Short-term economic dynamism as a policy tool to address supply shortages during crises

Abstract

This paper investigates the role of short-term economic dynamism in responding to crisis induced supply shortages. We focus on the domestic manufacturing ramp-up of surgical masks, respirators, and their intermediary products in response to the COVID-19 pandemic. We develop a novel method for timely identification and validation of the evolving state of domestic manufacturing. To unpack the activities of domestic manufacturers and related institutions, we triangulate across 56 qualitative interviews, certifications, Thomasnet.com®, industry associations, and other public data. We find that while large manufacturers could rapidly scale up, onshore, or diversify production to enter into domestic production of critical medical supplies, these large manufacturers alone were insufficient to meet the spike in demand. In face of this shortage, small and medium enterprises (SME), who entered into mask and respirator production as de novo firms, spin-offs, and by diversifying, were important in increasing overall domestic capacity and serving markets unmet by large hospital distributors. These firms often had fewer competencies and resources compared to larger firms, and received less effective government support. Despite these disadvantages, a number of SMEs succeeded in entering into domestic production, and our interviews suggest this capacity could have been better integrated into the national response. We propose new theory for how and when federal and state governments should support short-term economic dynamism (firm entry into target products and/or markets) during crises to address supply shortages, and the types of market and network failures federal or state governments may be most effective at addressing.