The Working Dead: The dynamics, causes and consequences of zombie businesses

Abstract

This thesis analyses the dynamics, underlying causes, and far-reaching implications of zombie businesses, which are characterised as financially unviable businesses propped up by continuous financial support from creditors. The thesis is divided into four key chapters that shed light on this complex phenomenon.

Chapter 1 examines the dynamics of zombie businesses using data from listed companies in China. It reveals that a significant portion of zombie businesses eventually recover to a non-zombie status, especially if they undergo substantial mergers and acquisitions, maintain low debt levels, and reduce operational expenses. However, even revived zombie businesses tend to have lower profitability than their industry peers and are more likely to return to their former zombie state. This highlights the limitations of relying solely on mergers and acquisitions to counter the persistent negative impact of zombification on profitability.

Chapter 2 explores the link between financial conditions and the capital invested in zombie businesses across 20 OECD countries and 11 industries. It finds that lenient financial conditions can lead to increased resource allocation to zombie businesses, particularly in countries with vulnerable banking systems (i.e., high rates of non-performing loans). This highlights the importance of strengthening a nation's banking system to mitigate lending to inefficient zombie businesses and optimise capital allocation.

Chapter 3 focuses on the consequences of zombie businesses in Australia before the COVID-19 pandemic. While it is observed that an increasing proportion of labour allocated to zombie businesses can lead to reduced activity (e.g., gross value added, employment and capex) among viable businesses in the same industry, the study challenges the extent of negative spillover effects associated with zombie firms. It did not find evidence of zombie firms displacing credit or hindering the efficient allocation of resources.

Chapter 4 evaluates the impact of COVID-19 business support measures and mobility restrictions on zombie businesses in Australia from 2020 to 2022. It finds that zombie businesses were more likely to access government subsidies but also faced lower wage growth, comparable headcount growth, and higher exit rates. This indicates that the process of creative destruction continued despite policy assistance during the pandemic, with indications of a temporary deceleration in 2020 due to mobility restrictions and support measures. The chapter highlights the importance of withdrawing direct business support measures in a timely manner to prevent lasting structural problems and enable optimal resource allocation.

In summary, the thesis underscores the significance of addressing zombie businesses for policymakers. These entities can encroach upon the resources of more productive counterparts, posing risks to financial stability. However, it also suggests that concerns about the macroeconomic impact of zombie businesses may be exaggerated in countries with effective product markets (such as healthy banking systems) and insolvency mechanisms, as demonstrated in the case of Australia. Show more