Journal of Industrial and Business Economics (2020) 47:499–510

https://doi.org/10.1007/s40812-020-00169-4

European SMEs amidst the COVID‑19 crisis: assessing

impact and policy responses

Jill Juergensen1 · José Guimón2   · Rajneesh Narula1 

Received: 30 May 2020 / Revised: 29 June 2020 / Accepted: 2 July 2020 / Published online: 11 July 2020
© The Author(s) 2020

Abstract
We consider how the COVID-19 pandemic has challenged European small- and
medium-sized enterprises (SMEs) in the manufacturing sector, and draw suggests
policy implications. The sudden onslaught of the pandemic has acted as an eco-
nomic shock, and we consider how it is likely to affect different types of manufactur-
ing SMEs. We distinguish between immediate effects, a result of the almost-simul-
taneous lockdowns across Europe and its major trading partners, and longer-term
implications for both SMEs and the global value chains where they are inserted. In
the shorter run, most SMEs have faced logistical challenges in addition to demand
disruptions, although the severity has differed across firms and industries. We argue
that in the longer-term, there will be different challenges and opportunities depend-
ing on the type of SME. Policy interventions will also need to be sensitive to the dif-
ferent types of SMEs, rather than adopting a one-size-fits-all approach. The policy
mix will need to shift from its initial focus on the survival of European SMEs in the
short term, towards a more structural and longer-term approach based on promoting
their renewal and growth through innovation, internationalization and networking.

Keywords  European SMEs · Innovation · COVID-19 · Economic impact · Policy

responses

* Rajneesh Narula
[email protected]
Jill Juergensen
[email protected]
José Guimón
[email protected]
1
Henley Business School, University of Reading, Whiteknights, Reading RG6 6UD, UK
2
Department of Development Economics, Autonomous University of Madrid, Campus de
Cantoblanco, 28049 Madrid, Spain

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 500 Journal of Industrial and Business Economics (2020) 47:499–510

1 Introduction

Small- and medium-sized enterprises (SMEs)1 are the backbone of the European
economy, making up 99.8% of all enterprises and two-thirds of employment (Euro-
pean Commission 2019). In the case of the manufacturing sector, which forms
the focus of this paper, SMEs account for 58% of employment and 42% of value
added (European Commission 2017). Over the last few decades, global value chains
(GVCs) have expanded amidst the growing fragmentation of economic activity and
the concurrent decline of the vertically integrated firm (Kano et al. 2020). The flex-
ibility of GVCs and their ability to reorganize themselves to optimize efficiency has
proven challenging for European SMEs, in part, due  to high labor costs and rigid
regulations. However, the increased application of digital technologies in manufac-
turing, also known as Industry 4.0 (van Tulder et al. 2018), has been interpreted as
a new opportunity for Europe that may enable a renaissance of local manufacturing
SMEs (Bellandi et al. 2019).
The continuing competitiveness of European manufacturing SMEs derives from
their capacity to be innovative. However, because of their size and ownership struc-
ture, they also generally struggle with profitability and liquidity, thus becoming par-
ticularly vulnerable to external shocks (European Commission 2019). In fact, crises
such as the COVID-19 pandemic are likely to have an inordinate effect on SMEs
(Laufs and Schwens 2014; OECD 2009), given their limited resources (human,
financial and technical) compared to large firms (Martin et al. 2019; Narula 2004).
On the other hand, SMEs are more flexible and adaptable than their larger coun-
terparts because of their small size, their tendency to be privately owned, and their
relatively flat hierarchical structures, all of which can be beneficial during a crisis.
Overall, however, SMEs are generally less resilient compared to larger firms, mean-
ing that they take longer to return (if at all) to ‘normal operations’ following a cri-
sis. This vulnerability became apparent in the aftermath of the 2008 global financial
crisis, where SMEs experienced both a severe decline in demand and financial dis-
tress. The falling demand particularly affected manufacturing SMEs (OECD 2009;
Wymenga et al. 2011). Hence, it is critically important to consider the role of manu-
facturing SMEs in recovering from the economic crisis associated with the COVID-
19 pandemic.
This pandemic represents an external shock of unprecedented magnitude, affect-
ing European SMEs on the supply and demand sides alike. For example, survey data
from May 2020 suggest that 41% of UK SMEs had stopped operations and 35%
feared they would be unable to reopen again (FSB 2020). In Germany, 50% of SMEs
expected a negative effect due to the crisis with one-third anticipating a decline in
revenues by more than 10% (DIHK 2020). In Italy, more than 70% indicated they
were directly affected by the crisis (CNA 2020). While SMEs in other European
countries have voiced similar concerns (OECD 2020), these firms are also highly

