Firm-level Digitalization and Resilience to Shocks: Role of Fiscal Policy

Firm-levelDigitalizationandResiliencetoShocks: RoleofFiscalPolicy ManabuNoseandJiroHonda WP/23/95 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 MAY ©2023InternationalMonetaryFundWP/23/95 IMFWorkingPaper FiscalAffairsDepartment Firm-levelDigitalizationandResiliencetoShocks:RoleofFiscalPolicyPreparedbyManabuNoseandJiroHonda* AuthorizedfordistributionbyNikolayGueorguiev May2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Woulddigitalizationatfirmlevelstrengthenfirms’resiliencetoshocks?Andifso,couldfiscalpolicyplayanyroletopromotefirm-leveldigitalization?Thispaperempiricallyexploresanswerstothesequestions.Basedonalocalprojectionmethod(usingtheOrbisdatacovering1.8millionnon-financialfirmsfrom53countries),weestimatetheimpactsofaggregateuncertaintyshocksonfirms’sales,profitmargin,andemployment.Thefindingssuggestthatuncertaintyshocksaffectdigitalizedandless-digitalizedfirmsverydifferently.Digitalizedfirmsweathershocksbetter,withsmallerdropsinsalesandprofits,whileless-digitalizedonesareworseoff,withlong-lastingscars.Thenweexaminetheimpactoffiscalinterventionstopromotefirms’digitalization,usingcross-countrypaneldata(covering64countries).Theresultsuggeststhataligningthetaxregimeondigitalserviceswithgeneraltaxationprinciplesandcompetitiveprocurementrulesondigitalproductscouldeffectivelysupportthepromotionoffirm-leveldigitalization.Overall,ourfindingspointthatfirm-leveldigitalizationwouldhelpstrengthenfirms’resiliencetoashock,andfiscalinterventionscanplayanimportantroletopromotefirm-leveldigitalization. JELClassificationNumbers: H32,O11,O23 Keywords: Digitalization;Digitaldivide;Fiscalpolicy;Globaleconomy Author’sE-MailAddress: mnose@IMF.org;jhonda@IMF.org *TheauthorswouldliketothankVitorGaspar,NikolayGueorguiev,KatherineBaer,MarcosPoplawskiRibeiro,SebastianBeer,SalmaKhalid,YueZhou,andIMFFiscalAffairsDepartmentseminarparticipantsforinsightfulcommentsandsuggestions.MiyokoAsaiprovidedexcellentresearchassistance. WORKINGPAPERS Firm-levelDigitalizationandResiliencetoShocks: RoleofFiscalPolicy PreparedbyManabuNoseandJiroHonda1 1TheauthorswouldliketothankVitorGaspar,NikolayGueorguiev,KatherineBaer,MarcosPoplawskiRibeiro,SebastianBeer,SalmaKhalid,YueZhou,andIMFFiscalAffairsDepartmentseminarparticipantsforinsightfulcommentsandsuggestions.MiyokoAsaiprovidedexcellentresearchassistance. Contents Glossary4 ExecutiveSummary5 I.Introduction6 II.LiteratureReview7 III.Data8 A.OrbisData8 B.TheAggregateUncertaintyMeasure9 C.DigitalizationMeasure10 Country-levelDigitalizationIndex10 Firm-levelDigitalizationIndex11 IV.EconometricAnalysis12 A.BaselineResults13 B.State-dependentLocalProjectionEstimation13 Results14 HeterogeneousEffectbySector15 C.RobustnessChecks16 D.HeterogeneousEffectbyInitialFinancialPerformance18 V.ImpactofFiscalInterventionsonDigitalization20 VI.Conclusions24 AnnexI.Sample26 AnnexII.RobustnessChecks28 AnnexIII.RegressionTable:ImpactofFiscalInterventionsonDigitalization29 References30 BOX 1.Post-COVIDFirmDynamics:ApplicationoftheResultsandCaseStudy19 FIGURES 1.TimeSeriesoftheWorldUncertaintyIndex,1990Q1to2022Q310 2.DescriptionoftheCross-countryDigitalization10 3.DescriptionoftheFirm-levelDigitalization12 4.LocalProjectionRegression–BaselineResults13 5.LocalProjectionRegression–RegimeSwitchingModelResults15 6.LocalProjectionRegression–HeterogeneousEffectbySector16 7.State-dependentLocalProjectionRegression–RobustnessChecks17 8.Zombification–DifferencebyDigitalizationandFinancialPerformance18 9.DigitalizationandFiscalRestriction22 10.Estimatesforthe1stand2ndQuartilesofDTRIRanking23 TABLE 1.SummaryStatistics9 Glossary AEs AdvancedEconomies DAI TheWorldBank’sDigitalAdoptionIndex DTR DigitalTradeRestrictiveness EIU EconomicIntelligenceUnit EMs EmergingMarkets EMDE EmergingMaketsandDevelopmentEconomies FTE FiscalTransparencyEvaluation GDP GrossDomesticProduct GFC GlobalFinancialCrisis ICT InformationandCommunicationTechnology IOT Input-OutputTable LICs Low-IncomeCountries OECD OrganisationforEconomicCo-operationandDevelopment SIR Susceptible-Infected-Removed SME SmallandMedium-sizedEnterprises WUI WorldUncertaintyIndex ExecutiveSummary Woulddigitalizationatfirm-levelstrengthenfirms’resiliencetoshocks?Andifso,couldfiscalpolicyplayanyroletopromotefirm-leveldigitalization?Thispaperempiricallyexploresanswerstothesequestions.Basedonalocalprojectionmethod(usingtheOrbisdatacovering1.8millionnon-financialfirmsfrom53countries),weestimatetheimpactofaggregateuncertaintyshocksonfirms’sales,profitmargins,andemployment.Thefindingssuggestthatuncertaintyshocksaffectdigitalizedandless-digitalizedfirmsverydifferently.Digital