In 2020, the Covid-19 pandemic and the succession of lockdowns, social distancing rules and restrictions on businesses pushed many small businesses to the brink. While various forms of government support were available, corporate insolvencies in England and Wales rose in 2023 to the highest level in thirty years, according to the Insolvency Service.

To be better prepared for any future crisis, businesses and policymakers alike need to learn lessons from the pandemic and understand what contributes to better business resilience. In a recent study,* we investigated the role that the digitalisation of Small and Medium-sized Enterprises (SMEs) plays in boosting resilience. In particular we explored the use of digital tools and technologies prior to the Covid-19 crisis for the chances of business survival over the pandemic. Perhaps unsurprisingly, we find that digital technology – in particular the ability to sell online – became much more important in helping businesses continue operations during the pandemic. However, this is only the case for businesses in urban areas. In more rural settings, SMEs faced the same probably of going out of business no matter what their use of digital tools.

Digital technology and SME resilience

In our study, we considered the use of two digital technologies: digital record-keeping tools, such as the use of a digital bookkeeping platform or software, and online sales, either through a business’s own website or a third party such as Amazon or social media. Importantly, we measured the use of these technologies before the pandemic hit, giving us a measure of resilience that is independent of any of the ad-hoc investments in remote working technologies businesses made in the face of lockdowns. We found interesting shifts in the role these technologies played pre- and post-pandemic. While digital record-keeping was already associated with a lower probability of business exit before the pandemic, businesses with an online sales channel were actually more likely to exit.

However, this changed sharply with the onset of the pandemic: from 2020 onwards, businesses using either digital record-keeping technology or selling online were less likely to exit the market than businesses using neither of these technologies. Yet, these effects only held for businesses in urban areas: in rural areas, the protective effect of digital record-keeping disappeared after 2020 and digital sales were not associated with a difference in exit rates either pre- or post-pandemic.

Several possible explanations for this could be explored. One possibility is that businesses in urban areas may have better access to suppliers or skilled employees to implement and use these solutions. SMEs in rural areas may lack access to appropriate support and advisory services to implement digital solutions effectively. According to our results, access to fast broadband does not appear to play a role.

Business survival and productivity

On the bright side, there is a saying that every crisis brings an opportunity, and we do know from previous economic crises that businesses that exit during these times tend to be less productive and would have probably ceased operations sooner or later. The more productive businesses are more likely to weather the storm, implying an efficient reallocation of economic resources from less to more productive businesses.

We thus ask the hypothetical question: If all businesses had used digital technologies, what would the effect on business survival and productivity have been? Our findings suggest that there would have been an increase in the survival rate of urban businesses. Importantly, this would not have come at the cost of aggregate productivity among the group of SMEs we studied. The pandemic was such an unprecedented shock that even some otherwise highly productive businesses were unprepared for it, and better use of digital technologies would have helped them survive. Again, we observe the opposite in rural areas: universal adoption of digital technologies would have only made a small difference to business exit, and they would have actually helped less productive firms to survive.

Investing in resilience vs public support

Using information on the use of government support schemes during the pandemic, we can also compare the role of digital technologies as a resilience tool against ad-hoc government support to help businesses survive. While support schemes were extensive, not every business was eligible or made use of what was available. We find that for urban businesses, digital technologies were actually more important in preventing business exit than government support, hinting at the importance of investments in technology. In rural areas on the other hand, government support was more effective at helping businesses survive, confirming our assumption that there are other barriers in rural settings that prevent businesses from making effective use of digital tools. For businesses in urban areas, support to adopt digital technologies is an effective policy option to increase resilience, but for rural businesses other barriers would have to be addressed first. While further research is needed on what exactly these barriers are, direct financial support to businesses in distress appears to be a more effective crisis response.

Carolin Ioramashvili, Assistant Professor in Innovation Policy at the Science Policy Research Unit, University of Sussex, and Sabine D’Costa, Senior Lecturer in Economics at Westminster Business School, University of Westminster

* D’Costa, C. Ioramashvili (2025)Does digitalisation increase firm survival? Evidence from British SMEs during the Covid-19 crisis. Working Paper No. 055, The Productivity Institute

https://www.productivity.ac.uk/research/does-digitalisation-increase-firm-survival/