Past Event

Zombie firms and weak productivity: what role for policy?

At this event, we will have the chance to discuss the final findings of OECD's project on Exit Policies and Productivity Growth, which started at the end of 2015.

Date: December 6, 2017, 12:00 pm Topic: Finance & Financial Regulation

Video and audio recording


There is growing recognition that the productivity slowdown experienced over the past two decades is partly rooted in a rise of adjustment frictions that rein in the creative destruction process. One important dimension of this phenomenon is that firms that would typically exit or be forced to restructure in a competitive market – i.e. “zombie” firms – are increasingly lingering in a precarious state to the detriment of aggregate productivity. In this view, reviving productivity growth will partly depend on the policies that effectively facilitate the exit or restructuring of weak firms, while simultaneously coping with any social costs that arise from a heightened churning of firms and jobs.

Findings from this new OECD project suggest that there is a wide scope for improving the design of insolvency regimes as measured by new cross-country indicators. It also shows that the survival of zombies is related to faltering bank health and the persistence of tax bias towards debt. Building on a large volume of cross-country research, the project presents evidence on the potential for reforms in the area of insolvency, banking supervision and taxation to revive aggregate productivity growth by facilitating the restructuring or exit of weak firms. Coupling these reforms with parallel changes in competition and social policies is shown to boost the productivity gains while minimizing the associated social costs.

Event materials

Presentation by Dan Andrews and Giuseppe Nicoletti

SUMMARY

At this event, Dan Andrews and Giuseppe Nicoletti presented results from the new OECD’s project on exit policies and productivity growth, focusing on so-called “zombie” firms, i.e., firms that would typically exit or be forced to restructure in a competitive market. The increasing lingering of such firms in a precarious state is an important dimension in the current productivity slowdown, as they hold back creative destruction potential.

The presentation pointed out that aggregate data on productivity conceal micro-level patterns, which suggest that along with raising productivity dispersion and declining efficiency of reallocation, there is evidence of distress on the exit margin, as entry is declining and weak firms are increasingly surviving. In particular, delaying exit or restructuring can (i) drag down average productivity, (ii) consume resources for healthier firms, and (iii) create barriers for potentially innovative young firms to enter. Findings suggest that healthy firms invest less the more capital is hold by zombies, and particularly so for young and more productive firms, thus hampering productivity by crowding-out credit availability to healthy firms. In this view, there is a wide scope for improving the design of policies that facilitate exit or restructuring of weak firms as measured by new cross-country indicators. In particular, insolvency reforms can reduce zombie congestion and boost reallocation, as well as revive productivity growth for laggard firms via technological diffusion. Results also show that survival of zombies is related to faltering bank health and the persistence of tax bias towards debt, thus calling for complementary measures to address NPLs and capitalization of banks, as well as promoting non-bank financing. At the same time, there is a need to minimize the social costs associated with job destruction, by coupling reforms with well-designed competition and social policies, in particular active labour market policies.

Carlo Altomonte highlighted that zombie firms seem to be an outcome of the wider phenomenon of insufficient catch-up by laggards. Therefore, understanding what is hampering technological catch-up should also be a priority for policy makers. Importantly, care should be taken when identifying zombie and laggard firms, as an overlap is likely but not guaranteed. Moreover, caution is advised on causal interpretation of negative effects from zombie capital to bank credit availability for healthy firms. For example, if a sector is hit by a shock in a country-year, it might experience both a rise of zombie firms and a contraction of credit to healthy firms. Finally, there appears to be large heterogeneity in access of firms to finance, irrespective of productivity, as well as a negative relation between credit constraints and size, after controlling for productivity and firm characteristics. Thus, large firms, rather than the most productive, seem to be preferred for credit, which means that while insolvency reforms should go hand in hand with bank health, it is also important to promote more productivity-dependant lending models.

Finally, among other issues, the discussion also highlighted the potential heterogeneity between manufacturing and services, possible relevance of easy monetary policy for zombie firms’ survival, and the underlying importance of product market competition.

Event notes by Francesco Chiacchio, Research Assistant. 

Schedule

Dec 06, 2017

12:00-12:30

Check in and lunch

12:30-13:00

Presentation

Chair: Reinhilde Veugelers, Senior Fellow

Dan Andrews, Deputy Head of Structural Policy Analysis Division, Economics Department, OECD

Giuseppe Nicoletti, Head of Structural Policy Analysis Division, Economics Department, OECD

13:00-13:15

Comments

Carlo Altomonte, Non-Resident Fellow

13:15-14:00

Q&A

14:00

End

Speakers

Carlo Altomonte

Non-Resident Fellow

Dan Andrews

Deputy Head of Structural Policy Analysis Division, Economics Department, OECD

Giuseppe Nicoletti

Head of Structural Policy Analysis Division, Economics Department, OECD

Reinhilde Veugelers

Senior Fellow

Location & Contact

Bruegel, Rue de la Charité 33, 1210 Brussels

Matilda Sevon

matilda.sevon@bruegel.org

Read about event More on this topic

Upcoming Event

May
25
08:30

Where is China’s financial system heading? Implications for Europe

An event on the Chinese Banking Sector.