1
  The European Commission defines SMEs as firms with less than 250 employees and have an annual
turnover of up to 50 million Euros, or a balance sheet of no more than 43 million Euros (as set out by the
Commission Recommendation of 6 May 2003) (European Commission 2019).

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Journal of Industrial and Business Economics (2020) 47:499–510 501

heterogeneous along several dimensions. For example, in the context of the 2008
global financial crisis, Cowling et  al. (2018) found that larger, established SMEs
in the UK were more affected than smaller, younger SMEs. The latter were more
agile and speedy in responding to the crisis, while older firms were not. Thus, while
external shocks affect all SMEs to some extent, it is important to consider how dif-
ferent ‘types’ of SMEs are affected by a crisis.
In this paper, we examine how different types of European manufacturing SMEs
are affected by the COVID-19 crisis and draw some policy implications based on
the analysis. Clearly, the impact of this crisis will vary substantially across indus-
tries, and this will require detailed sectoral analyses and foresight studies. How-
ever,  this is beyond the scope of this paper. Rather, we build on the taxonomy by
Narula (2002), which distinguishes between three types of SMEs. Firstly, there are
stand-alone SMEs, which trade under their own brand, producing final goods for the
consumer or industrial markets. They can, for example, be found in the Italian and
Spanish ceramic tile industry (Fernández-Mesa and Alegre 2015). More generally,
stand-alone SMEs struggle to achieve economies of scale, and many of them seek
to differentiate themselves, by operating in (global) niches. However, especially in
traditional sectors where differentiation through product or process innovation is dif-
ficult to achieve, stand-alone SMEs are continuously challenged by directly compet-
ing with their larger counterparts.
Secondly, specialist-supplier SMEs primarily exist in oligopolistic environments
where they provide intermediate goods to larger firms; for example, in the automo-
tive and aerospace industries (Frigant 2013; Speldekamp et al. 2020). While some
are entirely dedicated to one (or a few) customer(s), operating under exclusive cus-
tomer–supplier agreements, others are part of GVCs, where there is a high degree of
interdependence between actors.
Finally, knowledge-based SMEs generally develop emerging, pre-paradigmatic
technologies, supplying specialized knowledge-based assets to other firms or con-
sumer markets. Many operate in nascent sectors, such as biotechnology, medical
research or ICT manufacturing, where they collaborate with (or spin-off from) uni-
versities and large multinationals.

2 Implications of the COVID‑19 pandemic for European

manufacturing SMEs

Though the full economic impact of the pandemic is hard to predict, it is already
apparent that it represents an unprecedented external shock. On the supply side,
SMEs have faced logistical issues due to the disruption of transportation and labor
shortages. On the demand side, SMEs have seen their demand decline substantially
due to lockdown measures, a drop in consumer confidence and the shutting down
of a number of GVCs in affected industries. The severity of these demand and sup-
ply shocks is likely to differ according to whether the firm is a stand-alone, a spe-
cialized-supplier or a knowledge-based SME. These nuances are important to bet-
ter understand the medium- and long-term effects, and to set policies accordingly.
It is worth distinguishing between the immediate effects of the shock, due to the

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 502 Journal of Industrial and Business Economics (2020) 47:499–510

almost-simultaneous universal lockdowns across major economies between April

and June 2020, and its longer term effects.

