The mediating effect of innovation during the COVID-19 pandemic on Ibero-American MSMEs

What is it about?

The COVID-19 pandemic hit small businesses hard — but this study shows that innovation acted as a crucial buffer that helped many of them survive the storm. Drawing on responses from over 8,400 micro, small, and medium enterprises (MSMEs) across 14 countries in Latin America and Spain, the authors set out to understand not just whether the pandemic hurt business performance, but how. Their key question: did innovation help explain the connection between the crisis and how firms actually performed? The answer is yes. The pandemic clearly dragged down revenue, profitability, and other financial indicators across the sample. But it also pushed many firms to innovate — changing products, adjusting processes, reshaping management practices, or rethinking how they marketed and sold. And that innovation activity, in turn, was linked to better performance outcomes. In other words, innovation didn't just happen alongside the crisis — it was one of the main channels through which firms fought back against it. Two other patterns stood out. Larger firms weathered the storm somewhat better than very small ones, unsurprising given their greater access to resources. More strikingly, family-owned businesses performed worse on average than non-family firms during this period, a result that runs against some earlier crisis research suggesting family firms are more resilient.

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Photo by Dan Burton on Unsplash

Photo by Dan Burton on Unsplash

Why is it important?

This is one of the first large-scale studies to look at multiple types of innovation together, rather than focusing on just one (like digital transformation), and to test innovation's role as a bridge between crisis and outcomes rather than as a standalone factor. For MSME owners, the takeaway is practical: piecemeal innovation efforts are less effective than coordinated strategies that combine several types of change at once. For policymakers, the findings point to a need for targeted support — especially for microenterprises and family-run businesses, which often have the fewest resources to build innovation capacity on their own but stand to benefit the most.