Speakers: Alicia García-Herrero and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic More by this author

Policy Contribution

Are European firms falling behind in the global corporate research race?

The author looks at how concentrated corporate R&D is in Europe, compared with sales and employment. The US and China are more likely to produce new R&D leaders that take over some of the top positions from incumbent R&D leaders. How is the EU coping with technology shifts and creating the next generation of new leading firms?

By: Reinhilde Veugelers Topic: Innovation & Competition Policy Date: April 12, 2018
Read article More on this topic More by this author

Blog Post

Latvia’s money laundering scandal

Latvia’s third largest bank ABLV sought emergency liquidity from the ECB and eventually voted to start a process of voluntary liquidation, after being accused by US authorities of large-scale money laundering and having failed to produce a survival plan. What does it mean for the ECB?

By: Silvia Merler Topic: Finance & Financial Regulation Date: April 9, 2018
Read article Download PDF More by this author

External Publication

European Parliament

Cash outflows in crisis scenarios: do liquidity requirements and reporting obligations give the SRB sufficient time to react?

Bank failures have multiple causes though they are typically precipitated by a rapidly unfolding funding crisis. The European Union’s new prudential liquidity requirements offer some safeguards against risky funding models, but will not prevent such scenarios. The speed of events seen in the 2017 resolution of a Spanish bank offers a number of lessons for the further strengthening of the resolution framework within the euro area, in particular in terms of inter-agency coordination, the use of payments moratoria and funding of the resolution process.

By: Alexander Lehmann Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: March 28, 2018
Read about event More on this topic

Past Event

Past Event

Bank assets and business models: addressing complexity

At this event, we discussed the lack of transparency and problems in valuing correctly significant parts bank assets in the euro area based on an extensive study by the Bank of Italy.

Speakers: Simon Ainsworth, Paolo Angelini, Josina Kamerling, Martin Merlin, Alexander Lehmann and Nicolas Véron Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 21, 2018
Read about event More on this topic

Past Event

Past Event

The future of the EU budget: MFF post-2020

Which should be the priorities for the Multiannual Fiscal Framework post 2020?

Speakers: Roger Havenith, Günther H. Oettinger, Charlotte Ruhe, Margit Schratzenstaller-Altzinger and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 7, 2018
Read about event

Past Event

Past Event

(How) could European safe assets be constructed?

At this event we looked at the ESRB task force’s investigation on safe assets.

Speakers: Levin Holle, Sam Langfield, Anne A. Leclercq and Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 1, 2018
Read about event More on this topic

Past Event

Past Event

Bruegel - Financial Times Forum: The future of euro-area governance

The third event in the Bruegel - Financial Times Forum series looked into the future of euro-area governance.

Speakers: Maria Demertzis, Gideon Rachman, Manfred Weber and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 27, 2018
Read about event More on this topic

Past Event

Past Event

Is there life After TTIP? The future of transatlantic economic relations

The partnership between North America and Europe is becoming unsettled and uncertain. How can we deal with this new situation that threatens the prosperity and ultimately the position of North America and Europe in the global economy.

Speakers: Maria Demertzis, Daniel S. Hamilton, Luisa Santos and André Sapir Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 19, 2018
Read about event More on this topic

Past Event

Past Event

The implications of Blockchain platforms

The disruptive forces of block chain technologies in markets and industries: a European perspective

Speakers: Anna Dimitrova, Julio Faura, Georgios Petropoulos, Johan Pouwelse and Pēteris Zilgalvis Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 6, 2018
Read about event More on this topic

Past Event

Past Event

Europe’s immigration and integration challenges: Financial and labour market dimensions

The event, organised by Bruegel in cooperation with the Institute for International Affairs will discuss these and related questions and will also feature the launch in Rome of the study authored by Zsolt Darvas on the impact and integration of migrants in the European Union.

Speakers: Roberto Ciciani, Zsolt Darvas, Marcela Escobari, Tatiana Esposito, Manjula M. Luthria, Carlo Monticelli, James Politi and Nathalie Tocci Topic: European Macroeconomics & Governance Location: Banca Monte dei Paschi di Siena, Via Mighetti 30/A, Rome, Italy Date: February 2, 2018
Read about event More on this topic

Past Event

Past Event

Why think tanks matter in the era of digital and political disruptions

Bruegel is pleased to host this panel discussion as part of the global launch of the 2018 Global Go To Think Tank Index, published by the University of Pennsylvania’s Think Tanks and Civil Societies Program.

Speakers: Matt Dann, Shada Islam and Hlib Vyshlinsky Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 30, 2018
Load more posts