Impact of Adaptation Strategies on Business Expectations: Evidence from India during the Pandemic

Abstract

Did innovating firms experience improved business expectations during the pandemic? Using a survey of Indian firms conducted in June 2020, we explore whether innovating into a new product line or adapting to e-commerce platforms improved business outlook. To address the endogeneity of innovation/adaptation due to downturn in future sentiments, we use structural equations framework which relates the six-month ahead expectations of key demand (new orders) and supply variables (labour costs and raw material costs) to the two innovation strategies. Innovation strategies are in turn determined by unobservable latent variables of past demand- and supply-side shocks (experienced due to the Coronavirus pandemic and its associated lockdown in India). For expectations regarding new orders, we find that both the innovation strategies had a positive and significant impact. The innovation strategies had a mixed impact on the supply side sentiments. While firms which adopted to e-commerce were less likely to report higher expected labour costs six months in the future, neither of the two strategies improved expectations regarding raw material costs. Our paper is the first to explore the mutual relationships between business outlook, adaptation strategies and firm characteristics in India during the pandemic.

Keywords: Business Sentiments, Innovation, Firms, COVID-19, India

JEL Classification: M21, O31