One important question is therefore whether the COVID impacts are mainly a story of affected sectors, countries or firms.<sup>7</sup> We find that the country or sector dimensions alone explain no more than 5% of the variation in _any_ of the firm outcomes during the crisis – the likelihood of shutdown or measures of firm demand, supply or finance shocks. Thus, focusing on vulnerable sectors alone, or vulnerable countries alone is likely to be missing the bulk of the story. Rather, country-sector in combination explains on average nearly a third of the variation, with the majority explained by firmlevel differences within a country-sector. Accordingly, in the rest of this paper, we focus our analysis on comparing SMEs to large firms within a country-sector.

- 2.2 Channels of impact: Sensitivity to demand shocks as opposed to supply and financial

The COVID-19 pandemic has been a unique crisis in that it simultaneously shocked firms through several channels: a supply shock (reduced labor supply as workers stay at home, unavailability of inputs, disrupted supply chains); a demand shock (reduced demand from laid off and homebound consumers, precautionary savings, investor caution); uncertainty<sup>8</sup> (unable to count on a stream of future revenues that justifies replacement of workers or machinery for example); and the unavailability of finance which interact to create a downward spiral of firm activity. This section examines whether SMEs are more affected by each of these shocks than large firms, within the same country and sector.

Consumers are postponing demand for non-essential goods and services, such as clothing, tourism, durable goods and so on. The fall in domestic demand directly hits domestic suppliers. But for firms in global value chains, consumer spending in high-income destination markets affects demand for their exports. Consumption patterns in these countries has been closely following the virus transmission, fewer COVID cases restores consumer confidence and more cases erodes it (Chetty et al., 2020; Leer, 2020). Therefore, the duration of the demand shock facing firms in developing countries is tied to the health response both domestically and in developed economies. SMEs have been more severely affected by demand shocks than large firms in general; while they are less exposed to shocks to foreign demand in particular through exports (see Figure 4, top panel). According to the surveys available, SMEs are more likely by 9 percentage points to experience a fall in sales compared to one year ago than large firms and the sales of SMEs on average are lower by 8 percentage points than one year ago. Some firms and sectors are clearly experiencing demand growth in response to COVID – think of health care, home-office equipment etc. However, SMEs are also less likely to report a rise in sales than larger firms by 6 percentage points. Thus, SMEs experience more of the downside and less of the upside. In contrast, SMEs are less likely to

> 7 Several papers have used sectoral classifications of COVID exposure often for the United States, for instance based on essential services, the ability to work from home and so on (e.g. Dingel and Neiman, 2020).  Other approaches have constructed country vulnerability measures, often using GVC or commodity trade data (e.g. IFC Country Vulnerability heat maps).

> 8 Based on the World Bank’s COVID-19 Business Pulse Surveys, expectations for the next six months range from a 60% decline to a 20% increase in sales.

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