2.1 Immediate effects of the lockdowns on different types of manufacturing

SMEs

SMEs of all types have experienced immediate effects of the lockdowns on their
upstream and downstream activities. Specifically, on the supply side, stand-alone
SMEs have faced considerable logistical issues. However, while reduced capacity
utilization represents one key challenge, demand-side effects pose a more severe
threat. Indeed, most consumer-focused, stand-alone SMEs operate in industries
characterized by an elastic demand. With consumers facing employment uncer-
tainties and financial constraints, many of these SMEs have experienced a sudden
decline in demand. In contrast, many stand-alone SMEs serving the industrial mar-
ket may benefit from their niche position, as they face few substitutes and, there-
fore, customers may be reliant on them. However, with production lines being halted
across Europe during the lockdowns, and GVCs disrupted, many of these firms are
also likely to face reduced demand or an incapacity to produce.
Specialist-supplier SMEs were also severely hit both on their demand-side and
their supply-side. With many being engaged in exclusive agreements, orders from
key customers which themselves stopped production were likely to be halted.
Such effects have occurred in the automotive sector, for example. However, given
their specialized focus, these SMEs supply vital components to their customers
and, hence, once restrictions are lifted and production restarts, demand is likely to
recover. Notably, some SMEs serving the industrial markets, including stand-alone
and specialist-supplier SMEs, may have temporarily repurposed their operations
towards goods needed during the pandemic, such as face masks and medical equip-
ment; at least making up for some of their lost demand.
Finally, demand-side implications for knowledge-based SMEs during the crisis
were likely to have been less severe, compared to their supply-side issues. With
many of these SMEs requiring laboratories or special equipment, for example, little
progress can be made with scientists and engineers having to work from home.

2.2 Short‑ and long‑term implications for different types of manufacturing SMEs

There are economic implications associated with the COVID-19 pandemic that go
beyond the lockdowns. As outlined in Table  1, there are short-term effects which
apply to all types of SMEs and there are medium- and long-term implications which
differ across these firms. In the short-term, SMEs of all types will encounter finan-
cial concerns and liquidity issues. Specifically, stand-alone SMEs have experienced
a rapid decline in demand as well as some supply chain challenges, making them
particularly reliant on external financial support. Even before the crisis, many of
them were operating under tight budgets and financial constraints. These have wors-
ened as a result of the crisis, making their demise more likely. Knowledge-based
SMEs and specialist-suppliers have also experienced some interruptions, making

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 Table 1  Short-term and longer term effects of the COVID-19 crisis on manufacturing SMEs
Stand-alone SMEs (consumer and industrial) Specialist-supplier SMEs Knowledge-based SMEs

Short-term Most SMEs face liquidity issues and tightened financial constraints, following the disrupted operations during the lockdowns
There is an increased reliance on governmental subsidies and many SMEs apply for their local, governmental support schemes; depending on
eligibility
The main focus is on addressing immediate operational issues, ‘fixing’ particular disruptions on the demand and the supply side
New concepts and changes are put in place to ensure further governmental restrictions are being followed; for example, ensuring social distancing
measures
Medium-/ Long-term Many of these SMEs will have to upgrade their GVCs will be reorganized; growing trends New applications of their technologies can arise
digital infrastructure, enabling online sale towards multiple sourcing, stock manage- in a post-COVID-19 world; for example, in
channels, teleworking etc ment; reshoring, embracing geographical areas such as medical research and equipment
Employees will have to be re-trained accord- proximity Some may adapt their nascent technologies
ingly Supplier SMEs will see changes on both towards finding solutions for and tackling the
Long-term investments will be required to sides: They will re-organize their own sup- issues having arisen during and through the
Journal of Industrial and Business Economics (2020) 47:499–510

upgrade production processes to cut costs ply chains and will see their key customers pandemic
and increase productivity reorganize Successful SMEs can benefit from further gov-
New opportunities will arise for industrial Staying in existing agreements and entering ernmental research grants
SMEs to enter new supply chains or deepen new ones will depend on their ability to keep New start-ups may emerge to capture areas of
their involvement in existing ones; some may costs low and match prices; without compro- growth through ‘creative destruction’
also re-organize their own supply chains mising quality
Long-term and increased investments in digital
technologies will be required to enable
automation
503

