THE IMPACT OF COVID-19 ON SMALL BUSINESS

Submitted by:
NORHATA B. GALMAC
4/BSAB/B

Submitted to:
Prof. JALALODEN MAROHOM

Introduction
 In December 2019, the global health crisis caused by the Coronavirus Disease 2019
(COVID-19) pandemic began in China (Akpan et al., 2020a; CDC, 2020; Huang et al., 2020;
Ting et al., 2020), catching the world unawares and unprepared and causing significant havoc
to business activities, with serious adverse effects on small businesses (Akpan et al., 2020b;
Humphries et al., 2020).

Small businesses are likely to be severely affected, as they tend to be more

concentrated in sectors that have been directly affected by the COVID-19 response measures
(e.g., retail and services) and are typically more credit constrained than larger businesses
(Cao & Leung, 2020; Kumar & Francisco, 2005). Importantly, small businesses comprise the
majority of companies in the economy and are responsible for a substantial share of
employment (Humphries et al., 2020). Previous studies by Harel et al. (2019b, 2020a, 2020b)
that focused on promoting innovation in small businesses in industry sectors, showed that
small businesses that utilized open innovation tools (Harel et al., 2019b) and implemented
processes for sharing and utilizing knowledge (‘sharing processes’; Harel et al., 2020a) and
processes for developing an innovation culture that encourages innovation (‘cultural
processes’; Harel et al., 2020b), were more successful in promoting innovation. Earlier
studies on small businesses have also indicated the impact and direct link between innovation
and business performance and growth (Baregheh et al., 2009; DTI, 2003; Smith, 2005;
Taques et al., 2020).

In light of COVID-19’s far-reaching impact on all areas of life, and especially on the
economy and the business sector, the aim of the present study was to investigate the
pandemic’s effect on the scope of operations and the revenues of small businesses in
industrial sectors, and the extent to which adjustments or changes were made to business
activities in order to cope with the new challenges of this period. In order to try to assess the
COVID-19’s impact and future consequences for these businesses, the study looks at
whether, and to what extent, there were changes in the use of open innovation tools or
implementation of sharing and cultural processes that could potentially foster innovation, with
a corresponding impact on business performance. The decision to study this group of
businesses from among all small businesses stemmed from the fact that this was a distinct
group, in most cases consisting of businesses that operated in traditional industrial fields and
invested relatively small sums in R&D activity. These businesses are not engaged in high-
tech and advanced technology spheres, which in a conservative assessment can be said to
have had no material and immediate impact on their business operations.

On the other hand, these businesses do not belong to the group of businesses
engaged in the fields of retail, tourism and entertainment, which serve end consumers in face-
to-face interactions, and have been directly and severely impacted by the consequences of
COVID-19. The study is structured as follows: first, we present a short literature review,
including information and data on the COVID-19 epidemic, then provide background to
innovation in small businesses and insights regarding open innovation tools utilized by small
businesses, sharing processes and cultural processes. The next section presents the
theoretical framework, followed by the research methodology we employed, including an
explanation on the sample selection and data collection. The following section discusses the
findings and conclusions. We conclude with the theoretical contribution made by the research
and its practical implementation and a recommendation for future research.

Objective

This study examines employee perceptions of safety and health climates for well-being
during the COVID-19 pandemic in a sample of small businesses.

Literature review

COVID-19, which was declared a global pandemic by the World Health Organization
(WHO, 2019), has now infected more than 45 million persons and caused more than 1 million
deaths as of the end of October 2020 (ECDC, 2020). The frantic effort to curtail the human-to-
human transmission of COVID-19 led to a lockdown of communities and business closures
(Akpan et al., 2020a).

