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: Banking and capital markets

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

[email protected]

Read about event
 

Past Event

Past Event

Monetary policy in the time of climate change

How does climate change influence monetary policy in the eurozone? What potential monetary policy measures should be taken up to address climate risks?

Speakers: Cornelia Holthausen, Jean Pisani-Ferry and Guntram B. Wolff Topic: Green economy, Macroeconomic policy Date: October 20, 2021
Read about event
 

Past Event

Past Event

A hybrid future of work

Addressing employers’ and employees’ challenges.

Speakers: Julie Brophy, Joost Korte, Laura Nurski, Renske Paans and Alex A. Saliba Topic: Digital economy and innovation, Inclusive growth Date: October 19, 2021
Read about event More on this topic
 

Past Event

Past Event

What is the link between biodiversity loss and financial instability?

Biodiversity loss impacts financial stability. How big is the risk of biodiversity loss for financial institutions?

Speakers: Sylvie Goulard, Romain Svartzman, Guntram B. Wolff and Michael Wilkins Topic: Banking and capital markets Date: October 5, 2021
Read about event More on this topic
 

Past Event

Past Event

How to strike the right balance between the three pillars of the pension system?

In this event panelists will discuss the future of European pension schemes.

Speakers: Elsa Fornero, Svend E. Hougaard Jensen and Suvi-Anne Siimes Topic: Macroeconomic policy Date: September 23, 2021
Read about event More on this topic
 

Past Event

Past Event

Academic lecture: International technology competition

Bruegel Annual Meetings, Day 3 - On the final day of the Annual Meetings, our Director Guntram Wolf sits with Keyu Jin to discuss international competition policy.

Speakers: Keyu Jin, J. Scott Marcus and Guntram B. Wolff Topic: Digital economy and innovation Location: Palais des Académies, Rue Ducale 1, Brussels Date: September 3, 2021
Read about event
 

Past Event

Past Event

Conference on the Future of Europe: envisioning EU citizens engagement

Bruegel Annual Meetings, Day 3 - Panellists will discuss different options and what they may entail while revisiting the debates on the future of Europe at national and EU-level that have been conducted thus far.

Speakers: Caroline de Gruyter, Kalypso Nicolaïdis, Niclas Poitiers and György Szapáry Topic: European governance, Macroeconomic policy Location: Palais des Academies, Rue Ducale 1 Date: September 3, 2021
Read about event
 

Past Event

Past Event

Sustainable finance

Bruegel Annual Meetings, Day 3 - In this session on the final day of the Meetings, our panelists will discuss the future of finance and its sustainability.

Speakers: Maria Demertzis, Alberto De Paoli, Pierre Heilbronn and Alexandra Jour-Schroeder Topic: Banking and capital markets, Green economy Location: Palais des Académies, Rue Ducale 1, Brussels Date: September 3, 2021
Read about event More on this topic
 

Past Event

Past Event

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis, Alicia García-Herrero and Guntram B. Wolff Topic: Macroeconomic policy Location: Palais des Academies, Rue Ducale 1 Date: September 3, 2021
Read about event More on this topic
 

Past Event

Past Event

Navigating a more polarised world: policy implications

Bruegel Annual Meetings, Day 2 - Are we entering a new age in the relationship between international economics and global politics? Is Europe well-equipped for this new world?

Speakers: Hélène Rey, Jean Pisani-Ferry, Adam Tooze and Sabine Weyand Topic: Global economy and trade Location: Palais des Academies, Rue Ducale 1 Date: September 2, 2021
Read about event
 

Past Event

Past Event

Blending physical and virtual: shaping the new workplace

Bruegel Annual Meetings, Day 2 - This panel will cover the changes the COVID-19 pandemic made to our workplaces, and what to expect in the near future.

Speakers: Nicholas Bloom, Michael Froman, Mario Mariniello, Sara Matthieu and Luca Visentini Topic: Inclusive growth, Macroeconomic policy Location: Academy Palace Date: September 2, 2021
Read about event
 

Past Event

Past Event

Brave new digital industrial policy

Bruegel Annual Meetings, Day 2 - In this session our speakers will discuss innovation and digitalisation.

Speakers: Francesca Bria, Kerstin Jorna, Aura Salla, Marietje Schaake and Reinhilde Veugelers Topic: Digital economy and innovation, Inclusive growth Location: Palais des Académies, Rue Ducale 1, Brussels Date: September 2, 2021
Read about event More on this topic
 

Past Event

Past Event

Monetary and macroeconomic policies at the crossroads

Bruegel Annual Meetings, Day 2- In this session we would like to discuss monetary and macroeconomic policies after Covid-19.

Speakers: Grégory Claeys, Per Callesen, Gita Gopinath, Jorge Sicilia Serrano and Lawrence H. Summers Topic: Banking and capital markets Location: PALAIS DES ACADEMIES, RUE DUCALE 1 Date: September 2, 2021
Load more posts