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 504 Journal of Industrial and Business Economics (2020) 47:499–510

many of them vulnerable to financial issues as well. Additionally, in order to follow

continued government restrictions associated with social distancing, many SMEs
have had to implement significant changes in the physical establishments, requiring
further financial investment. Thus, as shown in Table 1, there are important univer-
sal short-term effects associated with the pandemic.
In the longer term, however, other challenges (and opportunities) will arise that
differ across types of manufacturing SMEs. In particular, the crisis has pointed
stand-alone SMEs to the importance of investing in digital technologies. These
became essential for SMEs, not only to support crucial downstream activities such
as sales and marketing, but also to increase their internal efficiency and productivity
(PwC 2018). From a managerial perspective, digitization provides new opportuni-
ties for firms (Cirillo and Zayas 2019) and the crisis associated with the COVID-19
pandemic will accelerate the responsiveness of SMEs to harness them. However,
some SMEs may struggle to implement digital initiatives due to prevailing financial
concerns following the crisis, and the need to re-train staff accordingly. Neverthe-
less, besides digitalization, the aftermath of the COVID-19 pandemic might also
give a new impulse to other ongoing trends affecting manufacturing SMEs, such as
the transition towards environmental sustainability.
Moreover, as outlined in Table  1, the COVID-19 pandemic is likely to change
GVCs (UNCTAD 2020; Gereffi 2020). For decades, these have been character-
ized by a globally scattered production system, tailored towards cost-optimization
through cheap labor and just-in-time production (Javorcik 2020). The pandemic has
evidenced the need to make GVCs more ‘resilient’ through supply chain diversifica-
tion and reversing the perceived overreliance on a few (Asian) suppliers, reducing
the dangers of a monopsonistic situation in the future (Miroudot 2020). Changes
in GVCs are likely to occur in terms of reshoring, supplier diversification, stock
management and embracing proximity, which brings new opportunities for Euro-
pean specialist-supplier SMEs and industrial stand-alone SMEs (see Table 1). Spe-
cifically, the potential reshoring of certain aspects of manufacturing operations to
Europe represents a key opportunity to be harnessed by these SMEs. However, par-
ticipants in modern value chains are characterized by a high degree of specialization
and customization. This level of specialization takes time, effort and money for new
members to achieve, and requires coordination with many other actors. Thus, the
high degree of interdependence between GVC actors makes the replacement of one
member rather difficult (Shih 2020). Nevertheless, the COVID-19 pandemic is likely
to provide an impulse for GVC reorganization.
It is likely, therefore, that some of the anticipated changes will require GVC ‘lead
firms’ to reorganize their supply chains and some specialist-suppliers will see their
contracts terminated. In general, SMEs in GVCs are particularly vulnerable to exter-
nal shocks because ‘lead firms’ often pass their own difficulties on to them (OECD
2009; Narula 2019). Thus, to keep their position in GVCs, European specialist-sup-
plier SMEs will have to be highly innovative to keep their costs down, whilst main-
taining price and quality standards. Those SMEs with prior experience and invest-
ments in such cost-oriented process and organizational innovations enjoy a natural
advantage, making their survival more likely. Additionally, a post-COVID-19 world
will be characterized by greater digital customer interactions and automated

