Using the OECD MAGIC database as the firm sample, the interest rate coverage ratio (ICR) is calculated as EBIT – constructed by the Secretariat using a common methodology to ensure comparability – divided by interest expenses, including capitalised interest (baseline). To assess the extent to which subsidies may mask underlying financial weaknesses, a counterfactual “no subsidy scenario” is constructed and compared with the baseline. In this hypothetical scenario, government grants are removed from EBIT, and firms are assumed to face market implied interest rates rather than subsidised borrowing (i.e. no BMB). In summary, the ratio is calculated as: ICR = (EBIT – Grants) / (Interest Expenses + BMB). Firms for which information necessary to calculate EBIT or BMB are missing are excluded from the analysis.
A firm is defined as a zombie firm in 2018, 2021, and 2024 respectively if it had an ICR below one for three consecutive years namely for the periods2016‑2018, 2019‑2021, and 2022‑2024, respectively. For example, if a firm’s ICR remains below one from 2015 to 2022, it is classified as a zombie in both 2018 and 2021.
Once zombie firms are identified, the zombie share in the total MAGIC sample is calculated for each reference year. For example, the zombie ratio in 2018 is the number of zombie firms divided by the total number of MAGIC sample firms in 2018. To analyse the effect of government ownership, a category of firms with more than 25% government ownership is created, and the corresponding zombie ratio is calculated. For instance, the zombie ratio in 2018 for the over 25% government ownership category is the number of zombie firms with more than 25% government ownership divided by the total number of MAGIC firms with more than 25% government ownership in 2018.
To better capture the economic weight of zombie firms, revenue shares are calculated in addition to firm counts. For example, the 2018 zombie revenue ratio is total revenue generated by zombie firms divided by total revenue of all MAGIC sample firms in 2018. Similarly, the 2018 zombie revenue ratio within the >25% government ownership category is defined as revenue from zombie firms with more than 25% government ownership divided by total revenue from MAGIC firms with more than 25% government ownership.
The difference between the baseline and the “no subsidy scenario” indicates the extent to which subsidies affect a firm’s likelihood of becoming a zombie. Comparing this difference between all firms and those with more than 25% government ownership highlights how subsidy impacts on zombie status vary according to ownership structure.
In Figure 5, the subsidy ratio for “zombie experienced firms” – defined as firms that were classified as zombies at least once in 2018, 2021, or 2024 – is calculated as the value of grants and BMB received by them relative to their revenue. To improve precision, each firm’s subsidy ratio is weighted by its share of total revenue.
To assess how actively the market responds, the market share ratio is calculated within each sector (among 15 sectors in the MAGIC database), comparing the first year of financial distress with the third year when a firm is classified as a zombie. For example, for firms identified as zombies in 2021, the shares in 2019 and 2022 are compared. Market share is calculated using firm level revenue (or segment revenue, when available and applicable) in the MAGIC database. In the baseline scenario, 24 of 51 zombie firms increased their market share during financial distress (among the firms with more than 25% government ownership, four out of 13 firms did so). In the hypothetical “no subsidy scenario”, 48 of 92 zombie firm cases increased their market share (for firms with more than 25% government ownership, 21 of 42 cases).
Several considerations should guide the interpretation:
(i) Static nature of the exercise: The counterfactual assumes no behavioural adjustment. In practice, firms may alter prices, production volumes, or financing structures if subsidies are withdrawn. Larger firms, which dominate the MAGIC database, may also exercise some degree of price setting power. As such, the results represent an accounting-based stress test rather than a dynamic general equilibrium simulation.
(ii) Treatment of young, growing firms: The definition of zombie status relies solely on the interest coverage ratio. Young firms may exhibit temporarily low ICRs during investment phases, potentially leading to misclassification. Adalet McGowan et al. (2017) incorporate an additional criterion requiring firms to have operated for at least ten years. Because of the possibility of young firms’ contribution to continuous imbalance between supply and demand, this analysis does not adopt the firms age criteria, but still this classification should be acknowledged.