In the wake of this global health crisis and to avoid shutdown of economic activities,
the use of some technologies that were not considered essential by small businesses became
crucial to avoid a complete shutdown of the global economy (Ting et al., 2020). Many
businesses of all sizes have since implemented technologies such as Zoom virtual meetings
and other methods (Ting et al., 2020; Webster, 2020). These technologies became one of the
survival strategies during the lockdown of communities by different levels of the government
meant to contain the spread of the COVID-19 pandemic and enable the management of
operations and projects remotely (Vaccaro et al., 2020), or conduct business meetings
without physical contact among employees (Puddister & Small, 2020; Vaccaro et al., 2020).

Businesses in certain sectors that were defined by the authorities as essential for
continuing economic conduct were allowed to continue their activities under restrictions like
maintaining distance between employees. Yet, it is unimaginable how things would have gone
had the technologies currently in use by businesses during this global health pandemic not
been as pervasive (Akpan et al., 2020b).

On the other hand, the epidemic and the resulting lockdown have accelerated and
magnified the impact technology can have on some organizations’ business models. Many
small businesses have also been able to utilize new techniques to adapt and improvise their
business models (Puddister & Small, 2020; Vaccaro et al., 2020). Notable examples include
personal training, tutoring and client consulting, using virtual video platforms like Zoom
(Puddister & Small, 2020) and restaurants that have turned to take away and delivery options
backed by online meal ordering (Pantelidis, 2010).

Theoretical Framework

Many small businesses operate in the retail and service sectors and serve the end
consumer through face-to-face interactions. These sectors were the most adversely affected
by the COVID-19 pandemic, due to the restrictions and closures imposed by the authorities
(Cao & Leung, 2020).

As noted, small businesses often operate in niche and highly specific markets and are
able to provide something different from standardized products and services offered by large
companies. In the industry sectors particularly, many of them act as specialist suppliers of
parts, components and subassemblies and work as subcontractors to large industrial
companies (Yew Wong & Aspinwall, 2004), which for the most part continued to operate
during the COVID-19 period, in view of their status as essential industrial enterprises to the
economy.

Hence, the following hypotheses:

H1: The revenue of smallest businesses in the industry sector did not decrease during the
COVID-19 period as compared to the corresponding period last year.

H2: Most small businesses in the industry sector have not made changes or adjustments in
their business activity during the COVID-19 period.

H3a: Most small businesses in the industry sector have not reduced their use of open
innovation tools (knowledge-acquisition activities and external collaboration) during the
COVID-19 period.

H3b: Most small businesses in the industry sector have not reduced the extent to which
sharing processes were taking place in the business and the extent to which there was a
change in the cultural processes implemented in the business during the COVID-19 period.

H4a: The rate of revenue from subcontracting work among businesses, whose revenues grew
or remained unchanged during the COVID-19 period, is higher than the rate of revenue from
subcontracting work among businesses that experienced a revenue drop during this period.

H4b: There is a negative relationship between the rate of revenue from subcontracting work
and the change in revenue during the COVID-19 period, such that businesses with a high rate
of revenue from subcontracting work displayed revenue growth or unchanged revenues
during the pandemic.

H5a: The rate of revenue from subcontracting work among businesses that changed or
adjusted their business activity during the COVID-19 period is lower than the rate of revenue
from subcontracting work among businesses that made no changes or adjustments during
that time.

H5b: There is a negative relationship between the extent to which changes or adjustments
were made in the business activity and income from subcontracting work such that
businesses with a high rate of revenue from subcontracting work show lower levels of change
or adjustment in business activity.
 Earlier studies noted the contribution of operating in international markets to business
innovation (Autio et al., 2000; Chetty & Campbell-Hunt, 2005; Madsen & Servais, 2004; Rialp
et al., 2005; Zahra et al., 2000).

The wider the range of foreign markets and cultures in which a business is active, the
greater the firm’s exposure to knowledge sources and to new and varied ideas that allow it to
develop the capabilities and faster learning processes necessary for innovation and for the
advancement of business opportunities. Thus, businesses that operate in the international
market show greater flexibility that makes them better able to cope with change than
businesses active solely in the local market (Autio et al. 2000; Zahra et al., 2000). Also, the
pandemic began at different times in different countries, with differing levels of impact around
the world.

