experience a decrease in exports, and less likely to be directly affected by import disruptions, reflecting their reduced participation in Global Value Chains compared to larger firms.<sup>9</sup> One potential concern is that size is correlated with other uncontrolled firm characteristics, that may explain the variation in firm impact. Adding controls for age, export status, foreign ownership and labor productivity however does not affect the statistical significance nor the magnitude of the estimated impact.

SMEs are more likely to face financial constraints than larger firms even in normal times. Collectively, estimates have placed the financing gap faced by MSMEs around $5.2 trillion, with an additional financing demand of $2.9 trillion due to the crisis. IFC estimated that 40 percent of formal SMEs in developing countries have unmet financing needs (IFC, 2017). Evidence emerging from the United States suggests that this gap may be widening, as bank lending has particularly grown to larger existing clients, potentially to mitigate COVID risks (Li et al., 2020; US Small Business Administration, 2020). In addition, SMEs are likely to have more limited internal sources of liquidity, such as retained earnings. Here we find that SMEs are more likely to report decreased liquidity or cash flow availability due to COVID than larger firms by an average of 10 percentage points. The longer the crisis persists, the more likely that decreased liquidity will translate into insolvency and firm exit.

Among SMEs, small firms employing fewer than 20 workers are particularly vulnerable to demand and finance shocks (see Figure A1 in the Annex). The negative demand shock is particularly severe for smaller firms, both in terms of the likelihood of falling sales and the percentage sales fall. Small firms experience a 10 percentage point greater fall in sales than larger firms, whereas for medium firms the fall is on average 6 percentage points. Similarly, small firms predominantly explain the exposure of SMEs to financial shocks, as one would expect. In contrast, small and medium firms have similar increased exposure to supply shocks and are equally unlikely to experience positive demand shocks or export demand shocks than larger firms.

COVID has led to massive increases in uncertainty that is likely leading firms to postpone investments in capital, skills and innovation – with likely scars for the post-COVID recovery. Measuring uncertainty is not straightforward, with scarce data for developing economies. SMEs typically report higher uncertainty over sales than larger firms, in part, due to poorer access to information and due to the fact that sales is where the impact by firm size is more severe. Evidence for the United Kingdom and the United States finds that while SMEs face around 20%-30% higher uncertainty over sales both before and after COVID, firm uncertainty has reached the highest levels since records began and dwarfing the financial crisis (Altig et al., 2020).<sup>10</sup> Results from the 13 countries surveyed by the World Bank are mixed, with variation in the overall expectations of return to normalcy lower among SMEs than large firms in some countries (see Figure 5), suggesting somewhat greater certainty in overall outlook. Large firms might be better able to cope with the challenges, but often have additional uncertainty to take into account such as foreign suppliers or the stock market, which SMEs are less likely to be listed.

> 9 Smaller firms may however be indirectly affected through disruptions to inputs imported by wholesalers. The World Bank Enterprise follow-up surveys do not allow measurement of the import supply shock.

> 10 The comparison group here is firms with more than 250 employees, but SMEs are defined as having fewer than 100 employees (as in the rest of this paper).  Their records began in 1985.

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