How do zombie firms affect innovation: from the perspective of credit resources distortion

Abstract

Excessive support from banks and governments to poorly-performing firms, making them zombie firms, distorts financial resources-a common factor in firm innovation. Using a large sample of Chinese industrial firms, this paper investigates the impact of zombie firms on the innovation of healthy firms. The results indicate that the prevalence of zombie firms reduces the patent output of healthy firms and seriously jeopardises innovation. Endogeneity analyses and robustness checks validate the results. Further analysis reveals that zombie firms distort the credit resources of healthy firms, especially those that are state-owned or in high-tech industries, thereby reducing innovation output. However, the higher financial marketisation of provinces can alleviate this negative effect. This study contributes to an understanding of the negative consequences of zombie firms due to the distortion of credit and provides some policy implications for the disposal of zombies to promote highquality economic development.

Can common institutional ownership inhibit the formation of zombie firms? Evidence from China

“…Our study ends in 2021, as this is the most recent data available at the time we began our research. We mainly collect data from the Chinese Securities Market and Accounting Research (CSMAR) database, which provides detailed financial data and has been widely used in other related studies (Kang et al, 2018;Qiao et al, 2022;Ding, 2023). Data on common institutional ownership were manually obtained from the China Securities Market and Accounting Research (CSMAR) database.…”

“…Feng et al (2022) suggest that zombie firms may increase the cost of debt financing for non‐zombie firms and prompt the latter to rely more on internal funds. Qiao et al (2022) point out that zombie firms could reduce the patent output of healthy firms and seriously jeopardise entrepreneurship and the implementation of national innovation strategies. Furthermore, the survival of zombie firms seriously exacerbates overcapacity, distorts resource allocation and tax structure (Geng et al, 2021), creates systemic financial risks, and undermines economic growth potential eventually (Shen and Chen, 2017; Wang and Zhu, 2020).…”

“…The essence of zombie firms lies in the destruction of the market mechanism, which not only makes it impossible for inefficient zombie firms to exit the market (Banerjee and Hofmann, 2022;Munoz-Izquierdo et al, 2023), exacerbating the problem of resource mismatch and overcapacity in the industry (Blazkova and Dvoulety, 2022), but also lowers the efficiency of the industry's allocation of resources and hindering technological progress (Geng et al, 2021;Qi et al, 2022). Moreover, in addition to the above economic negative externalities, some studies have shown that zombie firms also have significant environmental negative externalities on normal firms (Feng et al, 2022;Qiao et al, 2022), exacerbating the level of their pollution emissions, which is not conducive to the synergistic promotion of high-quality development and environmental protection (Han et al, 2019;Yu et al, 2021). One of the structural problems of China's real economy is the existence of zombie firms in the manufacturing industry (Guo et al, 2022;Ren et al, 2023).…”

Zombie companies in China in the COVID‐19 era

“…72 Certain target industries, for example, heavy chemical producers, attract more local government attention than others. 73 Such targeted interference may not simply be because of high unemployment as a result of the closure of a company; it may also stem from concerns about potential multiplier effects whereby the death of one zombie company can lead to the zombification of both upstream and downstream companies.…”