The coronavirus pandemic has brought on the worst recession in Germany since the Second World War. Many companies have managed to stay afloat during the COVID-19 pandemic thanks to government aid. The pandemic is hitting young, less established companies, such as startups, particularly hard.

ZEW economist Jürgen Egeln speaks about the challenges faced by newly founded companies in the coronavirus crisis.

ZEW economist Jürgen Egeln, deputy head in the Research Department “Economics of Innovation and Industrial Dynamics” at ZEW Mannheim, draws on findings of the IAB/ZEW Start-up Panel to recommend what young companies can do to survive the crisis.

Only large enterprises benefit from higher loss carryback

All in all, the researchers conclude that especially large enterprises can expect a liquidity boost from the increase both in the amount of losses that can be carried back to the previous period and in the allowance for trade tax additions. As a consequence of the coronavirus assistance measures, the amount of losses that can be carried back was increased from one to five million euros, while the tax-free amount for trade tax additions was doubled from 100,000 to 200,000 euros. Small companies that were below these thresholds prior to the measure will not benefit from the increase. “For small firms, it would be more important to expand the period of the loss carryback provision to two years,” suggests Theresa Bührle, researcher in the ZEW “Corporate Taxation and Public Finance” Department and co-author of the study. “This would give them the opportunity to claim tax refunds for both 2019 and 2018.”

As a further measure, the coronavirus tax assistance scheme also involves a temporary re-introduction of the declining-balance deprecation method for new investments. While this potentially benefits all companies, this measure does not go beyond the steps taken during the financial and economic crisis. “The German government could, for instance, temporarily allow immediate write-offs. Given the current low interest rate environment, this would not place a heavy burden on the German federal budget. At the same time, this would significantly increase incentives for investment,” explains Leonie Fischer, researcher in the ZEW “Corporate Taxation and Public Finance” Department and also co-author of the study.

Are most of the companies struggling during the coronavirus pandemic start-ups?

At a fundamental level, there is little difference between established companies and young companies. Around 70 per cent of all companies have been negatively affected by the COVID-19 pandemic. Among the remainder, 20 per cent have remained stable, while just 10 per cent have been positively affected by the crisis. But there are differences between established companies and start-ups when it comes to the scope of COVID-19’s impacts. A higher percentage of start-ups report being “very strongly” or “strongly” affected by the crisis (whether good or bad). Therefore, there is a stronger polarisation of effects in newly founded companies than in established ones.

Why are young companies more likely to see a large impact from the crisis?

Young companies, especially innovative ones, face much uncertainty. Even under favourable economic conditions, many fail and exit from the market after only a short time. Fluctuation is particularly high in consumer services and retail. Often, they lack financial reserves or a solid customer base. Manufacturers of high-demand products during the coronavirus pandemic, such as respiratory masks or disinfectants, have fared well. By contrast, businesses and freelancers in the creative sector have been hit very hard.

How have young companies responded to the crisis?

As in previous crises, companies have been reconsidering their business processes and adjusting them where necessary. Around one-third of young companies have decided to change their innovation strategy. For example, they change the processes through which they are able to pursue innovations that they are working on. One-quarter are moving to markets located elsewhere. Some have elected to change their product range. A good example are schnapps distilleries, which have repurposed the equipment for disinfectant manufacture. But changes in supply have rarely led to noteworthy effects in the aggregate, at least at the time of the IAB/ZEW survey in May. These are strategies designed to weather the crisis. For longer-term findings, we will

This project has received funding from the European Union Horizon 2020 Research and Innovation action under grant agreement No 82278

Date

20.11.2020

Contact

Online Communications Manager

Phone: +49 (0)621 1235-322

yvonne.braeutigam@zew.de