Hence, the following hypotheses:

H6a: The rate of revenue from export sales among businesses whose revenues grew or
remained the same during the pandemic is higher than the rate of revenue from export sales
among businesses whose income dropped during that time.

H6b: There is a positive relationship between export sales and the change in revenue during
the COVID-19 period such that businesses with a high rate of revenue from export sales
showed revenue growth or unchanged revenues during the COVID-19 period.

H7a: The revenue rate from export sales among businesses that made changes or
adjustments to their activity during the pandemic is higher than the revenue rate from export
sales among businesses that made no changes or adjustments during that period.

H7b: There is a positive relationship between the extent to which changes or adjustments
were made in the business activity and export sales, such that business with a high rate of
revenue from export sales show a higher degree of change and adjustment in their business
activity during the pandemic.
 Methodology

Sample

The sample included small businesses in the industry sectors in Israel that employ
between 10 and 50 employees.

The study included 50 business managers out of a group of 202 business managers
that participated in the earlier study by Harel et al. (2019a). The businesses in the present
study were selected based on innovation scores, on measures of OI tool utilization and on the
existence of sharing and cultural processes within the business as found in the prior study.
Given that most of the questions in the present study focused on changes in business activity
in the context of OI tool use and sharing/cultural processes, it was necessary to choose
businesses that utilized OI tools at moderate or higher levels and in which sharing/cultural
processes were present to a moderate or higher degree. For example, there was no point in
investigating changes in a business’ scope of collaboration with external entities, if it had
engaged in no such collaborations prior to the COVID-19 pandemic.

The business selection for the previous study was based on data from the Israeli
Industry and Craft Association that included all small businesses in these sectors, which by
law were incorporated into this organization. The study author contacted these 50 small
business managers, all of whom agreed to a telephone interview, resulting in a response rate
of 100%.

The interviews were conducted by telephone (call was initiated by the study author to
the business managers to their personal mobile phone). In light of the acquaintance from the
earlier study, none of the managers refused to participate in the interview for the current
study. No incentive was offered to the study participants.

During the interview, which lasted for about 10–15 min, the study author filled in the
answers in the questionnaire form, which was prepared by him in advance.

The interviews were not digitally recorded, but the study author recorded the responses in
handwriting as stated during the interview.
.

Analysis

The findings are presented in two parts. The first part comprises descriptive statistics
and presents the characteristics of the businesses, the characteristics of the business
managers and the businesses’ distributions according to the following: change in revenue and
the extent to which changes or adjustments were made in the business activity during the
COVID-19 period, the extent to which there was a change in the business’ usage of open
innovation tools (knowledge-acquisition activities and external collaboration) and the extent to
which there was a change in the sharing processes that were taking place in the business
and cultural processes that were implemented in the business during the COVID-19 period as
compared to the same period last year.

Quotes from the business managers are also included to provide explanations and
support for the answers they gave in the structured questionnaire.

The second part is the main analysis. In the first stage, t-tests for independent samples
were conducted to determine whether there were any differences between the businesses
whose revenues increased or remained unchanged during the pandemic and those whose
revenues declined, as well as to investigate the differences between the businesses where
changes or adjustments were made to business activity during the pandemic and businesses
where no such changes or adjustments were made. Differences between the business groups
were examined with regard to the following research variables: business characteristics,
business manager characteristics, the extent to which there were changes in business activity
aimed at identifying and acquiring external knowledge, the extent of collaboration with
external entities (Harel et al., 2019b), the extent to which sharing processes were taking place
in the business (Harel et al., 2020a) and the extent to which there was a change in the
cultural processes implemented within the business (Harel et al., 2020b) during the pandemic.

In the second stage, Pearson correlation coefficients were used to determine the
extent to which a relationship exists between change in revenue and the extent to which
changes or adjustments were made to business activity during the COVID-19 period, and the
other research variables noted earlier.