Zombie Firms

Zombie firms are businesses that, over an extended period, cannot generate enough profit to cover the interest on their debts. They survive only because lenders roll over loans or because they receive ongoing support such as subsidised credit or emergency relief schemes. The term was popularised in studies of Japan’s “lost decade” in the 1990s and has since been applied across advanced economies.

Zombie firms matter for entrepreneurship and growth because they can distort how capital and talent are allocated. When weak firms are kept alive by cheap credit or lender forbearance, they can tie up bank balance sheets, crowd out more productive businesses and slow down the normal process of exit and entry that underpins business dynamism in an economy. Evidence from OECD countries suggests that sectors with more zombie firms see lower investment and weaker performance among healthier rivals, especially younger firms.

The prolonged period of very low interest rates after the 2008 global financial crisis, and large-scale support measures during the COVID-19 pandemic, contributed to concerns that the number of zombie companies had increased. By making it easier for weak firms to refinance and service debts, these policies helped avoid mass insolvencies but may also have allowed some non-viable firms to persist.

For entrepreneurs, zombie firms are a double-edged issue. On one hand, support that prevents viable firms from failing in a crisis can preserve supply chains, jobs and demand. On the other hand, a high prevalence of zombies can make it harder for dynamic startups and scaleups to gain market share, secure finance or hire skilled workers.

Further reading:

• Olivier De Jonghe, Klaas Mulier and Ilia Samarin — Counting the undead: A new metric for identifying zombie firms

• OECD — The Walking Dead? Zombie Firms and Productivity Performance in OECD Countries

• OECD — Confronting the zombies: Policies for productivity revival