Turbulence in start-ups: short-term effect of COVID-19 lockdown on creation of new firms and its capital

Purpose Business creation is an important measure of real economic activity as it shows the dynamics with which new firms are born, create jobs, move their capital, innovate and compete with old firms. In this sense, this paper aims to analyze the short-term impact of the lockdown policies implemented to stop the spread of the COVID-19 on the creation of new formal firms in Ecuador. Design/methodology/approach This paper uses a regression discontinuity in time (RDiT) design jointly with official administrative real-time data. This data is collected by the supervisory and regulatory institution of formal companies in Ecuador. The authors use real-time data from January 13, 2020, to May 15, 2020. This period allows to use the President's order of effective lockdown on March 16, 2020, as the exogenous event. This gives 43 working days on each side of the cutoff date on the baseline model. Findings The authors find: an overall large drop in the creation of new formal firms (-73%) and a decrease in the total amount of initial capital coming from the new formal firms (-40%). Additionally, the results suggest that the negative impact of the COVID-19 lockdown on the creation of new formal firms seems not to decrease in the short term. The main conclusion is that lockdown policies have a negative impact on firm creation, a result that is of high policy relevance and can be a tool to design business attraction policies. Research limitations/implications The analysis is carried out in a short period because on May18, 2020, a new policy was applied in Ecuador that allowed firms to be created more quickly, with 1 USD of capital, and 1 shareholder, among other benefits, and this may affect the outcomes analyzed in this document, so extending the analysis of the impact of the lockdown to a longer period could result in biased results due to this policy. Additionally, studying daily sales would be of the utmost importance; however, these data are not found in the database of the supervising institution. Practical implications This study contributes to the empirical literature and the policy debate in various aspects. First, it is important to generate facilities for the creation of new formal firms, from the reduction of days it takes to create one (using technology as a support in this matter) to the decrease of the minimum capital to formalize a company. Second, improve the business conditions of the new formal firms that were born during the pandemic, but also that these conditions create stimulus for the creation of new companies. Third, the authors show that induced-lockdown policies have a negative impact on the creation of new formal firms and the total amount of initial capital from new formal firms; this effect could be a full-blown recession if governments do not apply mechanisms to revert this situation that could be a drag on the economy. Originality/value This paper opens the debate on the effects of the COVID-19 lockdown on the creation of new formal firms; therefore, future research could study the impact in a broader time window to analyze medium and long-run effects, but also in different economic sectors and in the effects on firm bankruptcy, which added to an analysis of job loss, will show a total effect of damage in the economy.