The impact of disasters on MSMEs

Natural disasters are often unanticipated costly events for MSMEs. MSMEs are affected differently by disasters. These differences are determined by the type of hazard, risk exposure or context-specific vulnerabilities (exogenous variables), as well as from the characteristics of MSMEs, which increase or decrease vulnerability to natural hazards (endogenous variables). Where data is available on the topic, the number reveal that in Japan, for example, when an earthquake hit in March 2011, 656 MSMEs employing a total of more than 10,000 workers, went bankrupt within a year.301 In the Bangkok flood of 2011, at least 550,000 MSMEs were disrupted, and more than 2 million jobs affected. The flood also reduced Thailand’s national GDP by 37 per cent.302 Similarly, in Malaysia, the great flood in Kelantan in December 2014 affected 13,337 MSMEs; this figure represented 37.7 per cent of all MSMEs in the state. 303 Most of the affected MSMEs, especially in developing economies, are unable to recover after their businesses were hit by natural hazards because of low disaster resilience. In rural areas, MSMEs that are environment-dependent can be considered one of the worse off sectors, given the severe disruption disasters pose to the availability of natural resources and the time it takes for ecosystems to recover.304 

To repair or reinstall what disasters destroy, businesses that survive are often saddled with debt. Because it is difficult for many local firms to either cover the total cost by themselves or prepare for such rare unpredictable events in advance to reduce the cost, the government often intervenes after disasters. The direct and indirect impacts of natural disasters and other calamities such as pandemics are devastating to business activities and their continuity. These catastrophic events have created a significant impact on MSMEs.

Infrastructure damage has been identified as an important source of financial stress for businesses after disasters. It can cause temporary business closure while structural repairs needed to restore operations usually require large amounts of resources. If businesses are uninsured or lack resources for these repairs, business survival is put at risk. Even if operations resume, physical damage has been found to make a difference in business performance of surviving firms as severe damage implies longer closure periods and more resources allotted for repairs, particularly in the case of uninsured firms.305 In addition, disruptions after disasters regarding the provision of public services such as electricity, water supply and sewage, fuel, transportation and telecommunications, can be responsible for businesses closing down and can cause population dislocation. Many businesses do not reach post- disaster stage. Further, in 2015, the Philippine Institute for Development Studies placed disaster impacts on enterprises into four categories, namely: capital, labour, logistic and market (see box 19 below).

Box 28. Philippine Institute for Development Studies disaster impact categories

Damages to the land, equipment and revenue drops have been identified as an important source of financial stress for businesses after disasters. Revenues are expected to fall down due to the less or no sales during and after the disaster occurs. Damaged or loss of stock can create issues in continuity of business. It can cause temporary business closure while structural repairs needed to restore operations usually require large amounts of financial and other resources. Damages to manufacturing equipment and machinery may affected severely and disrupted production. If businesses are not insured or lack of resources for these repairs, survival of business is questionable.

Disruptions after disasters regarding the provision of public and utility services such as electricity, water supply and sewage, fuel, transportations and telecommunications, can be responsible for businesses closing down and can cause population dislocation. Dysfunction in facilities and public infrastructure is an expected effect of disasters requiring business to look at alternative or emergency logistic support to enable business to function. These public infrastructure damage can lead to business closure for extended periods till repairs completed.

Human resources are the prime asset for any organization including MSMEs which have a limited staff in general. Employees of these firms might be the immediate victims of the disaster including deaths and casualties. In addition, labour force might face physical and psychological health effects including injuries and stress. Employees can be vulnerable to the numerous health hazards that prevail in weeks, even months after the event of flood. Water- borne dieses such as diarrhea and cholera are the most common epidemics that can spark after the flood. Employees who may affected severely are under financial distress too. Therefore, availability of manpower is crucial and firms have to consider manpower reinforcement and to support those affected workers to resume their duties at earliest which enable firms to meet targets, respond to spike in demand and resume operations at the shortest time.

A shift in market demand also expected in the short term with sharp increase in the demand only for basic commodities while a drop in many non-essentials. In general, difficulties in distribution, receiving and shipping of products are very common issues after flood situation. As demand side for many products weaken, sales turn over drops drastically resulting MSMEs find it difficult to do accounts payable and ultimately manage their financial balance. This drop-in demand for their products are affected more seriously for MSMEs as majority of them are totally depend on neighbouring markets where the villagers are direct victims of flooding.

Source: Samantha, Gunathilaka. (2018). The Impact of Natural Disasters on Micro, Small and Medium Enterprises (MSMEs): A Case Study on 2016 Flood Event in Western Sri Lanka. Procedia Engineering. 212.

MSMEs, however, have an inherent flexibility due to the lower levels of capital needed to operate (especially in the case of informal MSMEs), which could be exploited after disasters to support a faster and more equitable recovery of the local community.306 The role of MSMEs in disaster recovery thus depends on their own ability to withstand disasters and having the right incentives in place for them to participate in livelihood recovery. Pathways toward more resilient MSMES should consider tackling the socio-economic drivers of risk in the pre-disaster stage and should be further built by the provision of swift and adequate support to MSMEs shortly after disasters. MSMEs support the creation of social capital in communities, which is a crucial element in restoring the social fabric ruptured by disasters. With local businesses reopening and providing spaces for social bonding, MSMEs can contribute to motivating a relocated population to return home, as well as helping to attract new investment in recovering areas. A strong MSME sector also promotes a country's resilience to shocks by broadening and diversifying the domestic economy. By reducing the dependency on few large firms or specific sectors, MSMEs protect a broad base of the labour force from sector-specific shocks and fluctuations in international markets.307 Through better understanding of the impact of disasters on MSMEs, vulnerability to natural hazards can be reversed by promoting enabling pre- and post- disaster environments for MSMEs to use entrepreneurship as a driver of local economic and social recovery. MSME resilience requires partnerships and cooperation among firms, government and other private organizations.


301 UNDP (2018). 'Small Businesses: Impact of Disasters and Building Resilience'

302 APEC (2019). APEC Disaster Risk Management Strategies to Support MSMEs Business Sustainability.

303 Ibid.

304 Internationals Institute for Environment and Development. Contribution to the 2009 Global Assessment Report on Disaster Risk Reduction.

305 Dietch, Elizabeth & Corey, Christy. (2011). Predicting long-term business recovery four years after Hurricane Katrina. Management Research Review - Res Manag Rev. 34. 311-324.

306 UNDP (2018). 'Small Businesses: Impact of Disasters and Building Resilience'

307 Dalberg (2011). Report on Support to SMEs in Developing Countries through Financial Intermediaries.