Firm Size, Productivity, EU Funds, and Corruption

Abstract

The Covid-19 pandemic and the resulting economic crisis have led to structural rearrangements in the business sector. Most companies were hit by the pandemic, but some earned new opportunities, mainly firms which were able to use digital techniques, directly or indirectly, and remote working. In the first part of the chapter,we analyze the size distribution of firms in theEEEcompared to other regions of the EU and its implications for average labor productivity. Our main message is that not only is the EEE characterized by a lower average firm size and lower labor productivity than the EU average, but the differences in productivity between small and large firms are also much more substantial than in more advanced EU members. SMEs were more vulnerable to the damage caused by the Covid crisis, but this is unlikely to significantly change the firm size distribution in EEE. In response to the Covid-19 pandemic, the European Commission has announced a large-scale support program to help Member States mitigate the economic downturn and other economic and social damage. Our results highlight the importance of monitoring the use of this support program, preventing misuse, irregular activities, and mitigating corruption risk, especially in the EEE where the quality of state institutions is relatively poor, and the rule of law is weaker. The use of EU subsidies and the risks of corruption in the EEE need to be examined vigorously because there is a greater chance that EU subsidies will increase corruption and weaken market competition.