The effect of COVID-19 special credit guarantees on local business dynamism: A case of 25 autonomous districts in Seoul

This study empirically analyzes the causal effect of COVID-19 special credit guarantees on the dynamism of Seoul’s 25 local commercial districts. Using panel data from 2017 to 2023, we employed a continuous difference-in-differences model exploiting cross-district variations in guaranteed supply intensity, supplemented by an event study. The results indicated that a one standard deviation increase in guarantee intensity (24 billion KRW) caused a 0.91 percentage point decrease in the business establishment growth rate. This dampening effect was statistically significant in low-entry-barrier sectors (wholesale/retail and accommodation/food services), where positive pre-intervention growth trends transitioned to significant negative treatment effects. Conversely, capital-intensive manufacturing showed no significant response. A robustness check using employment growth suggests that this pattern reflects suppressed new entries, rather than employment contraction. We acknowledge some limitations, including the inability of net growth rates to distinguish entry suppression from exit acceleration and potential deviations from strict parallel trends. Ultimately, the findings suggest that, while large-scale liquidity acts as an emergency safety net, prolonged intervention may delay the exit of marginal firms and weaken market dynamism. Therefore, post-pandemic policies should shift from volume-oriented provisions to quality-selective support to restore the market’s cleansing mechanism.