Short-Term Economic Dynamism as a Policy Tool to Address Supply Shortages During Crises

This paper investigates, and draws lessons from, the role of short-term economic dynamism in responding to supply shortages during the recent COVID-19 crisis. 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 facilities. To unpack the activities of domestic manufacturers and related institutions, we triangulate across 56 qualitative interviews, federal contracts & certifications, Thomasnet.com®, industry associations, news articles, and company websites. We find that while large manufacturers could rapidly scale up, onshore, or diversify domestic production to produce different products, large manufacturers alone were insufficient to meet the spike in demand. In the 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, appear to have been important in increasing overall domestic capacity and serving markets not reached by large hospital distributors. By definition these firms often have fewer competencies and resources compared to the large firms, and receive less effective state and federal support. Despite these disadvantages, a number of de novo firms succeeded in producing product. However, 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 new products and/or markets) during crises to address supply shortages, and the types of market and network failures federal as opposed to state governments may be most effective at addressing.