Attacks, protests and civil unrest can severely disrupt economic activity – but in developing economies, they hit some businesses harder than others
At a global level, conflict and volatility is widespread. According to the United Nations, conflict and violence are on the rise, and in Ukraine, Europe has seen its greatest ground war since 1945. But in the face of violence and instability, we know little about the financial decisions that company leaders take.
We wanted to find out exactly how small and large firms respond in the face of violent political upheaval, believing that armed with this knowledge, businesses would be easily able to bear the brunt of violent disruption.
Using data from companies in Mozambique, we took a detailed look at how businesses invest during episodes of upheaval. For decades, the country has experienced varying degrees of civil unrest and, since 2017, insurgents linked to the Islamic State have claimed thousands of lives in the resource-rich north of the country. During our two years of research (2016 and 2017), there were more than 200 outbreaks of violence across the country, and attacks rose steeply in 2020.
Small vs. large firms
Our findings were surprising: we discovered smaller firms limit their spending far more than their larger counterparts. On average, companies react to unrest in the short term by cutting stock purchases by as much as 19 per cent in the month following a nearby violent outbreak. But, for smaller firms, the response is more stark: they spend 33 per cent less on stock.
Why the disparity? We suspect smaller businesses are more vulnerable to fear and uncertainty, and less able to bear the cost of protecting their premises against damage and disruption. Previous research has shown uncertainty prompts a “wait and see” response from businesses. It might be small business owners lack the sophistication of larger outfits, some of which actually increase spending on stock during periods of conflict.
But smaller firms are also less likely to be able to afford extra security or physical reinforcements for their property, which could increase their reluctance to invest in inventory. And there’s another potential unseen cost: as small businesses in retail and hospitality batten down the hatches, larger outfits could take advantage of the subsequent unmet consumer demand.
Impact of conflicts
Our businesses – 64 per cent of them in Mozambique's capital Maputo – were a mix of supermarkets, food shops, warehouses and restaurants, cafés, hotels and petrol stations, and we tracked their monthly purchases, logging any conflicts that took place within 10 kilometres of the premises. Nearly half (45 per cent) were exposed to violence during this time.
We were careful to have clarity around the time frame of violent attacks and their subsequent effects. In our analysis, we considered the prevailing economic climate and its potential impact upon decisions about how much stock to buy. We also showed a fall in purchases wasn’t driven by supply chain disruption, and was more likely to result from the clients’ own decisions.
Smaller businesses are more vulnerable to fear and uncertainty
We also see the impact of violent conflicts is relatively short-lived: after a short time, businesses bounce back and begin to spend as normal. But we found some small businesses don’t make any further purchases after a violent outbreak; it’s fair to assume that they have gone out of business.
While we’ve only examined a narrow slice of the Mozambican economy, we’ve been able to bring into sharp focus the immediate impacts of violence. These insights cast a wider light upon the challenges facing businesses in sub-Saharan Africa.
To date, we have focused on short-term spending, but it would be interesting to investigate longer term fallout from conflict. We believe this will support leaders of small businesses and help them to better understand how to weather instability and uncertainty.
This article draws on findings from "Inventory Decisions Under Political Violence" by Cláudia Custódio (Imperial College Business School), Bernardo Mendes (Imperial College London), Diogo Mendes (Stockholm School of Economics and Swedish House of Finance).