Resource Reallocation across Firms during the COVID-19 Pandemic: Analysis of productivity dynamics using firm-level micro data

During the COVID-19 pandemic, a substantial shift in demand occurred in the economy, including a decrease in demand for some non-manufacturing industries such as retail, transportation, and restaurants and accommodation services, a downturn in international trade due to the global spread of infections, and an increase in demand for information and communication services due to remote working and other factors. In countries with high labor mobility, such as the United States, active reallocation of resources across industries and firms during and after the pandemic could be observed. On the other hand, in Japan, the reallocation of resources across firms in response to demand shifts may have been sluggish due to the difficulty of laying off regular employees (especially in large firms) and the government’s efforts to maintain employment and prevent bankruptcies through employment adjustment subsidies and special COVID-19 loans. Using firm-level financial data from Tokyo Shoko Research, we examine the reallocation of resources across firms during the COVID-19 pandemic in private-sector production activities in Japan by focusing on developments in productivity dynamics and the share of zombie firms.

Our analysis of total factor productivity (TFP) dynamics shows that in 2018–2021, probably due to rigid employment practices, there was a large negative within-firm effect among large firms, and especially large firms operating in the non-manufacturing sector saw a substantial decline in TFP. In contrast, small and medium-sized enterprises (SMEs) experienced increases in TFP during this period due to positive reallocation effects. Especially SMEs engaged in manufacturing saw an acceleration in TFP growth. This suggests that the market selection mechanism functioned mainly for SMEs. Meanwhile, the share of zombie firms, defined as firms with an interest coverage ratio of less than 1 for several years, peaked in 2011 and then gradually declined. Although there has been a small increase since the start of the pandemic in 2020, the increase in 2020–2021 was not particularly pronounced compared to the rapid increase from 2009 to 2011.