME industrial policy to sectoral analysis. Plain English summary: The effects of the macroeconomic lockdown and its transmission to the rest of the economy differ by firm size and across sectors. Using the Spanish context for micro-, small, medium, and large firms, we distinguish the direct and indirect effects caused by the COVID-19 pandemic. The main implications are the following: (1) Research: results emphasize that SMEs and large firms are both important to support economic activity but, in order to account for the relative effects on SMEs, it is crucial to consider the specific sector that receives the disruption. 2) Policy: SMEs are an important focus of business support policies within the EU. According to our estimations, disruptions in SMEs produce larger reductions in demand. These results could support credit policies for SMEs with a strong impact on the aggregate economy due to their greater productive and financial linkages with the domestic economy.