Zombie firms and weak productivity

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POLICY PAPER

Confronting the zombies: Policies for productivity revival (2017)

BACKGROUND PAPERS

Blogpost - Zombie firms and weak productivity: What role for policy?

Design of Insolvency Regimes across Countries (2018)

Breaking the shackles: Zombie firms, weak banks and depressed restructuring in Europe (2017)

Insolvency regimes, technology diffusion and productivity growth: Evidence from firms in OECD countries (2017)

Insolvency regimes, zombie firms and capital reallocation (2017)

The Walking Dead? Zombie Firms and Productivity Performance in OECD Countries (2017)

Coping with Creative Destruction: Reducing the Costs of Firm Exit (2016)

Insolvency regimes and productivity growth: a framework for analysis (2016)

DATA

Insolvency indicators

MAIN FINDINGS

A number of OECD countries have seen an increasing survival over the last decade of low productivity firms that would typically exit in a competitive market (so-called “zombie firms”), which hamper productivity growth by crowding-out growth opportunities for more productive firms, especially start-ups.

New cross-country indicators of the design of insolvency regimes uncover significant differences across OECD countries, in particular in terms of the personal cost to failed entrepreneurs and barriers to corporate restructuring. These cross-country differences in the design of insolvency regimes can in turn explain three interconnected sources of contemporary productivity weakness: the survival of zombie firms, capital misallocation and stalling technological diffusion.

Evidence suggest that the zombie firm problem in Europe is also connected to banking sector weakness and bank forbearance. Reviving productivity growth will require policies to diversify the source of corporate financing away from bank lending towards market-based debt and equity financing.

Reforms that accelerate corporate restructuring can have powerful effects on productivity, but also carry social costs. Active labour market policies play a key role in returning workers displaced by firm exit to work, thus helping to reconcile the productivity portential of creative destruction with social inclusion.

Share of capital sunk in zombie firms in 2013

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Note: Zombie firms are defined as firms aged ≥10 years and with an interest coverage ratio<1 over three consecutive years. The sample excludes firms that are larger than 100 times the 99th percentile of the size distribution in terms of capital stock or number of employees.

Source: Adalet McGowan, Andrews and Millot (2017), based on ORBIS data.

OECD indicator of insolvency regimes

Increasing in barriers to exit or restructuring