are postponing their investment plans amid uncertainty and expectations of a further deterioration in business prospects and the general economic outlook (Figure 13a and Figure 13b).
Figure 12
COVID-19 impact on use of labour services and on investment plans
Source: EIBIS 2020.
Base: All firms (excluding don’t knows/refusals to respond).
Note: Sectors correspond to the NACE Rev. 2 classification of economic activities in the European Union as follows: manufacturing is section C; electricity is section D (electricity, gas, steam and air conditioning supply); water supply is section E (water supply; sewerage, waste management and remediation activities); construction is section F; trade is section G (wholesale and retail trade; repair of motor vehicles and motorcycles); transport is section H (transportation and storage); accommodation is section I (accommodation and food service activities); and telecoms is section J (information and communication).
Question: Thinking about the impact of coronavirus, have you had to put staff temporarily on leave, make staff redundant or unemployed or reduced the number of hours they work compared to before the coronavirus pandemic? Has your company’s overall investment expectations for 2020 changed due to coronavirus? Will your company invest more, invest less or keep investment broadly the same?
Optimism about a rebound in investment in 2021 may be premature, however. While increased uncertainty and the deterioration in the economy in the first half of 2020 had the strongest impact on investment, firms also said they expected difficulties with finance, especially internal finance. This should come as no surprise as cash flows have retreated well into negative territory, especially in some sectors (see also the analysis in Chapter 3).
Firms that are more affected by the pandemic are significantly more pessimistic about their ability to finance investment internally over the next 12 months (Figure 14). The decline in sales caused by the lockdown resulted in low or negative cash flows for many firms. Some of those firms were obliged to draw down their liquidity as a result, which will affect their overall capital and, ultimately, their net worth (Chapter 3). These firms have lower internal funds to finance investment and are more likely to face worsening conditions for external finance because of their lower net worth.[8] Furthermore, the firms most affected by the crisis are often small and therefore even more exposed to finance difficulties. Unless these firms receive fresh capital, their investments are very likely to remain low beyond 2020, even in an economic recovery.
Figure 13
Change in investment in 2020 (by sector)
Source: EIBIS 2020.
Base: All firms (excluding don’t knows/refusals to respond).
Note: See explanations about sectors in the notes to Figure 12.
Question: Thinking about your investment activities, to what extent is uncertainty about the future an obstacle? Is it a major obstacle, a minor obstacle or not an obstacle at all? Do you think that business prospects specific to your sector or industry will improve, stay the same, or get worse over the next 12 months?
Less competitive firms with small cash holdings plan to invest less in 2020 (Maurin and Pal, 2020). Firms that were not profitable in 2018-2019 are much more likely to have pulled back their investment plans as a result of the pandemic, especially in Western and Northern Europe and in Southern Europe (Figure 15a). In previous EIBIS waves, these firms were typically less productive than profitable firms[9] and their liquidity was significantly lower. Figure 15b plots the cash-to-total assets ratio as a function of previous-year pre-tax profits, calculated using the matched EIBIS-Orbis database.[10] It shows that less profitable firms hold much less cash, as a share of total assets, than profitable ones. Firms with higher cash buffers can withstand a shock to cash flow much better, and they are better able to survive the shock and to continue to grow and invest (Joseph, Kneer, van Horen and Saleheen, 2020).
Figure 14
Impact of the COVID-19 crisis on internal finance
Source: EIBIS 2020.
Base: All firms (excluding don’t knows/refusals to respond).
Question: Do you think that availability of internal finance will improve, stay the same, or get worse over the next 12 months? Thinking about the impact of the coronavirus, have you had to put staff temporarily on leave, make staff redundant or unemployed or reduce the number of hours they work compared to before the coronavirus pandemic? Has your company’s overall investment expectations for 2020 changed due to coronavirus? Will your company invest more, invest less or keep investment broadly the same?
Figure 15
Profitability and cash holdings’ effect on investment
Source: EIBIS 2020 and EIBIS-Orbis matched database.
Note: The figure shows the 10th, 25th, 50th, 75th and 90th percentiles of firm-level cash to total assets.
Longer-term impact of the pandemic
While the pandemic may be brought under control sometime in the near future, it may have a permanent effect on the economy. The size and nature of the shock caused by the pandemic are such that it will likely trigger sweeping, structural changes in the economy, altering how we work, commute, travel and spend our holidays for many years to come. The evolution will likely modify investment priorities and employment patterns. Firms that do not invest in adapting to these changes might be left unprepared for future challenges.
The share of firms that do not have any investment plans in the next three years has increased compared to the average from 2016 to 2019 (Figure 16a). The share of small firms that do not plan to invest in the next three years has risen even faster. Smaller firms face greater difficulties in coping with the economic shock caused by the pandemic. The evidence is corroborated in Figure 15. Smaller firms that do not plan to invest over the next three years have significantly lower median productivity than smaller firms that plan to invest. The difference in productivity is largely absent for medium and large firms. It is therefore very likely that the consequences of the coronavirus on investment and productivity will be felt acutely in the medium term.
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