Zombie enterprises, crowding out effect, and total factor productivity: Empirical evidence from Chinese manufacturing listed companies

Abstract

Due to special historical factors and government preferences, many zombie enterprises with subsidies and credit as the main source of income can be maintained in China. Zombie enterprises damage the fair position of market players and cause irreparable damage to the market mechanism, with efficiency as the core. This study chooses factor productivity as the starting point and uses the financial data of listed manufacturing companies from 2008 to 2016 as the sample to explore and evaluate the damage of zombie enterprises to the production efficiency of the Chinese market. The main contributions of this study are as follows. First, zombie enterprises in listed companies are identified by a comprehensive identification method. Second, the growth rate of the total factor productivity of non‐zombie enterprises is measured by the DEA Malmquist index method, the crowding‐out effect of zombie enterprises on TFP growth of normal enterprises is studied, and the specific transmission path is analysed. The empirical results show that zombie enterprises have a significant inhibitory effect on the total factor productivity growth of non‐zombie enterprises, verifying our conjecture at the macro level. Finally, on the basis of theoretical and empirical analyses, this paper puts forward some policy suggestions to help zombie enterprises clear up to promote the growth of total factor productivity of non‐zombie enterprises and the healthy development of the entire industry.

Surviving beyond expiry: a systematic literature review of zombie firms

“…In turn, government officials pursued the state agenda rather than profitability and sustenance. The government was induced to push for soft budget constraints wherein it finances zombie SOEs since, such SOEs obliged government directives of employment and maintaining financial and economic stability, especially in the context of personal motivations of local politicians to keep the zombies alive for their promotion (Shao et al, 2023), maintaining BASEL norms for banks, and also carrying this "social burden" where firms could have restructured by laying off excess employees but were unable to do so. Excess employees adversely affect the asset turnover ratio, leading to poor management and overall inefficiency, and they are not laid off because they allow for the demand of subsidies.…”

“…(c) Liquidity Concerns: From a liquidity perspective, as a policy suggestion, an increase in the capital adequacy ratio to fulfill BASEL norms would further reduce credit availability for healthy firms (Hoog, 2018). Further evidence shows that crowding out leads to massive market distortion because zombies do not have to abide by market dynamics, leading to the movement of nonzombies from the marketplace (Shao et al, 2023). One major market implication is the distortion of the value chain caused by zombies.…”

“…Given the prominent position that China holds globally to improve environment-related considerations (Wang, Wang, Guan, & Taghizadeh-Hesary, 2023), it is of the utmost importance for the government to ensure that zombies do not undo their efforts. Shao et al. (2023) provide evidence that zombie firms depress innovation; hence, governments must be aware of this while extending subsidized credit to them.…”

“…Given the prominent position that China holds globally to improve environment-related considerations (Wang, Wang, Guan, & Taghizadeh-Hesary, 2023), it is of the utmost importance for the government to ensure that zombies do not undo their efforts. Shao et al (2023) provide evidence that zombie firms depress innovation; hence, governments must be aware of this while extending subsidized credit to them. Financial technology (FinTech) has proven to be useful in reducing information asymmetry for targeted financial assistance, optimizing banks' risk assessment mechanisms, and mitigating market distortion to provide a synergistic effect, leading to overall improvement (Jin, Pan, Li, & Liu, 2022).…”