Firms can pivot so much and no more, says professor

Firms can pivot so much and no more, says professor

Senior staff reporter

Wednesday, September 23, 2020

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IF Jamaica's COVID-19 cases continue to increase and the Government is forced to implement more measures that could precipitate a shutting down of all, or part of the economy, the outcome would be “dire” for some businesses, one university professor has said.

Charging that “there is only so much and no more pivoting that firms can do”, professor of development finance at The University of the West Indies and dean of the Faculty of Social Sciences David Tennant says, while some businesses have been able to carve out new opportunities created by the pandemic, others are going to find it difficult to pull through.

He was speaking last Friday during a virtual meeting at which the findings of an Inter-American Development Bank (IDB) study, conducted in July to assess the impact of the COVID-19 pandemic on Jamaican businesses, particularly micro, small and medium enterprises (MSMEs), were disclosed.

The study, which was led by Professor Tennant, surveyed 390 non-financial businesses across all sectors, parishes and business sizes, and found that a large proportion of MSMEs have their markets locally, consisting of individuals and, to some extent, small firms.

“If there is a huge spike and there is a closing down of the economy like what we experienced at the start, many MSMEs, based on the data, will not be able to survive,” Professor Tennant said.

Quizzed as to how MSMEs should respond to this threat, he replied: “MSMEs should work with the large companies, schools, the Government, to try and reduce the spread of the pandemic as much as is possible.

“I know that is not the answer you are looking for, but that is one of the key areas we have to think about,” he told the meeting.

Jamaica reported its first case of COVID-19 in March. Since then, the Government has implemented numerous measures to contain the spread of the virus, resulting in significant economic decline. MSMEs, which already faced challenges under normal conditions, are now under more pressure in relation to their ability to pivot, as they are hindered by capacity constraints and access to financing.

According to the IDB study, over half (52.2 per cent) of the respondents laid off workers up to the end of May 2020. On average, firms laid off just over a quarter of their workforce (27.6 per cent), while almost a fifth (18.3 per cent) of the firms indicated that between 81 per cent and 100 per cent of their workers were laid off, and a further 12.4 per cent laid off between 41 per cent and 80 per cent of their workers.

Based on the research, the relative vulnerability of micro and small firms is again highlighted, with over a fifth of the respondents in these categories indicating lay-offs of between 81 per cent and 100 per cent of their workforce, compared to 11 per cent of medium-sized firms and no large firms reporting similarly large lay-off exercises. It said approximately one-fifth of small and medium-sized firms reported laying off between 41 per cent and 80 per cent of their workers, while only 6.2 per cent of large firms reported lay-offs of a similar magnitude.

According to the data, the “heightened vulnerability of the hospitality, creative and related service sectors is also confirmed, with almost 30 per cent of the respondents reporting lay-offs of 81 per cent to 100 per cent of their workforce.

“None of the other sectors had such a prevalent rate of large-scale lay-offs. Although more than half of the firms in our sample laid off workers, just over a third (37.6 per cent) had engaged in redundancy exercises up to end [of] May 2020, with 14 per cent of the respondents making between one per cent and 20 per cent of their workers redundant, and 10.1 per cent making between 81 per cent and 100 per cent of their workers redundant,” the study stated.

Professor Tennant, in addressing the question of the sectors that should be given precedence by the Government in the short term, and the ranking of MSMEs in this scenario, said: “The MSME sector must be prioritised.”

“If you think about the employment in the country, that is one of the areas in which the economy has done quite well pre-COVID, reducing the unemployment rate. A lot of employment comes through the MSME sector, so if it diminishes and struggles then employment is going to be adversely affected.

“If employment is adversely affected, then local consumption is going to fall. If local consumption falls, then the sector is going to be worse affected because their market is primarily individuals in the domestic market,” he pointed out. “So the adverse multiplier effect is going to be significantly worst. A key way of breaking that cycle or even slowing it, is by providing support to the sector.”

In the meantime, economist and IDB country representative in Jamaica, Therese Turner-Jones, speaking during the forum, said the IDB has upped its support to the MSME sector.

“We have a long-standing relationship with the Development Bank of Jamaica and they have been our main partner through which we can channel support to MSMEs. We have the IDB lab, our innovation lab, and we have been supporting small entrepreneurs through that window for years now.

“Obviously COVID-19 and this economic calamity is forcing us to be more creative in how we deliver support. I think the detail in this research is so insightful on so many levels... I think it gives us a roadmap for future work and we will continue doing what we are doing, but I think we need to also bolster the work we are doing in Jamaica,” she said.

Turner-Jones said, too, that there is a lot that firms can do if they have the mindset.

“I know access to finance is one of those stubborn problems that we've been facing throughout this region, not just in Jamaica. We continue to pound the doors of financial institutions. I think financial institutions will finally get it, given the length and depth of this particular crisis, we are going to have to figure out ways to support this particular sector,” she said.

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