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Journal of Industrial and Business Economics (2020) 47:499–510 505

processes, which may well enable flexible and stable supply chains (McKinsey
2020). Thus, in order to stay relevant in GVCs, European specialist-supplier SMEs
will not only have to be highly innovative to match prices and quality standards of
rivals, but also to upgrade their internal operations through digital initiatives.
Despite these challenges brought by changes in GVCs, there will also be entre-
preneurial opportunities, offering new areas of growth and allowing newer SMEs
to benefit from creative destruction dynamics (Schumpeter 1911). Indeed, empirical
evidence suggests that highly ambitious entrepreneurs are able to perceive opportu-
nities in times of adversity and exploit unfulfilled gaps and market needs following
a crisis (Giotopoulos et  al. 2017). For example, birth rates in ICT manufacturing,
which prior to the pandemic were relatively low (European Commission 2017), may
increase as a response to the anticipated demand for ICT equipment induced by tel-
eworking. On the other hand, scholars argue that entrepreneurship is dependent on
the economic climate and is likely to be particularly hit by external crises (Klap-
per and Love 2011). For example, empirical evidence points towards lower levels
of entrepreneurship following the 2008 financial crisis (OECD 2009). With entre-
preneurial endeavors ultimately being tied to uncertainty and financial risks, many
potential entrepreneurs may put their plans on hold, until more concrete implica-
tions of the pandemic have unveiled. Overall, whether existing SMEs will survive
and whether entrepreneurship can flourish will ultimately be determined largely by
European policymakers.

3 Policy responses: from survival to renewal and growth

European policymakers were quick to recognise that supporting SMEs was of para-
mount importance to address the economic crisis caused by the pandemic. In con-
trast to the 2008 financial crisis where initial policy attention in most European
countries focused on supporting banks and large construction firms this time around
SMEs have become the center of policy attention from the outset.
Recognizing that SMEs tend to be most vulnerable during this kind of severe
economic shock, the immediate policy priority at the beginning of the pandemic has
been to address the challenges of the survival phase for SMEs. This has  entailed dif-
ferent kinds of financial support to prevent liquidity crunches and minimize employ-
ment losses. Progressively, and as confinement measures are alleviated, policies will
need to refocus towards the renewal and growth phase for those SMEs that survived,
shifting to more structural policies aimed at promoting innovation, internationaliza-
tion and networking. Table 2 summarizes the scope of these two phases of policy
intervention and the main policy instruments used in each phase.
A recent OECD survey offers a useful cross-country analysis of SME policy
responses during the survival phase (OECD 2020). A remarkable finding is that
most European governments acted quickly to protect the workers of SMEs through
specific wage support schemes for partial unemployment, working hour reduction
and sick leave. Most European countries also put in place measures that enabled
SMEs to postpone payments, as well as new lines of finance to protect the liquidity
of SMEs. The latter have included loan guarantees to incentivize commercial banks

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 506

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Table 2  Policy approaches to support manufacturing SMEs during the COVID-19 crisis
Survival phase Renewal and growth phase

Main focus Financial support to prevent liquidity crises and maintain employment Structural measures to foster innovation, internation-
alization and networking
Time horizon Short-term Medium-/Long- term
Target groups One-size-fits-all approach Differentiated strategy by sector and by type of SME
Policy mix Reduction of working hours and temporary unemployment Support for internationalization
Deferral of tax, social security payments, debt payments, and rent and utility pay- Innovation support schemes
ments Training and skills development
Loan guarantees Teleworking and digitalization
Direct lending to SMEs Cluster development and networking initiatives
Grants and subsidies Entrepreneurship and start-up support
Journal of Industrial and Business Economics (2020) 47:499–510
Journal of Industrial and Business Economics (2020) 47:499–510 507

