The rise of the walking dead: zombie firms around the world

November 10, 2023

The macroeconomic implications of unproductive and unviable zombie firms have returned to the forefront of the public debate during the Covid-19 pandemic, as the unprecedented public support to firms may have helped these zombie firms stay afloat. The presence of zombie firms creates important negative spillover effects to healthy firms operating in the same industry: zombie firms distort the competition in the markets in which they operate, ultimately depressing market prices and raising market wages, which crowd out the profits of healthy firms. The overall effect is to reduce productivity, investment, and employment in the economy.

Notes: Blue (beige) bars refer to the percentage share of listed (private) zombie firms.
Caption: Share of zombie firms for listed and private firms

Zombie firms is not a new phenomenon. It dates back to Japan’s lost decade in the late-1980s and 1990s, a period when the misallocation of capital away from the most productive firms played a key role in amplifying the ongoing economic stagnation. Similar results have been found during the 2010s European sovereign debt crisis, when weak banks “kicked the can down the road” by evergreening zombie loans. The two key ingredients for the zombification phenomenon typically combine undercapitalized banks and weak supervision, as weaker banks face incentives to provide credit to zombie firms to avoid the realization of losses.

What is special about the current environment is that zombification across the globe has been increasing over time, particularly since the GFC and the Covid-19 pandemic (Figure below). This paper builds a novel dataset on global zombie firms to assess and compare the incidence of zombification between listed and private firms for a large set of advanced and emerging markets over the last two decades. Although zombification is a widespread phenomenon, and increasing in many jurisdictions, the paper finds some encouraging signs that strengthening the banking sector, tightening macroprudential policies, and developing insolvency regimes can help to mitigate the congestion effects from zombie firms.

Click here to go to the paper by Bruno Albuquerque and Roshan Iyer.


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