to expand their lending to SMEs, as well as direct lending to SMEs through new
funds created by governments or central banks. In addition to loans, several Euro-
pean governments also offered direct financial support to SMEs through grants and
subsidies. Altogether, the policy mix to support the survival of SMEs during the first
stage of the crisis was the same, regardless of the type of SME. However, such poli-
cies were more critical to specialized-supplier SMEs, which suffered most from the
disruption of GVCs, than to certain stand-alone SMEs with nationally-bound opera-
tions, particularly in certain sectors such as the agro-food industry or the manufac-
turing of medical equipment, which might have even benefited from the crisis.
In the renewal and growth phase, the focus of the policy mix needs to shift
towards more structural measures aimed at promoting the resilience of SMEs in the
longer term and supporting their further growth. The focus here is to foster innova-
tion, internationalization and networking. In contrast with the survival phase, in this
case different types of SMEs might require different policy interventions. Indeed,
more strategic and targeted policy strategies will become necessary in this stage,
taking into consideration the opportunities and challenges facing different sectors
and the particularities of different types of SMEs within those sectors. For example,
stand-alone SMEs will benefit more from policy support to enter new international
markets, while the best policy approach towards specialized-supplier SMEs might
be to strengthen local networks and clusters, promoting the embeddedness of their
customers (often multinational firms) in the territory. All types of SMEs will benefit
from strong innovation support schemes, but the focus required might be different.
Specifically, product and marketing innovations are most relevant for stand-alone
SMEs, including those that differentiate themselves (or operate in niches) and those
which—due to the nature of their industry—do not. For the latter group, marketing
innovations may be particularly valuable to retain existing and attract new custom-
ers. For specialized-suppliers, the main focus will need to be on process and organi-
zational innovations, enabling them to compete on price and quality. Meanwhile,
stronger investments in entrepreneurship and start-up support will turn critical to
promote knowledge-based SMEs. The most adequate policy mix will also depend on
the particularities of each industry and territory, making it necessary to adopt more
strategic policy responses, in contrast with the one-size-fits-all approach that charac-
terizes the survival stage.
The shift from a focus on survival to the renewal and growth phase is a delicate
one that requires a proper sequencing of policy responses. While the survival phase
is important, it is very costly and cannot last forever, given its profound effect on fis-
cal deficits and public debt. Removing the associated initial policy actions should,
therefore, be well planned, gradually removing generic financial support measures,
especially grants, as the economic situation stabilizes, while introducing new sup-
port policies fostering innovation and growth.
Policymakers will need to adopt a more proactive role, coordinating new indus-
trial efforts for coupling domestic capacities with the dynamics of GVCs. As we
have argued earlier, the COVID-19 crisis can also act as an accelerator of digitali-
zation and sustainability transitions, while spurring a renewed interest in emerging
health technologies such as biotechnology and genetics. Policymakers should cre-
ate new incentives for European firms to benefit from these opportunities, against

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the context of the ongoing structural reshaping of globalization characterized by the

increasing influence by China (Petricevic and Teece 2019). This calls for a new gen-
eration of demand-oriented innovation policies, such as strategic public procurement
for innovation and investment in environmentally-oriented projects in the fields of
renewable energy, transport infrastructure, and information technologies.
This approach -which has been increasingly influencing European, national and
subnational policies over recent years- represents a shift towards “transformative”
industrial and innovation policies, aimed at setting the direction of change rather
than just addressing market failures (Schot and Steinmueller 2018). However, fol-
lowing the sharp fiscal effects of the initial wave of public expenditure in the “sur-
vival phase”, many European countries will lack the capacity to aggressively pursue
this kind of strategic “renewal and growth” agendas. Therefore, policy intervention
at  the EU level will become critical to support European manufacturing SMEs,
including new lines of research and innovation funding from the European Com-
mission, as well as dedicated investments and financing by the European Investment
Bank.
Given the contribution of manufacturing SMEs to the European economy, poli-
cymakers need to carefully reassess their policy mix in light of the evolution of the
crisis. An ambitious structural policy approach based on promoting the renewal and
growth of European manufacturing SMEs—through innovation, internationalization
and networking—is of paramount importance to deal with the challenges ahead.

Compliance with ethical standards 

Conflict of interest  On behalf of all authors, the corresponding author states that there is no conflict of
interest.

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